Cheap labour solves productivity puzzle?

Merryn Somerset Webb, editor of the magazine Moneyweek, claims to have solved the productivity puzzle afflicting the UK – actually, all other developed economies are suffering in much the same way 

“It’s never ever seemed like much of a puzzle to us” she says, adding: “We’ve written many times over the last decade that, if you provide an economy with an almost endless supply of cheap labour, as the UK government has done, employers will use it instead of investing in any kind of productivity raising automation”

In fact, since 1998 the UK has seen exceptionally high net immigration due to the instant freedom of movement given to all new east bloc members of the EU

“Employers tend to hire cheap labour when it is available rather than invest in all the things that raise productivity and, of course, real wages – the existence of workers who will take low wages effectively create low wage jobs”

Will Holman and Tim Pike of the Bank of England apparently share the same opinion: “When looking to expand their productive resources, companies have chosen recruitment over business investment for both directs (shopfloor) and indirects (sales, marketing, R&D) reflecting a change in the relative costs of labour and capital”

They also spotted: “As a result of the “large inward migration of employees from Eastern Europe, the composition of the economy and workforce pivoted towards lower value-added services and jobs, resulting in downward pressure on average wages and productivity levels”

So, for Merryn, the solution to the current UK puzzle is ‘perfectly obvious’

However, things are now changing

She says companies are now turning to investment in labour-saving plant and machinery to raise productivity and alleviate resource bottlenecks, partly because labour shortages are beginning to bite and pay pressures rise, partly because of some major advances in technology such as robotics which are increasing the returns from investment relative to those from recruitment, and with rapid paybacks

Merryn’s conclusion – “If labour supply rises and is cheap, employers create low-paid, low-productivity jobs” – odd how other experts apparently overlooked this

But hold your horses

Her grand finale is: “Part of the puzzle solved”

Not completely, only partially!

So what % remains a puzzle?

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