Business: The British way of working: high employment but low roductivi ty

Christopher Johnson on why our living standards still lag behind the Eu ropean average

The British attitude to the rest of Europe on economic performance veers between boasting about our high employment and bemoaning our low productivity. Is it us or other countries that are too weak to enter Economic and Monetary Union? Recent statements from the Treasury indicate that we do not have a monopoly of economic virtue. We may be more flexible than other countries in varying the length of the working week, upwards as well as downwards. But we are not yet flexible enough in te rms of skills to join EMU. "Britain today is some 20 per cent less productive than our main competitors," Gordon Brown, Chancellor of the Exchequer, admitted in his pre-Budget statement. The net result of extra effort and reduced efficiency is that our living standards in terms of GDP per head are 4 per cent lower than the EU average. We are 10th, ahead of Ireland, Spain, Portugal and Greece, and behind all our main industrial rivals. (T he figures are based on OECD statistics for 1995. Different years and other sources give different figures, but the broad picture is the same.) GDP per head is equal to hours worked per head of population (labour input) times GDP per hour worked (productivity). Productivity depends on capital inputs, including human skills as well as physical investment. Hours per head of population are hours pe r person employed times the percentage employed of the total population (the employment rate). Countries vary even more in working hours, employment rates and productivity levels than they do in living standards. The graph shows different countries' combinations of effort in thousands of hours worked and efficiency in GDP per hour in dollars at pu rchasing power parities. The UK's labour input is 764 hours a year per head of population, second only to Denmark's in the EU. It is, however, well below that of Japan, the US and the Far Eastern "tigers". Japan's productivity is less than that of the UK , and the US's less than the EU average. Their higher GDP per head is due to longer working hours, so it has a welfare cost. Britain achieves its high labour input partly by having 44 per cent of the population (71 per cent of 15-64s) in employment. Its employment rate comes below those of only Denmark and Sweden in the EU. Britain also has the longest average working hours pe r employee after Spain and Finland - 1735 hours a year. We input 20 per cent more labour than the average EU country. The relatively high number of part-time workers is more than made up for by the longer full-time working week. The Government's policy is to increase the employment rate, even though it is already relatively high. A higher employment rate tends to go with lower unemployment. Looking across countries, an employment rate one per cent higher is apt to mean an unempl oyment rate two-thirds of a per cent lower. Higher employment is beneficial to welfare, as long as it is not compulsory. On this score the UK is doing well, as long as it maintains the voluntary principle. Long working hours are a more dubious benefit. They boost household income and satisfy worka holics, but they can have adverse effects on health and family life. According to a 1995 NOP survey, about 45 per cent want to work a shorter week; only 25 per cent want to work more than 40 hours, compared with 70 per cent actually doing so. In most EU countries, employment has risen over the past 10 years only in line with population, so the employment rate has been more or less static. Population growth in the UK has been 0.4 per cent a year - average for the EU - and employment growth has been 0.5 per cent a year. Average hours worked have fallen in most EU countries, but have risen 0.1 per cent a year in the UK. In the US, employment has gone up 1.6 per cent a year - 0.5 per cent faster than the population increase - and working hours 0.3 per cent a year. So an increase of 2 per cent a year in labour input accounts for over half the high US growth rate of 3.3 pe r cent. Britain is as far below the EU average on productivity as it is above it on labour input. UK GDP of about $23 per person hour is 20 per cent below the EU average of $29, and 13th in ranking, above only Greece and Portugal. Italy and the Netherlands have the highest figure of $38 an hour, followed by Belgium ($36), France ($32), Austria ($31) and Germany ($30). The new DTI report says that France and Germany are 25-30 per cent ahead of the UK on productivity; my figures are 35 per cent for France and 30 per cent for Germany. The DTI's sectoral analysis shows that only chemicals and paper and printing in the UK achieve productivity higher than the G7 average. All other sectors have lower productivity, some as much as 50 per cent lower. Low productivity in the UK is due to lack of sufficient skills training, as Mr Brown has recognised by the measures in his Green Budget. Other EU countries have done better, while the US has done almost as badly, owing to the deficiencies its education s ystem shares with that of the UK. The DTI report blames too little investment in physical capital and research and development as well as low-skilled human capital, for the UK's poor productivity. "For every pounds 100 per worker invested in the UK between 1983 and 1993, Germany andthe US invested nearly pounds 140, France almost pounds 150 and Japan over pounds 160." One of the Government's main arguments for going into EMU is that it would lower interest rates and increase investment. The graph shows that there is an inverse relationship between labour input and productivity, at least among the more advanced EU countries. This works in both directions. As the law of diminishing returns suggests, if labour input is increased with a given quantity of capital, the extra labour is less productive than the labour already employed, and the average product per hour falls. It is still worth creating jobs as long as GDP per head does not fall by more than the increase in employment. Looking at it another way, if productivity per hour is rising, people can do less work and enjoy more leisure, yet still be better off. The story of economic progress over the centuries has been one of shorter hours, and productivity rising faster than t he fall in hours. Result: higher living standards. For any given objective in terms of living standards, countries have a choice of different combinations of labour input and hourly productivity. Within the EU, Italy and the Netherlands have chosen one end of the spectrum, with short hours and high produ ctivity. The UK and to a lesser extent the Scandinavian countries have taken the other end, with long hours and low productivity. If only the UK could raise productivity by 25 per cent to the EU average, while keeping its present working hours, it would overtake all the other EU countries with a similar rise in living standards. If it could do even half as well, with a 12.5 per cen t increase in productivity, it would be level pegging with France and Germany at a GDP per head of $20,000 a year. In the better years of the Thatcher era, the UK managed to raise productivity faster than its EU rivals, without catching them up. If it could now increase productivity 2.5 per cent a year faster than them for five years, it could catch up in terms of li ving standards though not in terms of productivity levels. Higher labour input - particularly by means of more jobs rather than longer hours - and lower productivity are a valid alternative to the continental model.

* Christopher Johnson is UK Adviser to the Association for the Monetary Union of Europe.

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