Public sector clues to the productivity paradox

Yesterday’s labour market productivity figures showed little change to the headline measure of labour productivity - the number of hours worked is up, but output has risen too such that the ratio of output per hour remains roughly the same.

Overall therefore there is no conclusion yet to the so-called productivity conundrum - the issue of why productivity as a whole is so low. Looking beneath the figures, however, offers another clue as to what is going on. Manufacturing productivity is on the up but in services, output per hour remains stubbornly low.

As the graph below shows, within services, the main drivers are financial services - where output has fallen dramatically in the last few years but the number of hours worked less so - and government services where hours are rising faster than output.

That productivity is weaker in the government sector is on the face of it surprising: drastic budget cuts have after all caused public sector jobs to be slashed. However the definition of public services not only includes contracted out services but also is far harder to measure. Perhaps contracting out has led to a fall in efficiency, or there is something about the recession that means government spends more to achieve less or, if it’s a data issue, possibly it isn’t as much of a conundrum as it first appears.

Kitty Ussher, Managing Director, Tooley Street Research

July 2nd 2014