Productivity slump hits wage rise hopes

PRODUCTIVITY fell through the first half of 2017 in the latest blow to hopes that wages will rise and prosperity take off, with employees producing less output for each hour worked than they were a decade ago.

Rising productivity is a key factor in improving living standards over the long run, so the fall in output per hour in both of the first two quarters of this year is a gloomy indicator.

Output per hour fell by 0.1pc from the first quarter of the year to the sec- ond, and is now 0.3pc below its level at the end of 2007, the Office for National Statistics said.

That means productivity is now 20pc lower than it was expected to be, if the pre-financial crisis rate of growth had been maintained. “Given the uncertain economic and political outlook, some businesses may also be trying to meet demand by taking on labour rather than commit to investment. The relatively low cost of labour relative to capital certainly supports employment over investment,” said economist Howard Archer at the EY Item Club.

Employment has recently risen to a record high while unemployment is at a 42-year low, but there has also been weak investment and sluggish pay growth. Mr Archer added that a large number of jobs were being created in relatively low-skilled, low-paid areas.

And there may also be an impact from the so-called “zombie” companies, those which are inefficient and unproductive but which are kept alive by low interest rates, enabling the problem to persist.

Productivity growth is also weak compared with other countries, and output per hour worked in the UK is now 15.1pc below the average among the other G7 countries. Analysts at Bank of America Merrill Lynch believe this poor productivity growth will turn into weak long-term economic growth.