Workers sitting idle at home drag productivity further into the mire
Paying staff to do nothing has wreaked havoc on figures for output per worker, finds Russell Lynch
The Covid-19 outbreak delivered a further blow to the UK’s lacklustre productivity as the Government’s job retention scheme paid millions of employees to sit at home, official figures revealed.
Raising the UK’s productivity – effectively the economy’s ability to produce more with less – is seen as the holy grail for policymakers, as it allows companies to improve their competitiveness and fund pay rises for workers.
But after the worst decade for productivity growth since the
19th century, it now stands more than 20pc below pre-financial crisis trends due to a combination of factors such as low investment, stagnant real wages making workers more attractive than machines, and record low interest rates helping keep weaker companies afloat.
The latest Office for National Statistics figures for the first quarter of the year underlined the damage done as productivity measured by output per worker plummeted 3.1pc compared to a year earlier – the biggest fall over a single quarter since 2009.
This was due to the number of workers actually rising 1.4pc compared to 2019. The UK’s gross value added (GVA) – a measure of goods and services produced less the costs of production – fell 1.7pc due to the lockdown of the economy in the final week of the quarter from March 23.
The furlough scheme was backdated to the beginning of March by Rishi Sunak, the Chancellor, when it was introduced, with taxpayers paying 80pc of the wages of millions of workers, creating a major dent to productivity. Measured by output per hour, the blow was less severe – down 0.6pc – as the number of hours worked fell 1.2pc, albeit still less steeply than the decline in GVA. Paying workers to do nothing also pushed unit labour costs – the cost of producing a unit of output – up 6.2pc, the biggest annual rise since 2006.
The desperate hunt for a Covid-19 vaccine is also reflected in the figures. While overall output per hour among manufacturing firms sank 0.6pc compared to the end of 2019, the chemicals and pharmaceuticals sector stands out with a staggering 11.9pc rise over the first quarter of the year.
Pablo Shah, UK economist at the Centre for Economics and Business Research, said: “A primary driver of this result will have been the coronavirus pandemic, and the global scramble for medical equipment, drugs and treatments.”
Among services sector workers the pain was much more pronounced as output per worker in food and accommodation businesses plunged 12.3pc compared to the previous quarter.
Output in “real estate activities” meanwhile sank 6.3pc, as the property market effectively shut down in mid-March.
Despite a surge in health spending, productivity in public services sank 4.8pc year on year as well, because schools were closed and the extra outlays on health were also met by the cutting back of GP appointments, the rapid scaling back of non-emergency surgery, as well as cancelled or postponed outpatient activity.
The productivity figures underline the disproportionate impact of the shutdown on lower paid workers, a persistent theme of the economic impact of Covid-19. While an unemployment crisis looms for millions of those lower paid workers in a world of lingering social distancing, the corollary is that it actually improves the productivity numbers due to a composition effect.
Compared to a year earlier, the smaller fall in output per hour can also be explained by an increase in the share of hours worked by older, generally better paid workers compared to their more unfortunate younger counterparts. Hours for those with no qualifications fell by 5.8pc, while hours for the most qualified grew by more than 2.3pc. Younger workers saw a decrease of 5pc in hours worked, whereas those aged over 50 years increased their hours by 1pc.
Businesses such as restaurants are generally less productive, so a disproportionate fall in that sector is actually good news for output per hour too, and raises the ironic prospect of much stronger productivity – at least on an output per hour basis – in the second quarter even as overall GDP collapses by around 20pc.
But economists warn that a genuine longer-term solution to the UK’s productivity crisis will only come with extra investment from businesses that were already deterred from spending by the on-off saga of Brexit before the coronavirus struck.
Tej Parikh, chief economist at the Institute of Directors, said: “The UK’s productivity woes didn’t begin with the pandemic” and put the onus on the Chancellor to help encourage businesses to invest.
He warned: “However, cash will be tight in the months ahead. Ongoing uncertainty and unhealthy balance sheets will make it hard for many SME directors to invest in their organisations at this critical time. The Chancellor must shift the dial with tax incentives for business investment.”