The real gift to the younger generation this year would be solving the productivity puzzle

This week highlights the financial stretch between wanting everyone to have a good time and worrying about the cost of it all
  • @TheIndyBusiness

The week before Christmas is always one of contrasts: between modern commercialism and the Bible story of course, but also between the need to get things done and the opportunity for contemplation about the year to come.

The economic story this week is especially one of contrasts. It looks very much as though this Christmas season will see the largest spend ever by British consumers. Yet the squeeze on living standards remains: the rise in consumer prices reported yesterday is still well above wage increases. The next set of employment and unemployment figures, out today, will show more people in work in Britain than ever before, but the Institute for Fiscal Studies has just calculated that people born in the 1960s and 1970s will be worse off in retirement than their parents.

For most families, this week highlights the financial stretch between wanting everyone to have a good time and worrying about the cost of it all. The sense that we are having to run harder to stay in the same place is pretty widespread, but the run-up to Christmas makes it more evident than during the rest of the year.

The good news first. It looks as though next year will at last see earnings climbing above inflation. That is by no means certain, and it has taken longer than most people expected, but it should not be too far off now. Next, it looks as though overall growth in 2014 – not just for the UK but for the developed world as a whole – should be stronger than this year. The cyclical position is improving. You can see it in all sorts of ways, not least in the improvements in the fiscal deficits of just about all developed countries, Britain included.

The bad news is that the structural position is not getting better, here or elsewhere. The IFS paper is interesting in that it highlights the pressure on people in their thirties and forties. Up until now, they have enjoyed a much higher standard of living than their parents did. But, partly because they have saved less, or had less saved on their behalf by the government and their employers, and partly because of demographic changes, they face a poorer retirement.

Not all this is bad. The biggest single reason why the next generation of retirees will be poorer is that they will, on average, live much longer. I don’t think many people would welcome a fall in life expectancy. But it does mean the 1960s and 1970s generations will have to save more and/or work for longer. The big spend this Christmas week therefore means less of a spend in, say, 20 years’ time. In an ideal world governments would have offset individuals’ reluctance to save by holding back more themselves – running fiscal surpluses – but all over the world they have done quite the reverse. So the next generation of retirees face a double whammy: they haven’t saved enough themselves, and the state hasn’t saved enough to fill the gap.

There is only one positive way round this problem, which is to run our societies more efficiently. The word is productivity, but that is confusing because we use that to describe output per person without thinking about the quality of that output or the quality of the job. One of the under-reported positive changes at the moment is the way in which the public sector is improving its productivity: the squeeze on spending is forcing it to do more with less. The stories have all been about the squeeze, not about the improved service that many parts of the state have managed to deliver.

This week demonstrates another under-reported area of improved productivity: the shift to online retailing, which on some calculations may have risen to 20 per cent of retail sales. We have the highest proportion of goods sold online of any major economy. We are learning how to use the new technologies to improve efficiency of distribution.

That is how increases in living standards have occurred in the past. A new technology comes along – the moving production line for example. It then takes years for people to think of ways of applying it to increase output, in this case the development of mass production. There is a further twist. If, hunting for a present, you do a Google search, you are using a service that is free to you. It does not show up in GDP because no money changes hands. Yet surely our real living standards are increased by the availability of information that search engines bring. So maybe the next generation will find ways of increasing living standards after all, even if some of these do not show up in the figures.

That leads to a bigger thought. We are economic animals – individuals trying to do the best for ourselves and our families. But we are also social animals, particularly at this time of year, gathering together to try to nudge our societies towards mutual goals. The surge in charitable giving, including this newspaper’s Christmas auction, is just one example of that. One of the faults of economics is that it focuses on narrow measures, such as GDP growth, rather than wider ones, such as communal endeavour. We need both, so in this week of contrasts, let’s acknowledge the social desires of human beings too.

Foreign workers are a sign of success

New figures later today showing that job growth is continuing strongly will highlight the contrast between what is happening here and on much of the Continent.

In terms of employment, Britain has been experiencing a very strong recovery. The politics have been, on one hand, about the prospect of another wave of EU migrants coming to the UK and depressing wages, and, on the other, about the benefits that we gain from attracting energetic and well-educated young people from Europe. Hence the pressure for a cap on migration and so on.

What has been less noted is the feedback loop. Faster job growth here attracts more job-seekers from Europe, which helps hold down wage pressures, which makes us relatively more competitive and helps us grow faster. That in turn creates more jobs. Indeed, that is what a single labour market is supposed to do.

In the case of Ireland, as we reported last week, there is a specific policy to urge young people to seek jobs in Britain and elsewhere, to hold down social security costs.

It is very hard to see how movement like this could be stopped, even if it was desirable, because demand for labour is, at the moment at least, so very strong. We should therefore think more about managing it, for example by making sure that British people have the balance of skills to compete in the labour market, and by making sure that job-seekers from elsewhere have the services they need, and are paying for.

This is a problem born of success, which must be better than problems of failure.