The uk productivity dilemma april

Chart of the Day
Man in Van solves UK
Productivity puzzle …
April 2015
The Saturday Economist - Special Report

For more information - Check out The Saturday Economist .com
Chart of the Day
Data Source : Ofﬁce for National Statistics : Labour Productivity, Q4 2014 Release Date April 2015
The Saturday Economist
Understanding the UK Productivity Dilemma - April 2015
This week -
we were on BBC Breakfast to
explain the UK productivity
dilemma. Here’s a copy of the
research for the show ..
April 13th 2015

Productivity Index
20
30
40
50
60
70
80
90
100
110
120
130
1960 1970 1980 1990 2000 2010
The Saturday Economist Understanding The UK Productivity Dilemma April 2015
Data 1960Q1 - 2014Q4
Trend Rate 2.24
OLS 1960Q2 - 2007Q3
“Productivity growth has failed to increase - despite the recovery …
Data Source : Ofﬁce for National Statistics : Labour Productivity, Q4 2014 Release Date April 2015
Productivity has failed to
increase despite the recovery .
Leading to fears the potential
rate of growth will be impaired
in future years …

Productivity Rate of Growth %
0.00
0.75
1.50
2.25
3.00
1960s 1970s 1980s 1990s 2000s 2010s
0.7
1.2
2.02.0
2.5
2.9
“But has been falling since the 1960s …
Data 1960Q1 - 2014Q4 Data Source : Ofﬁce for National Statistics : Labour Productivity, Q4 2014 Release Date April 2015
Productivity
Rate of Growth
In fact, it’s been falling for
the last ﬁfty years …
So no need to panic just yet

Productivity Rate of Growth - Quarterly Year on Year
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1960
Average 2.00
1960Q2 - 2014Q4
“The Productivity of Growth is very volatile …
Productivity growth is very
volatile …

Productivity & GDP - Rate of Growth
Correlation 0.731
OLS 1960Q1 - 2014Q4
-8
-6
-4
-2
0
2
4
6
8
10
12
-6.8 -4.5 -2.3 0.0 2.3 4.5 6.8 9.0
“and is highly correlated with the rate of Growth of GDP …
Productivity
GDP
And is highly correlated with
the rate of growth in GDP …
The current “anomalies” are
well within the bounds of
historical distribution.

Productivity Rate of Growth %
0.00
0.75
1.50
2.25
3.00
1960s 1970s 1980s 1990s 2000s 2010s
0.7
1.2
2.02.0
2.5
2.9
“Part of the reason for declining productivity over the years…
Productivity
Rate of Growth
The fall in productivity over
the years … can be explained
(in part) by the relative rates of
productivity in the sub sectors
of the economy …
(next slide)

All*
Transport Equipment
Chemicals & Pharma
Computer & Electrical
Information and Comms
Manufacturing
Production
Finance and Insurance Services
Textiles and Clothing
Professional Services
Metal & Metal Products
Rubber & Plastics
Food Drink Tobacco
Machinery & Equipment
Coke and Petroleum
Private Sector Services
Transport & Storage
Wholesale and Retail
Service Sector
Services Other
Wood Paper Print
Admin and Support
Forestry Fishing
Arts Entertainment & Recreation
Government Services
Accommodation and Food
Construction
Real Estate Activities
-1.0 0.0 1.0 2.0 3.0 4.0 5.0
-0.1
0
0.3
0.4
0.9
1.2
1.3
1.3
1.5
1.6
1.6
1.8
2.1
2.1
2.3
2.3
2.4
2.4
2.4
2.8
2.9
3
3.1
3.8
4.3
4.4
4.8
2.3
Productivity by Sector
“is the relative rate of growth of sectors within the economy…
Manufacturing has much higher
productivity than services …
Especially if we compare transport,
(wheels and wings) to leisure,
accommodation and food …

Data 1960Q1 - 2014Q4
Productivity Jobs Growth Dec-12 Dec-14
All 1,753 31,768 33,521
Service Sector 1.6 1,528 26,431 27,959
Professional Services 2.4 335 2,545 2,880
Accommodation and Food 0.3 261 1,960 2,221
Admin and Support 1.3 240 2,546 2,786
Information and Comms 3.8 92 1,250 1,342
Wholesale and Retail 1.6 87 4,809 4,896
Transport & Storage 1.8 86 1,506 1,592
Construction 0.0 86 2,035 2,121
Manufacturing 3.1 76 2,539 2,615
Real Estate Activities -0.1 71 499 570
Arts Entertainment &
Recreation
0.9 68 894 962
Forestry Fishing 1.2 63 375 438
Finance and Insurance Services 2.9 -24 1,144 1,120
Private Sector Services 2.1 -44 1,569 1,525
Government Services 0.4 -44 1,569 1,525
“Much of the job growth is in sectors with lower productivity…
Data Source : Ofﬁce for National Statistics : UK Labour Market Data 000, March 2015 Release Date March 2015
The ﬁgures speak
for themselves …

the faster rate of growth in output and jobs in service with lower
productivity …
explains in part the slowing rate of productivity over the last
ﬁfty years …
We estimate the trend rate of
productivity growth is now just
1.6% …
“the faster rate of growth of leisure … with even lower productivity
explains the continuing slow down in productivity rate of growth…
“

“So what of productivity since the recovery ?
“The UK is still almost 10% below the trend rate
growth of output …
As we demonstrate in the next slide

QTR 4Latest
Data
GDP Trend Rate
2.7%
Trend Rate
Latest
3.0%
GDP and the Trend Rate of Growth
Our long term trend rate of growth
1955Q1 : 2014Q2 is 2.7% identiﬁed
from trend rate analysis using OLS
simple regression. The intercept at
1995Q1 is coincidental.

The average rate of growth 1995Q1 :
2008Q1 is 3.3% using similar
methodology.

The output gap 2014Q3 compared
to long term trend is 9.4%
The Output Gap and Trend Rate
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
1995 1998 2001 2004 2007 2010 2013
9.4%
3.3%
2.7%
Growth Rate Q4 - 2.7%
Trend rate - 2.7%
Output Gap - 9.4%
Data : ONS

Gross domestic product index: CVM: Seasonally adjusted

YBEZ seasonal_adjustment SA base_period 2010 price

CONS index_period 2010

“The UK is still almost 10% below the trend rate
growth of output …
So what impact
does this have
on productivity… ?

“We consider productivity is a derivation of output / labour …
rather than the driver of growth … ?
90
100
110
120
130
140
150
160
1995 1998 2001 2004 2007 2010 2013
O
—
L
GDP Index
Productivity Index P (f)
1995Q1 = 100
We think of productivity as
a derivation of output over labour …
A simple arithmetic …
Productivity is ..
Not a driver of output and growth .

Data 1960Q1 - 2014Q4 Data Source : Ofﬁce for National Statistics : DYDC : UK Labour Market Data 000, March 2015 Release Date March 2015
20,000
21,000
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
33,000
34,000
35,000
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Workforce Jobs …
Jobs are increasing …

Data 1960Q1 - 2014Q4 Data Source : Ofﬁce for National Statistics : Business Investment [NPEL] £000, March 2015
30,000
32,000
34,000
36,000
38,000
40,000
42,000
44,000
46,000
48,000
50,000
52,000
54,000
56,000
58,000
60,000
2000 Q1 2001 Q2 2002 Q3 2003 Q4 2005 Q1 2006 Q2 2007 Q3 2008 Q4 2010 Q1 2011 Q2 2012 Q3 2013 Q4 2015 Q1 2016 Q2
Business Investment
Business investment
is increasing …

0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Manufacturing Services
Data 1960Q1 - 2014Q4 Data Source : Office for National Statistics : Profitability of UK Companies … 9th April 2015
Business Profitability …
And so too
is business profitability …
especially in the service
sector …

“So what of the man in the van …
The vans keep rolling …
No matter how big the load
in the back!
Remember …
We think of productivity, not as a driver of growth but as a simple output of growth.
A simple calculation. A function of output divided by labour which renders the productivity calculation.
As output increases productivity improves. As output falls, productivity falls.
The man in the van explains all. Our man in the van, is part of a national delivery ﬂeet.
The next day delivery promise, demands a national ﬂeet with a national team of drivers to
keep the vehicles on the road. At the beginning of 2008, order books and the vans were
full. Productivity was high …
In 2008, the orders fell as did the loads in the back of the van. The productivity of our
man in the van fell and has not made a full recovery since. His productivity is improving
but is not yet back to pre recession levels.
Productivity is important as a Key Performance Indicator (KPI) in the
manufacturing sector with a exposure to international markets. But is it so
important in the service sector, where service is the KPI. Can waiters serve
more tables? Housekeepers clean more rooms? Retailers cut staff without
increasing queues at check out!
In the manufacturing sector with a exposure to
international markets, Productivity is important as a
Key Performance Indicator (KPI). But is it so important
in the service sector, where service is the KPI. Can
waiters serve more tables? Housekeepers clean more
rooms? Retailers cut staff without increasing queues at
check out!

The vans keep rolling …
No matter how big the load
in the back!

“Sooner or later, something will turn up …
… it will be UK productivity”
Thanks to the man in the van …
Sooner or later …
Something will turn up …
It will be UK productivity!
“In a service sector economy, it is important to understand ..
The concept of a ‘cyclically and sectoral adjusted productivity’ trend rate of growth
and productivity as an output of growth … not a driver of growth!

Chart of the Day
Man in Van solves UK
Productivity puzzle …
April 2015
The Saturday Economist - Special Report
Thanks to the man in the van …
Sooner or later …
Something will turn up …
It will be UK productivity!

The uk productivity dilemma april

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