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Economists fault productivity puzzle for falling unemployment, stagnant wages

By Wang Youran | 2014-09-12 | Hits:
(Chinese Social Sciences Today)
Members of the UNISON (UK Public Service Union) were marching in the Regent Street, the center of London, demanding for a pay rise on July 10, 2014.
On Aug. 13, the U.K. Office for National Statistics released the statistics of the country’s labor market for April to June 2014. The statistical bulletin shows that there were 2.08 million unemployed people in the second quarter of 2014, and the unemployment rate continued to fall, reaching 6.4 percent, the lowest since late 2008. Pay including bonuses for employees in Britain fell for the first time since 2009 whereas pay excluding bonuses also declined to the lowest level since 2001. To put it simple, within an economic context that is improving overall, the unemployment is notably decreasing but the pay is almost stagnating.
It was reported by Financial Times that though the rate of economic recovery in Britain ranks the highest among developed countries, the British do not quite feel their pockets bulging. One of the aftereffects of the global financial crisis has been a rather sluggish rate of pay increase, which is also prevalent in America and Germany. But a contrast between the unemployment rate and salary levels is the starkest in Britain.
Are there any other factors that affect the pay increase of the UK labor market? Geraint Johnes, professor of economics from Lancaster University told the reporter that the pessimistic prospect of labor productivity is an important factor. For the past decades after the economic recession—particularly in the 1980s and 1990s—labor productivity has been on the rise, Johnes said. However, the damage caused by the recent financial crisis is hard to recover from, posing another enigma for economists.
In a roundtable held at the Work Foundation, a British not-for-profit organization providing consultancy on the future of work in May this year, some economists discussed the puzzle of productivity. They listed several reasons that might explain the dismal pace of productivity recovery. For example, they pointed to changes in the composition of industry, notably the decline of capital-intensive, high-productivity, extractive industries, such as oil. This may be a partial explanation, because productivity has declined within a wide range of sectors, not just in some industries. Another case in point is that a decline in successful innovation, particularly in industries such as pharmaceuticals, may contribute to the falling productivity in some industries. Also potentially to blame are changes in the composition of investment, with much capital flowing into areas like R&D, design, brand management, reputation and software development. Over the last 20 years, such “intangibles” have come to represent a far greater proportion of investment within the economy than before—up from under 10 percent to some 35 percent.
When firms invest in intangibles, they seem to be spending resources on salaries without getting a return. The intangibles are not, by and large, treated as an investment in the national accounts, so national output is miscalculated. This would suggest that GDP is, in reality, higher than the official figures suggest and that productivity has not really fallen or at least not by as much as the published data would lead us to believe.
Johnes and Ian Brinkley, director of the Work Foundation, also talked about the relation between the rising employment rate and the delayed retirement age of middle and elderly employees.
Howard Reed, director of the economic research consultancy Landman Economics, said that low-paying jobs are being created at a faster rate in the United Kingdom than better-paying jobs and also there has been a huge increase in self-employment, much of which is very poorly paid.
Also, in his view, the bargaining power of labor in the United Kingdom is weaker than it has been probably for at least 150 years. This allows employers to cut wages without much fear of reprisals. Workers are also scared about walking out of low-paid jobs to find other employment because living costs are rising sharply and many households are in debt, meaning that they don’t have enough resources to cover any period of unemployment in between jobs.
The Chinese version appeared in Chinese Social Sciences Today, No. 639, August 27, 2014  
Edited and translated by Bai Le
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