Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 28 April 2015

Mediamacro myth 8: employment growth

We have had the slowest recovery from a recession almost since records began, and a large part of that is down to the sharp fiscal contraction that the coalition government chose to undertake, despite there being no market pressure to do so. But, supporters of the coalition might say, employment growth has been very strong. This is an argument that is almost as ludicrous as the 2013 recovery vindicates austerity idea, but there is still a half-truth behind it. [1]

To see why it is ludicrous, you just need to note that - by definition - labour productivity is output divided by employment, and that over the medium to long run living standards are largely determined by productivity. So to try and take credit for strong employment growth despite lack of output growth is to take credit for poor productivity growth (or, in the UK case, the virtual absence of productivity growth over the last five years). Which is very close to wanting to take credit for the lack of growth in real incomes.

In short, it is output that matters, not employment. Employment growth due to output growth is good, but employment growth without output growth is not. To extol employment growth without output growth could be described as a luddite point of view!

The half-truth concerns the distributional impact of a recession. On average we are worse off in a recession, but those that really feel it are workers that lose their jobs. For a given level of output in a recession, it would be better if the pain was evenly spread through cuts in living standards and little increase in unemployment. So, if (and this if is critical) productivity growth just paused during a recession, but then made up for all the lost ground afterwards, that would probably be a good thing.

So, in that very specific sense, lack of productivity growth might be a good thing given the lack of a recovery, on the assumption that we get it all back again later. However I doubt very much whether the government would want to take credit for stagnant productivity during their term of office for two reasons. First, it probably has very little to do with them, and rather more to do with the flexible labour markets encouraged by their predecessors. Second, there are very strong doubts that we will get back all the lost productivity growth: the OBR is assuming we get back virtually none.

So to claim credit for strong employment growth is the same as claiming credit for poor productivity, and it is hypocritical to try to do the first and not the second. [2] Given that many economists argue that poor productivity growth is our number one problem right now, implicitly claiming credit for creating the problem in the first place is somewhat bizarre.

Previous posts in this series

[1] There are many reasons to doubt the ‘quality’ of the employment growth (see for example David Blanchflower (pdf)), but that is not my concern here, except in so far as that helps explain lack of productivity.

[2] Although this highly unusual lack of productivity growth after a recession pretty well coincides with the period of the coalition government, it is far from clear whether there is a connection or not. If poor productivity is down to firms using workers rather than capital because the recession plus austerity has pushed down wages, then there is a connection between austerity and poor productivity. However other explanations are equally possible, which is why it is called the UK productivity puzzle. 

31 comments:

  1. I see the growth "miracle" just hit the bumpers down to 0.3% last quarter. Maybe the fake 5000 business signatories in a recent letter spent to long penning letters rather than producing things and they will get the blame. I see much spinning coming our way over the last few days till May 7th.

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  2. "to claim credit for strong employment growth is the same as claiming credit for poor productivity"

    Surely this is only true if a scenario in which there is less employment but productivity is no better could not have happened, which isn't immediately obvious to me. Since productivity bottomed out in 2009 both employment and productivity have improved, albeit not by much.

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  3. Can we infer that compared to 2010: (1) There are more people in work. (2) They are earning less on average? If the answer to (2) is yes, then is there any evidence where the contraction in wages is weighted?

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  4. The statement that "In short, it is output that matters, not employment." only holds if we restrict ourselves to the standard, but very narrow, assumption that utility only depends on what people (could) consume. With more realistic assumptions, unemployment may be felt by the unemployed to be bad in itself, not only because fewer goods are produced and consumed. There is evidence for this.
    If we go further and use a social welfare function that includes more than individuals' current utlity then there are even stronger reasons for including employment in the function, in addition to output. For example, one of the suggested reasons for hysteresis effects of slumps is that unemployed people subsequently are less productive than they otherwise would have been (or at least are considered so by prospective employers). Again, there is evidence for this. Almar

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    1. I think that was what my half-truth was getting at.

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  5. Your argument here seems very biased. First you say employment growth is a lie. Then you say, well, it doesn’t count, because there has been no productivity growth. The person who now has a job might disagree there. Also “it is output growth that matters” - well, if there has been employment growth at constant productivity… I understand that you have very strong feelings about the current government, but I believe your cause would be served better by more carefully thought through argument. Am I missing something?

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    1. Rather a lot, apart from the bits you have added: where do I say employment growth is a lie? Just ask yourself, does the government deserve credit for employment growth? If your answer is yes, it must also take the credit for flat productivity.

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    2. The title of your piece says that employment growth is a myth. Maybe not quite a full lie, but close.

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    3. So you only read the titles of my posts now. It is obvious what I meant from the first two paragraphs. How silly can you get.

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    4. Actually James in London reveals quite a lot about the level of debating in this country. Cheap point-scoring and quoting out of context are far more important than engaging with the argument. Especially when you've lost the argument and want to construct a smoke screen to disguise that fact

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    5. It would be lovely to have productivity growth, it would be lovely to have real wage growth, but when you have mass unemployment job growth has to be the priority. And should be welcomed. Just how mean spirited can you guys get?

      You do all sound a bit like the railway companies complaining of the "wrong type of snow", I guess we are just having the "the wrong type of recovery".

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    6. Thanks James in London, "mean spirited" really made my day.

      I love the idea that job growth was the "priority" of the government. Laughable. I love the implication that Cameron, Clegg and Osborne were sat round a table deciding which of the two mutually exclusive alternative of jobs or productivity that they could go for.

      If the reason we should vote Conservative is because of increased number of baristas, then you really are scraping the bottom of the barrel.

      In a flexible labour market then unemployment doesn't last that long as the out-of-work look for jobs, and indeed get them after a couple of years. Ergo all the new baristas and less than zilch in the way of real wage growth.

      Unemployment would have fallen under labour as well. The labour market has been pretty flexible for over 20 years now. Indeed flexible labour markets are to be welcomed, but that war was won some time ago.

      But why not expect real income growth as well? At any other time in the past 200 years that's what we'd have got. In a time with rapid technological innovation this is not unreasonable. It's complete stagnation in productivity over the duration of the Coalition's term of office that is unreasonable.

      The reason of course is the systematic suppression of demand embodied in the Coalition's austerity policies. Nothing to do with snow.

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    7. In an economy with 75% of production in the services sector concepts like output and productivity should be treated far more carefully than they are on this blog. Employment can be measured easily, the other things are too philosophical to use for making policy.

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  6. This has been an excellent series that I wish everyone with a vote (unlike me) in the UK election would read - but I find myself much less convinced by this post than by others. I come away thinking employment growth has indeed been very strong AND that it's plausible (but far from clear) that policy had something to do with it, via the austerity-lower wages mechanism mentioned in the footnote.

    I think it would be better to say that the media should be informing voters that the Coalition's claims about causing employment growth must be qualified by saying that if true, it was at the price of lower wages and lower productivity, hence reducing average living standards. This is the kind of trade-off (lower unemployment versus lower average living standards) people could then differ about (I'd certainly choose lower unemployment for the distributive reasons you mention - which is why your "output is what matters" sentence is a bit off). Of course I am persuaded, in part by this blog, that any employment-wages trade-off could have been avoided or at least limited by better fiscal policy.

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    1. I think I probably needed a footnote to my footnote. My half-truth is that, given the recession and delayed recovery, poor productivity might have had distributional benefits, and you agree on that. But that is different from saying the government deserves credit for that better distributional outcome, because it came at a cost of lower output as well as lower productivity - output is not given in that case. Without austerity, all of productivity, output and employment could have been higher.

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    2. I find myself much less convinced by this post than by others

      I agree. If productivity and employment are not inextricably linked, then what is to say that productivity and employment could not fall at the same time? If that is the case, it is at least possible that government policies have increased employment (above what it would have been) without harming productivity (compared to what it would have been). So there is no obvious logic to the statement that "claiming credit for strong employment growth is the same as claiming credit for poor productivity".

      A weak argument amongst a set of otherwise very strong arguments is what a lawyer I know calls the 'turd in the fruitbowl'.

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    3. "it is at least possible that government policies have increased employment (above what it would have been) without harming productivity (compared to what it would have been)." Yes, if they had increased output growth (compared to what it would have been), but we have already seen in previous posts that they had reduced output growth!

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    4. Imagine an economy with two sectors: A and B. Productivity in sector A is declining for some sort of external/structural reason the government has no control over. Output in sector A is therefore declining. If government policies successfully increase employment (and therefore output) in sector B they can take credit for this even if overall output in the economy does not increase.

      What is wrong with this reasoning?

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  7. I agree with all of that. But this means this "myth" is not independent of the others. So someone who, unlike you and I, didn't accept that austerity reduced output would have no reason to dismiss the Coalition's claims about jobs (though they should still accept that if those claims are true a price was paid in productivity and wages).

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    1. To clarify, above comment was meant to come in reply to SWL's reply to my first comment - so "all of that" refers to SWL's comment of 9.35am yesterday.

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    2. "they should still accept that if those claims are true a price was paid in productivity and wages."

      I don't think that's necessarily true: see my last point above.

      I do agree with your first point though: in fact I would go further and say that this myth is not a separate myth at all. Of course if you accept that austerity reduced output, then if there hadn't been austerity then either employment or productivity (or both) would have been higher. But in a debate with people who don't accept that premise the best you can say about this argument is that it dosn't add anything.

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    3. JD, I think the problem with your scenario is you don't specify a mechanism through which the government increases employment in low-productivity Sector B. Simon has suggested one such plausible mechanism - austerity lowers wages (and thus shifts demand from capital-intence, high-productivity sectors to low-productivity labour-intensive sectors - from A to B in your scenario).

      So someone who wants to credit the Coalition with these jobs but not blame it for low wages and low productivity would have to come up with an alternative mechanism.

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    4. Well let's suppose that sector B didn't allow women to work in it, and the government changed that. Or the government abolished a law stating that anyone employed in sector B couldn't be fired for two years.

      The sort of improvement in employment that I'm describing in sector B could feasibly come about because of supply-side reforms. If you admit this possibility then the logic that increases in unemployment are just the mirror image of decreases in productivity doesn't hold up.

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    5. Wouldn't these supply-side reforms also have a positive effect on output? Remember the "puzzle" arises because employment is performing unusually well relative to output (or output unusually poorly relative to employment!). Of course the people who find jobs may be lower-skilled, but the employment rate is not so high that we're talking about previously-unemployable categegories who are going to drag average productivity in a way they didn't in the past when employment was this high. I suppose it could be that supply-side reforms have been targeted on exceptionally low productivity sectors, so that people once active in more productive sectors have found less productive jobs.

      But when I said that the notional defender of the Coalition's jobs record would have to come up with a mechanism for how the jobs were created, I was thinking of something empirically rather than theoretically plausible - do you have any supply-side reforms in mind?

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    6. Well yes, and in my example they do have a positive impact on output: in the absence of the reforms output would have fallen.

      I don't think concrete examples are necessary to undermine SWL's argument: as long as you admit that supply-side reforms could be behind the increase in employment you admit the possibility that the correlation between low productivity and high unemployment doesn't hold. And why get into an argument about exactly what kinds of reform might have had what kinds of effect on employment, when you've already won the argument on the link between austerity and output at the aggregate level? This is what I mean by the 'turd in the fruitbowl'.

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    7. "in my example they do have a positive impact on output"

      That's a reason why your example might not apply - you need something that raises employment but not output (or at least raises employment more than output).

      But yes, we do agree with one another that the case about austerity hurting output is the more compelling one.

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    8. In my example employment does rise by more than output (because output doesn't rise at all) but I don't think it matters. The point is that productivity and employment are not necessarily a direct trade-off. But why get into an argument about whether and to what extent supply-side reforms might or might not have increased employment when you've already shown that austerity decreases output overall?

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  8. In my (small) company productivity = output / employee is very strongly influenced by demand. At the moment demand is weak so productivity by this definition is low. That does not mean that we are not getting on with other things, such as designing new products. I suspect that much of the economy is working at under-capacity.

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  9. My gut feeling is that lack of productivity is probably related to a combination of a shift to lower paying service jobs (often supported by taxes), and lack of investment. The lack of investment in people or infrastructure in this country is incredible.

    I work in a large multinational that trades on it's knowledge. My time is sold to clients at more than the price of a high spec laptop per day. I have not had a day of skill training in a decade that I didn't pay for myself, and my 7 year old home laptop has much more speed than the one work assigned me last month! How long can they continue to charge for my knowledge and skills with such investment?

    There it has all been down to a focus on the next quarterly figures rather than long term business health. My gut feeling is that modern business culture is more to blame than recent politicians, despite my dislike of the latter. Sadly it has also infected politicians, who'd happily sell assets and rent them back at high rates for a short term balance sheet gain (and no, they should of course handle that differently on a proper balance sheet).

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  10. Haven't we produced enough??!! Its time to give Mother Earth a break. Where will it end??!

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    1. Growth of services means GDP increase doesn't require increased use of natural resources.

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