The productivity conundrum that isn’t

Following George Osborne’s budget, there has been much talk of the productivity “conundrum” – the question of why the United Kingdom’s productivity levels are so low.

Is it really a conundrum?  The reasons seem obvious to me:

A sustained failure to invest -the UK’s investment figures are among the lowest in the industrialised world, and this is a long-term failing.  Under Labour the private sector’s failure to invest was partly offset by significant public sector investment –  in health and education for example – but under Osborne that has largely ceased.

Falling pay and casualisation – traditionally, levels of pay, even for unskilled workers, have been “sticky” – they haven’t fallen; reducing output costs has meant investing in technology and processes.  But that has changed; wage rates continue to fall in real terms, and the casualisation of the labour force means that the cost of labour relative to capital has fallen further.

Weak levels of demand – as pay falls, people buy less and the attractiveness of investing in productive capacity also falls, measured against the expectation of short-term gain by financial investment and speculation.

In other words, we’re in a vicious circle.

The interesting point about the measures announced by George Osborne –  is that they are all based around the supply side: better education and training.  Labour market flexibility is the mantra of the day, but there is considerable evidence that it is a source of economic weakness, not strength, increasing uncertainty and further reducing the willingness of the private sector to invest.

But the demand side is left largely untouched – and this gives us the clue to why there is a “conundrum”.  It’s because the need for policy-makers to use the state to facilitate and stimulate investment is ideologically outside the mainstream political debate – certainly in the Tory party, but also on the Labour right (witness Yvette Cooper’s recent speech talking about how statism has had its day and small start-ups are the answer – ignoring the fact that such start-ups are dependent on big things like decent broadband infrastructure that, in parts of the UK at least, the private sector has been notoriously unwilling to provide).

It seems to me that the conundrum of productivity is basically an ideological construct; it’s only a conundrum if you’re not willing to move beyond the prevailing ideological consensus.   It’s not an economic conundrum, it’s a political evasion.

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