Will proper pay rises soon be affordable?

Homer Simpson Have we become a nation of Homer Simpsons?

Ask any economist (ie, not me - don't ever forget I am a hack) and they'll say it is impossible to have any meaningful improvement in living standards without any improvement in productivity.

Which is why it has been slightly nerve-wracking, after all those years that we've been getting poorer, that the recent economic recovery has been accompanied by only the smallest improvements in output per hour worked or output per worker.

But just perhaps there's a glimmer that you and I are beginning to generate more revenue for the same toil and graft (actually I am not sure whether I am, but I have no doubt that your efficiency is on the up).

Figures out this morning showed that in the last three months of the year, output per worker was 1.3% greater than in the same period of the previous year, and output per hour worked was 0.7% per cent higher.

A golden age?

OK this is not exactly a return to a golden age. It is important to recall that between 1998 to 2007, productivity improved at an annual rate of 2.5% per annum, fuelling economic growth at a similar tempo and rising prosperity.

But the reason the latest nudge up in productivity may be a bit of a breakthrough is that it caps a year of gentle improvements, after 18 months, from the middle of 2011 to the end of 2012, when there was no improvement in productivity at all.

Why has productivity been so lousy since the crash, with output per hour worked almost 5% below where it was in the first quarter of 2008?

Well what happened after the Crash and deep recession of 2008 - which many would see as a good thing - is that businesses retained workers on their books to a far greater extent than was true in previous recessions.

So as a matter of arithmetic inevitability, productivity fell sharply.

And then, curiously, in the long years of stagnation, companies started to hire again - which again meant that productivity fell, by definition.

More recently, as a recovery took hold, hiring accelerated. Productivity improved, but not by very much.

A nation of Homer Simpsons?

But why on earth, you may ask, are companies hiring, rather than making their existing workers work harder and smarter?

Have we become a nation of Homer Simpsons, fat, lazy and dim?

And for the avoidance of doubt, this is a British phenomenon. Productivity has risen faster in competitor nations. The gap between UK productivity and those of the G7 major industrial nations (excluding Britain) is more than a fifth.

Or to put it another way, we are more than a fifth less efficient than the US, Germany, France and so on (productivity in France, an economy usually sneered at by British business leaders, is well over 30% greater than in the UK).

What has gone wrong?

Puzzled economists (them again) posit a number of explanations.

Often they blame our weakened banks, for failing to provide finance to younger, riskier businesses with potentially better prospects.

Or they point to the banks keeping weak or zombie companies alive, a practice that appeared to be socially benign, which propped up irredeemably weak businesses that ought perhaps to have been put out of their misery - such that the capital locked up in them could have been redeployed to more productive outfits.

Or they say that something has gone wrong with companies' ability to exploit new technologies properly.

Or they argue that the recession undermined the confidence of companies to such an extent that they simply stopped investing in productive new kit and productivity.

Or the economists shrug and say they don't really have a clue what's been going on.

A one-off step change

For what it's worth, when I talk to company bosses they paint a different picture.

They insist that they are continuing to make great productivity strides, in the sense that their people are working harder and more intelligently than ever.

But they say they fight a constant battle against deflation, falling prices for their goods and services. They say they sell more stuff for less revenue, and that they simply can't improve the efficiency of their people fast enough to offset this squeeze in income.

Which implies they are prepared to take a smaller profit for unit sold to generate greater sales in the long term. So maybe the fall in officially measured whole-economy productivity is a one off step change in a downward direction, which will soon be reversed.

We should probably all hope that's the case.

Because quite apart from that inescapable link between productivity and our living standards, unless productivity starts to improve soon, there is likely to be a tightening in the labour market - which could lead to wage rises viewed by the Bank of England as inflationary.

Which would mean a premature, yucky and potentially recovery-stifling rise in interest rates.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 28.

    "But they say they fight a constant battle against deflation, falling prices for their goods and services. They say they sell more stuff for less revenue, and that they simply can't improve the efficiency of their people fast enough to offset this squeeze in income."

    So no matter how hard people work they will still be squeezed. Cameron's austerity forever for the ordinary worker !!!.

  • rate this

    Comment number 27.

    The paperwork generated by the desk jockeys where I work has definitely increased as they all struggle to justify their non- jobs.

  • rate this

    Comment number 26.

    What humans can do is limited, vast majority of jobs are already productivity maxed out & much productivity is only increased by replacing humans with machines & robots & computer programmes

    Where will increased productivity profits come from, apart from working longer for less pay, or cutting corners in services & removing humans from equation

    Main thing depressing wages is fear of asking

  • rate this

    Comment number 25.


    I take grave exception to be classified as gloomy. I am not gloomy. The solution that I have been advocated since 2008 would by now have fixed the too big to fail problem and actively encouraged the necessary deleveraging which preceded ALL recoveries from the dire situation of 2008 - try doing research yourself before you criticise others.

    RP is not paid to see the World - but to report.

  • rate this

    Comment number 24.

    Why so little productivity increase? To raise productivity you have to hire enough people so that they each have some extra productivity left to give at the end of the day! Private enterprise has spent the years since 2008 paring back their full-time staff to skeleton levels, and putting the remainder on insulting levels of pay and hours. Everyone's at their limit!

  • rate this

    Comment number 23.

    Robert.....some questions...
    1 Where on earth do you and these "economists" get these so called statistics from and are they up to date?
    2 How do we know they are accurate,not just written on the back of a fag packet over a game of pool?
    3 Do you really think these statistics will make one blind bit of difference to my employers decision to afford me a pay rise or not because I don't?

  • rate this

    Comment number 22.

    Productivity - the output per person - only increases when there is a real price to be paid for capital - that is NOT now or for the last 5 years.

    Free money encourage unproductive hair brained schemes that reduce productivity - investment in productive capital is actively discouraged by zero interest rates. ONLY when rates rise to ordinary levels will productive investment & productivity rise!

  • rate this

    Comment number 21.

    JfH. Just because Robert doesn't see the world in exactly the same gloomy way you do doesn't mean he is wrong or that he needs to 'get a grip' (whatever that means). I must say I find his comments better researched, more informative and better expressed than yours. Oh and they are reasonably balanced.

  • rate this

    Comment number 20.

    Robert, when you say irredeemably I think you mean irremediably.

    Sorry, but you do claim some expertise with words.

  • rate this

    Comment number 19.

    Bob GET A GRIP.

    UK 'economy' (if it can be called such!) is & remains chronically unbalanced. (Much like those who we pay huge sums to run it!)

    The banks remain too big to fail. The price of money is still at a 320 year low (indeed 1/5 of the previous ever low.)

    Stop spouting the nonsense you are supplied and remember where we are!

    QE must be repaid & rates must return to ordinary levels .

  • rate this

    Comment number 18.


    'Why is inflation of wages seen as a bad thing, but inflation of house prices a good thing?!'

    Long term house inflation bad. Short term good as far as HMG is concerned I suspect. House price inflation encourages debt & house buying. Typically each house buy puts 8K of spend into the economy plus stamp duty to the treasury. The slump in construction cost 250,000 jobs in that sector

  • rate this

    Comment number 17.

    There is the assumption here that "businesses retained workers on their books to a far greater degree than previous recessions"
    I think that is not entirely accurate. Yes unemp kept lower - but the peak in redundancies, in JSA onflows and in LFS job losses were all as high as previous recessions.
    People found jobs faster this time - but many were 2nd choice jobs - hence lower productivity.

  • rate this

    Comment number 16.

    The economy is not balanced

    House prices are for most unaffordable

    Interest rates are still causing savers misery

    Years of inflation people still struggling

    No real jobs and job security

    Graduates burdened with debt

    No apprentice training

    Cheap European labour with no vested interest in UK

    No matter what politicians/economists say the majority are not convinced = no change

  • rate this

    Comment number 15.

    Why is inflation of wages seen as a bad thing, but inflation of house prices a good thing?! Rising wages help to absorb all that extra money that has been created through QE (stimulating demand), rather than inflating asset values, which benefits the rich rather than everyone else and does not stimulate demand.

  • rate this

    Comment number 14.

    Is this an April Fool? It is hard to tell...

  • rate this

    Comment number 13.

    UK productivity has not improved with declining wages has it. Model broken

    I expect to be told in a decade or two there is a new model to explain it. That is the usual economic trick, change the model

    However I would suggest the definition of a job in terms of security, guarenteed hours, remuneration etc etc has changed progressively, or should that be regressively

  • rate this

    Comment number 12.

    The central problem is that our economic system (including our infatuation with low inflation) have created a situation where you can make more money electronically than by actually making any useful products or performing any useful services.
    This has to change & one way is to promote higher inflation.
    Inflation is the fairest possible tax on money - those who have the most pay the most.

  • rate this

    Comment number 11.

    Pay rise you say? Where? You'll be telling us we have a compassionate conservative government next...

  • rate this

    Comment number 10.

    Robert, you are doing a grand job, remember that 2 Economists will always offer you 5 opinions, a Hack is lucky to be able to invent one opinion.

    Demand has increased as the business climate has improved and as a consequence productivity has improved, that is only to be expected in a good business.

  • rate this

    Comment number 9.

    Err it is April 1st


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