Multi-Factor productivity in the UK. A stunning decrease.
After 2008 labour productivity in the UK declined – despite a continued increase of the stock of capital and a more efficient use of labour. One of the anomalies of the post-Lehman world is the development of British labour productivity, i.e. real production per hour. It shows a large and, more worrying, structural decline. Eurozone productivity showed a somewhat comparable decline in 2009 but rebounded much more strongly in 2010 and 2011, while Eurozone developments in 2012 and 2013 were, though subdued, much more positive than developments in the UK. Can the UK pattern be explained by a less efficient use of labour and/or less capital? Recently, the ONS published data on multi-factor productivity, i.e. productivity of basically a weighted average of labour, capital and other factors like the structure of the economy or use of intermediate inputs which enable us to investigate this. But these data make the problem only larger. The British economy actually used more capital and employed more labour in more efficient sectors – but despite this aggregate productivity declined.
Graph 1. Multi-factor productivity of the UK economy
In four out of the five last years multi-factor productivity declined. What caused this development? Probably a whole number of subsequent developments.
Graph 2. The change of Multi-Factor productivity in the UK. Source: see previous graph.
We have to explain two problems: the 2009 decline and the lack of a rebound (in fact: continued decline) after 2009. Some hypotheses:
A) The initial decline was caused by the financial crisis, just like in other countries. However, as the UK was highly specialized in financial services much more of this decline was structural than in other countries. Remember that bonuses show as high productivity in these estimates, productivity when down with 19% in the financial sector.
B) After 2008 the decline of the high productivity hydrocarbons sector (production and refining) added to this development – the exact opposite of what happened in the USA.
C) Frances Coppola suggests that high energy prices in combination with the devaluation of the pound also led to very high relative energy prices in the UK, which led to a sharp reduction in the use of hydrocarbons. This might be an explanation why, in 2012, almost all sectors of the UK economy experienced a sharp decline in productivity
D) Incomes of the self-employed also went down with about 20%, after 2006, which shows up as a decline of productivity.
Anyway, thanks to this decline relative labour productivity in the UK is, at this moment, lower than in Italy and Spain.
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Real-World Economics Review Blog 
Hyper-financialization leads to productive investment at labor returns plus replacement being unable to compete with returns from rentier rent seeking of 7-10%+. Leverage in the property and equity markets then grows at a much faster differential rate to production and wages, resulting in gross mispricing of assets, misallocation of savings, EXTREME wealth and income inequality, and plunging velocity, culminating in massive leveraged asset bubbles (hoarding of leveraged financial assets at no velocity) that burst, causing a large-scale banking and financial markets crises.
Study financial bubbles throughout history, and ALL of them resulted in crashes and real GDP per capita decelerating to 32- to 60- or 70-year lows.
Today, in response to the 2008-09 crash, the central banks and largest too-big-to-exist commercial banks have created the largest financial and real property bubbles in world history as a share of wages and GDP. When the global bubble bursts the next time, and ALL bubbles burst, the crash and its effects will be unprecedented in scale, and worse than 2008-09.
We’re kidding ourselves with MFP calculations , and production function calculations in general , in an environment of wild swings in credit generation , which is the principal driving force in advanced economies :
What makes more sense – that abrupt swings in ( apparent ) MFP drive credit growth , or the other way around ? :
A post today at Illusion of Prosperity perfectly illustrates why MFP growth declines when credit – and sales – fall off :
The graph shows retail employment growth contrasted with growth in weekly hours of retail workers. During the credit bubble , hours grow faster than employment , as retailers cope with vigorous sales growth. Although hours have increased , overall productivity will still be higher , as other labor costs , like benefits , are unchanged. With the credit crunch and reduction in sales , the reverse dynamic comes into play , and suddenly retail workers have become “less productive”.
This is not a mystery , nor is it stunning. It’s an expected consequence of moving from a period of rapid credit growth to one of rapid credit contraction.
Source:
http://illusionofprosperity.blogspot.com/2014/02/a-closer-look-at-retail-employment.html
A correction to the above : The graph shows the post-crisis recovery in ( U.S. ) retail employment , etc , and not the pre-crisis bubble period , but it’s still an apt illustration. Here I show the same graph , along with the credit impulse ( aka “credit accelerator” , per Keen ) for household debt , in red :
http://research.stlouisfed.org/fred2/graph/?graph_id=162181&category_id=0#