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June 1, 2020

Would a short term reduction in productivity be a good idea?

Normally one of the key economic goals is higher productivity. Indeed, one of the UK’s major economics weaknesses has been the stagnation of productivity since the financial crisis. There are measurement issues and part of the slowdown in productivity growth may have been driven by structural changes such as the rise of the lifestyle economy and the shift from excessive pay in the financial sector to less silly levels.

 

But the only way that an economy can generally make people more prosperous on a sustainable basis is by making them more productive.

 

However, that is in normal times. And these are not normal times. 31% of the labour force is furloughed, 85% of companies are supported by some government scheme while the number claiming unemployment benefit has jumped to 5.8%, the highest in more than two decades, or 2.1 million. The government borrowed £63.5 billion in April. No one even bothered to check whether it was the highest borrowing in one month ever – it obviously was.

 

The government can’t go on borrowing at this rate even with the facility to print money. Eventually it will prove inflationary, even if not for a while.And the clear risk is that as the government schemes are wound down unemployment soars. Six million unemployed isn’t unrealistic, since even though the economy is bouncing back, it won’t be operating at full speed for a long while yet. And tourism, clubs, bars, restaurants and shops – all of which create hundreds of thousands of jobs – will operate well below capacity even if and when they can restart.

 

It is against this background that it might be worth considering turning the normal logic on its head. For a temporary period while the economy is in recovery mode, it might make sense actually to encourage employers to hold productivity down and share work around rather than laying people off.

 

There are arguments in favour and against.

 

In favour is that keeping people in work, even at lower levels of activity, prevents loss of skills. Conventional wisdom says that it takes an average of 66 days for habits to be learned and unlearned. So being out of work for much more than a couple of months can damage your ability to return to work. If this happens to larger parts of the workforce unemployment might fall only slowly following a recession and not return to pre-crisis levels for some time. The technical economics term for this is hysteresis.

 

And running the ‘90%’ economy by having 10 people working at 9/10ths rather than having 9 people working at 10/10ths and one not working at all shares the pain around.

 

One argument against is that someone has to take the pain of only producing 90% rather than 100%. The government can’t afford it and the companies in the sectors that are in trouble can’t either. Pay adjustments would have to be one of the factors involved, though the government, which will be saving on unemployment benefit, can probably pitch in a bit to incentivise.

 

There are two other problems. The first is that the pain of unemployment does play a part in the working of the economy. People out of work look for new jobs. But my argument is that in current circumstances the pain is disproportionate to the gain. If there aren’t enough new jobs around no matter how hard people look, the pain will be high and the gain tiny.

 

The second is that we may get used to a lower intensity of working life and want to stay that way. But if we do, there will be implications for government long term revenues. We can only manage a lower level of incomes if at the same time we cut the cost of government, which would be controversial.

 

For more information, please contact:

 

Douglas McWilliams:          dmcwilliams@cebr.com   +44 7710 083 652

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