Job growth driven by real wage squeeze pushes UK down international productivity ranking

The Office for National Statistics (ONS) this morning published its first estimate of how labour productivity in the UK compares with the other major industrialised economies (the G7).

The bad news is that the UK is falling fast down the international productivity ranking. Output per hour in 2012 was 16 percentage points below the average for the G7 major industrialised countries – the widest ‘productivity gap’ for almost two decades (since 1994). The relative improvement in the UK’s productivity performance from the mid-1990s to the late 2000s has clearly gone into reverse in an economy reliant on falling real wages, rather than increased output, as the main driver of employment growth. According to the ONS output per hour in 2012 would have been 15 percentage points higher had the pre-recession rate of growth been maintained. Though some of this latter growth may have been ‘illusory’ in that it was propelled by an unsustainable boom, the UK economy clearly needs in particular a strong resurgence of business investment in order to regain its pre-recession productivity mojo.   

The drop in the UK’s international productivity ranking in 2012 proves that strong employment growth fuelled by falling real wages is symptomatic of relative economic weakness rather than strength. While the real wage squeeze is preferable to even higher unemployment, these latest international productivity figures show the UK economy can’t be deemed to be experiencing a genuine recovery until we see firm evidence of both stronger output growth and rising real incomes.