Thursday, March 10, 2005

Lies, damned lies, and productivity gaps

One of Gordo’s boldest claims was that he would fix Britain’s productivity gap (see previous post). By applying a good dose of that post-neoclassical endogenous growth thing, he would ‘raise the rate of UK productivity growth over the economic cycle, improving competitiveness and narrowing the productivity gap with the USA, France and Germany.’

And that gap was reckoned to be huge. He said that in 1996, the last full year under those hopeless boom and bust Tories, our output per worker was about 25 per cent lower than France, 30 per cent lower than (West) Germany, and an eye-watering 40 per cent lower than the US.

But he had a plan to fix it: more innovation, more enterprise, more investment, more competition, and more skills.

Sounds sort of right, doesn’t it.


It soon became apparent that what this actually meant was more public spending, more of those impenetrable tax credits, more bureaucratic interference, and more- many, many more- commissions, reports and general bumph.

He doubled the DTI annual budget to its current £5.8 billion, pumped hundreds of millions more into R&D tax credits, and in the last Pre-Budget Report alone reported that he’d commissioned a host of new reports from Mssrs Leitch, Hampton, Graham, Lambert, Cave, Kelly, Wood, Bellis, Latham, Wyn Griffith, Graham, Snyder, McKillop, and Morris. He also reminded us of some previous contributions from the great and the good, including the Myners, Sandler, Barker, Miles and Higgs reports.

That’s an awful lot of trees, for someone so committed to Kyoto.

Has it done any good?

According to the latest PBR:

‘In 2003, UK output per worker was 29 per cent lower than in the US (compared with 30 per cent in 1995), 13 per cent lower than France (22 per cent in 1995) and around the same level as Germany (8 per cent in 1995). The difference is greater on an output per hour basis. To produce the same output, UK workers work 14 per cent longer hours than German workers and 29 per cent longer than French workers.’

So apart from the sclerotic Europeans sinking back, there's little change. All that money, all those trees, all that energy I expended shouting at Gordo on the telly- no change.

In fact, since the PBR, the Office for National Statistics has revised the numbers again (Feb 2005- here). The latest version reckons our output per worker is now above Germany, and less than 10 per cent below France.

In truth, the numbers are all over the place- they get revised all the time and the cumulative revisions are big. For example, since 2002, when the ONS took over the calculations from the (presumably incompetent) DTI, the 1995 figures referred to by the PBR have been reduced by 5.4 per cent for France, 7 per cent for Germany, and a stunning 9.4 per cent for the US.

Chucking loads of money at a target you can’t measure. That’s…well, that’s very New Labour I suppose.

But you might have thought that someone- maybe that nice Mr Balls- could have warned G at the start about the statistical minefield he was entering. He could have said that measuring productivity across countries is fiendishly complex because of:
  • Difficulties on the output side, for example well known problems measuring GDP. The problems may get worse as economies become more 'weightless', with economic value residing in ideas and computerised transactions, rather than physical goods.
  • Productivity measures rely on splitting changes in volume and quality from price inflation. In a steel plant for example one can use a measure of the number of tonnes of a given grade of steel per worker. But identifying similar measures in, for instance, the output of a television station is difficult, since changes in quality of the output are also at work. In general productivity is harder to measure in services than manufacturing.
  • International comparisons use Purchasing Power Parity exchange rates, to remove the impact of sudden changes in market exchange rates. But PPP rates are estimates, not actual rates, so introducing a margin of uncertainty.
  • Output per hour, rather than per worker, is arguably the best measure of productivity. However, there are particular difficulties with hourly data.
Oh…crumbs, I’ve just realised I lifted that whole section from Gordo's 1998 PBR. Would you believe it- he did know about the statistical problems with these comparisons, and went ahead with all that expensive interventionism anyway.


The reality- as far as the shaky stats allow us to say- is that there is only one major economy significantly ahead of us in the productivity stakes. It is the US, which is ahead of everyone (see for example the work of Mary O’Mahony at NIESR).

And guess what. Unlike France, Germany and Britain, the US has managed to keep tax and spend down to 30 per cent of GDP. And they don’t seem to need big centrally driven productivity programmes.

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