What has neo-liberalism got to do with productivity? Since the financial crisis many countries in both the rich and emerging world have experienced slowing productivity growth. Productivity growth is what makes rising living standards possible. It enables workers to earn more while working the same hours. Alternatively, it can enable them to earn the same wage while working fewer hours and taking more leisure. Government policy, trade unions and corporate governance can have a strong influence on such outcomes.
The UK economy has seen a particularly dramatic productivity slowdown since the crisis, from annual growth in output per hour of 2.2% between 1996 and 2006, to an average of 0.2% between 2006 and 2016. This is an astonishing turnaround.
Last week’s Financial Times reported that the UK’s poor productivity performance has been unevenly spread across different sectors. Banking, while making up only 4.4% of the economy, contributed roughly one fifth of the slowdown in productivity. Other sectors where productivity slowed significantly include telecoms, energy, management consultancy and legal services. Together these five sectors account for two thirds of the slowdown.
The shifting fortunes of banking thus go some way to explaining the UK’s productivity slowdown. It is likely that the 30-year expansion in that sector was reflected in the increase in private sector debt, and the associated ‘financialisation’ of the economy, or the penetration of finance into more and more areas of economic life. With the advent of the crisis and its aftermath, that process has surely reached some sort of limit. This doesn’t mean that growth was somehow ‘fake’, but it was certainly unbalanced and unsustainable.
Despite the limits to financialisation in boosting growth, the reduction in the debt to income ratio in the UK, known as deleveraging, has been slow, and household debt as a share of GDP is on the rise again. Very low interest rates make this possible, as debt-servicing costs stay low; one dreads to think what would happen if they were much higher. But as I have argued many times on this blog, a drastic rebalancing of the economy is needed, in order to restore growth to a more sustainable pattern, with higher net exports and a current account moving towards balance and even into surplus. Production needs to rise relative to consumption, with higher investment and even higher saving for the overall economy. Only in this way can the necessary deleveraging take place without stagnant GDP.
Financialisation of the economy is a big part of neo-liberalism. Another key part of the latter has been the deregulation of the labour market, which has proceeded to different degrees from country to country. A ‘flexible labour market’ is defined as relatively weak worker rights and protections and the freedom for wages to adjust to changes in supply and demand, rather than being regulated and more subject to minimum conditions and the influence of trade unions.
The UK’s vaunted flexible labour market has allowed rapid job creation but weak wage growth since the recession, despite a persistently sluggish recovery. I have written how this job creation has a downside in that it probably hides substantial ‘disguised unemployment’: if growth in aggregate demand were to pick up, there would be a reallocation of workers in low paid, low productivity work, to higher wage, higher productivity work. Disguised unemployment in the UK shows up in substantial involuntary self-employment at low incomes.
The ability of firms to employ workers at low wages may also discourage investment in new technology. After all, if cheap labour is more affordable than a new machine, why bother paying for the latter? Flexible labour markets may be associated with faster job creation, but they also result in lower wages and productivity. The social costs of low wages have increased the burden on the public purse: income tax receipts have weakened, and governments from the US to the UK have turned to the policy of topping up low wages in the form of tax credits. These effectively subsidise low wage employment which, while they contribute to reducing poverty among those in work, do not solve the root of the problem.
The downsides of neo-liberalism have become increasingly apparent and unsustainable: a huge burden of private debt, increased inequality and low pay, and stagnant growth in productivity and wages. No wonder the direction of national politics across the rich world has become so uncertain.