Anthony Hilton: Productivity crisis? The stats don’t tell the whole story

Economists have been banging on for months about the collapse in Britain’s output per worker, with productivity now 4 to 5 per cent below the peak scaled before the onset of the financial crisis despite increased business activity and relatively high employment.

This worries people like the Governor of the Bank of England and the Chancellor because it feeds into measurements of the amount of spare capacity in the economy, which in turn helps in predicting how much scope there is for expansion before inflationary problems flare up again.

The estimates of what is called the output gap are all crazy guesswork, of course, but it does not seem to deter our leaders from trying to set policy by them.

At last, however, Charles Dumas of Lombard Street Research has come up with what, to me at least, is the most convincing explanation: it is a statistical quirk.

Everyone knows that services form the bulk of the economy and the measure of productivity in services is value added per employee – the largest part of which is their wages and salaries. Over the past few years, however, a lot of people have accepted pay cuts rather than risk losing their jobs. So that means the measure of productivity anywhere this has happened is likely to show a fall – even if the people are working harder than ever.