- There is no doubt that productivity growth – by all conventional measures – took a considerable hit in the recession from which it has not recovered. The failure of productivity growth to return to previous levels stands in stark contrast to previous recessions. Despite a variety of factors being suggested as explaining parts of the shortfall, the continued lack of productivity growth remains a puzzle. Much research has actually given negative results as to what might be a reason.
The Bank of England for example found [1]
Our overall conclusion is that there is some evidence that supports the idea that inefficiencies in resource allocation contributed to the stagnation in UK productivity growth 2008-13. These inefficiencies may initially have been associated with the contraction of credit supply, but the evidence is not clear as to why these effects persisted. More importantly, we conclude that other common factors, which we do not explore in this article, for example widespread uncertainty and general demand weakness, perhaps caused by the financial crisis, coupled with flexible wages, are likely to have been central in explaining the stagnation in UK productivity growth. (emphasis added).
- While many examine the drop in productivity simply post recession, it is arguable that, whatever the reasons might be, they pre-date the recession, as productivity growth had clearly slowed before 2008 as shown in the bar chart below. Even the average of 2004-2007 (thus excluding the drop in 2008) was lower than the average 1997-2003.
- It seems at least possible that migration is a factor in this, though the picture is complicated. Looking at a simple comparison of whole-economy productivity with migrant share in the workforce appears to show three distinct phases of change illustrated in the graph below. Firstly, a period of high growth in productivity from 1997 to 2003/4 associated with an increase in the migrant share from about 7% to 9%. Secondly, from then until 2008 a large increase in the migrant share to nearly 13% but a much smaller increase in productivity. Finally, a continued increase in the migrant share with no growth in productivity.
- Two key papers have looked specifically at the impact of migration on UK productivity, but not over this whole period. Firstly, the National Institute for Economic and Social Research (NIESR) [2] published a weighty paper in November 2013 which found
a positive and significant association between increases in the employment of migrant workers and labour productivity growth in the time period analysed; even after controlling for changes in the skill mix of the workforce, a 1% change in immigrant share in employment is associated with an increase in labour productivity of 0.06% to 0.07%.
However, as the time period analysed was from 1997 to 2007 this is perhaps unsurprising. Indeed the authors pointed up the need for caution saying
the results must be regarded as preliminary at this stage. Further research is also required to establish the nature of any causal relationship.
and
it is possible that sectors where productivity is growing sharply might also be those where the immigration share is increasing, so the causality could be operating in reverse.
- Secondly, in May 2015 the Centre for Economic Policy Research[3] published a discussion paper focussed specifically on the services sector, finding immigrants increase overall productivity in service-producing firms.
However, this looked at the even shorter period of 1999 to 2005. These authors too noted the need for caution, saying
it is important to note that in 2004 several Eastern European countries joined the European Union and their workers gained access to U.K. labour markets. This partly altered the composition of new immigrants, tilting it toward the less skilled. This event however took place very late in our sample.
- Thus neither paper explores the impact of the relatively recent and very large flows of Eastern European migration to the UK. It could, however, be inferred from putting the two together that such migration might not make any positive contribution to productivity at all, bearing in mind the observable characteristics of such migrants, and in particular their concentration in low skilled and low paid employment. Intuitively this could exert downward pressure on productivity growth by changing the balance of attractiveness between employing more labour rather than improving efficiency, given the ‘flexible wages’ observed by the Bank of England (para 1 above).
[1] http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/swp531.pdf
[2] Migration and productivity: employers’ practices, public attitudes and statistical evidence, Heather Rolfe, Cinzia Rienzo, Mumtaz Lalani and Jonathan Portes
[3] Immigration, Trade and Productivity in Services: evidence from UK Firms, Gianmarco Ottaviano, Giovanni Peri and Greg C. Wright