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.
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[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.
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