Thread by @alfie_stirling

*THREAD*

Are higher minimum wages & more paid holiday key to fixing the UK's productivity puzzle?

Brand new @NEF research out today, covered by @RJPartington in @guardian and welcomed by @johnmcdonnellMP and @geofftily @The_TUC shows they are... 1/18 theguardian.com/business/2019/…

High productivity (amount produced per time spent working) is a key ingredient for an economy that works for people, society & planet.

1) Alongside good labour regulation, high productivity is an enabler of good pay for workers & closely correlated with earnings across time 2/18

2) Across countries, higher productivity is also associated with social benefits like higher life
expectancy & reduced child mortality (H/T Silvana Tenreyro bankofengland.co.uk/-/media/boe/fi…)

3) While doing more (or the same) with
less is crucial to environmental sustainability 3/18

But the UK has a productivity problem.

Since 2008, improvements in productivity have stalled, contributing to the UK having among the lowest levels among advanced economies today. For past 10yrs, productivity grew at about 1/3 the rate seen over the previous four decades 4/18

Traditionally, technology is seen as key factor behind long-run productivity. But even to the extent that innovation is in decline, or creating value that is missed by GDP, this doesn't explain why trend productivity pivoted so sharply in a single year 5/18

For 10yrs, economists mainly tried to explain UK puzzle from supply side - the way we produce & deliver goods & services.

One theory was low interest rates since financial crisis allowed low productivity ('zombie') firms to continue trading, weighing on average productivity 6/18

But the evidence couldn't contradict this idea more perfectly.

In fact, the decline in UK productivity growth has been located in our most, not least, productive firms 7/18

Similar issues beset all attempts to explain UK puzzle from supply side alone. Weak business practices, trade, finance, oil prices, skills, corporate governance & even measurement error all have some evidence. But even collectively they fail to explain the full divergence 8/18

So @NEF's new report adds to a growing literature suggesting that the reason for this is that the demand side - the level & nature of spending in the economy - may also be crucial to understanding the UK's productivity problem 9/18
neweconomics.org/2019/08/time-f…

In theory, firms confident in strong demand invest in future efficiency, raising productivity to increase profit margins. But when demand is weak, firms rely instead on cheap labour where costs can be easily shed if demand slows. But productivity also stays lower for longer 10/18

The UK evidence is strikingly consistent with this pattern. For example, new growth accounting from @ONS shows that a lack of investment started to become an increasingly important factor from 2012 onwards... 11/18

... over exactly the same period that cheap, insecure labour rose significantly 12/18

From austerity to Brexit, causes of weak demand
are also clear. @bankofengland estimate 2016 referendum reduced
demand by around 2% of GDP in 2018/19. NEF
analysis of @OBR_UK calculations also shows economy was up to 4.7% smaller in 2018/19 as a
result of government cuts... 13/18

... meanwhile the most uptodate evidence shows that continued Brexit uncertainty & threat of no deal means we could already be in recession again 14/18

The logic of demand side intervention is also strong. While failing to boost demand risks permanently lower living standards, any inflationary risks of excess demand can be offset by Bank of England - & would in fact help UK find a sustainable path to higher interest rates 15/18

So @NEF has called on government to implement a package of measures to boost demand, which are also consistent with wider objectives to reduce inequality & transform industry to meet carbon targets: including green investment, better public services & and stronger welfare 16/18

But also key are higher minimum wages via a new mandate for the Low Pay Commission & the creation of a new body to make regular recommendations on increasing statutory leave.

Boosting pay & giving employees more time off to spend it is a v efficient way to raise demand 17/18

Boosting productivity isn't everything. But as @paulkrugman once famously said, "it's almost everything".

The causes include many that are deep and structural, ranging from austerity to inequality. Brexit or not, the policy response needs to be equally transformative 18/18