Should the United Kingdom Be Worried About Productivity Data?

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Productivity data from the United Kingdom may reveal an underlying weakness in the country’s economy, the Wall Street Journal reports. On the surface, productivity measures from the U.K. have looked up, rising by 0.5 percent in the second quarter of this year according to data released late last month.

This was the first rise since 2011, causing some to herald the increase as just one more good sign for the country’s economy. Building on positive data from the service and manufacturing sectors, as well as unemployment data, some have gone so far as to say that the U.K. is on the road to recovery.

However, looking at where the U.K. stands in comparison to the rest of the developed world paints a different picture of the data. Productivity in the U.K. remains 16 percentage points below the average value of the G7 nations, approximately double what the gap was a decade ago. Looking at the difference between the U.K. and the United States reveals an even bigger discrepancy, with Britain lagging behind by a rate of 29 percent.

One explanation of the gap is that the United Kingdom did not experience such a drastic shock in unemployment rates as other developed countries, meaning that, instead of employment rates dropping during the crisis, productivity rates dropped. This could happen as companies simply retained staff despite theoretically needing to make cuts, which manifested as a reduction in productivity rates. Thus, as a recovery progresses, productivity rates will be expected to rise while unemployment rates will drop at a slower pace than expected.

If valid, the explanation could have major consequences for the Bank of England, which has declared that interest rates will remain at their current levels at least until unemployment drops below 7 percent. However, most analysts expect that to happen in mid-2015, ahead of official projections, which have the threshold being crossed no earlier than 2016.

Other explanations of the gap are scarier for the health of the U.K.’s economy. One possibility is that the country’s financial system has been weakened by the crisis, constricting the flow of capital to small businesses. Another option is that the gap is the result of long-term trends in the country’s industries, such as declining oil and gas production in the North Sea.

Yet a different explanation is that it reflects a fundamentally different manner in the way that businesses are approaching the concept of efficiency. Businesses have the option of investing in new technology to increase their output, but another method is simply to hire more staff.

However, this lowers the average productivity level per worker. Some have warned that such a trend would be harmful in the long-term, as it experiences diminishing returns and could leave British companies lagging behind firms in other developed companies.

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