Explaining (part of) the UK labour productivity puzzle

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Apologies, this is slightly wonkish....one of the puzzles of the current economic recovery is that labour productivity appears to be falling. This just isn't what we would expect to happen at this point in an economic cycle. Yes, we do expect it to fall substantially in an actual recession: employers lay off workers more slowly than output falls, meaning that each worker is producing less (the reason for the slowness of the layoffs being that firing someone now and rehiring in the good times costs money, there's stickiness in what happens here). And productivity we expect to grow strongly in the early stages of a recovery as people sweat that labour they've got as output increases rather than immediately going out to hire more people.

So we can happily explain much of what's happening in that chart using our standard assumptions. Then we get to 2011 and beyond and we're not sure what is happening there. We really don't expect to have falling labour productivity at that point. So what is happening?

We can't tell you exactly and precisely what is happening here: we can't even tell you how important this next point is to what is happening. But we can tell you that this is absolutely one of the things that is going on. Public sector wages are falling relative to private sector ones. That is part of the cause of that fall in labour productivity.

Here we enter a rather Alice in Wonderland area of economic statistics, the measurement of  public sector labour productivity. In the private sector this isn't actually easy but it is at least logical. Stripped to its essence we add up the value of what is produced, look at the number of hours of labour required to produce that and divide one into the other. If there's more production from the same number of hours then labour productivity has risen. Obvious, really.

The important part here being that that "value" is "at market prices". But we cannot use this method for estimating public sector output. Because most of what the public sector does doesn't have market prices: how can we "value" the output of a diversity adviser?

Therefore we don't even attempt to do this. The output of government is defined as what we spend in order to gain this output. Thus public sector labour productivity is equal to, exactly the same as, the wages we spend on public sector labour.

This has, obviously, perverse effects. If we pay a nurse £25 an hour then we record her output as being £25 an hour. If we double her wages to £50 an hour then her output doubles: even as she ignores the same number of patients to do her paperwork. And note what happens to her productivity: it's just doubled just because we are paying her more.

There is no difference whatsoever in the output: but because of the odd way (through necessity) that we measure labour productivity in the public sector that productivity has just doubled.

This effect will also obviously operate in reverse as well. If we cut public sector wages then we will be cutting public sector productivity. It might be that we get the same actual output in terms of government from those newly more lowly paid civil servants. And that would normally be regarded as an increase in labour productivity: we're getting the same output for a smaller input. But this method we use to measure public sector labour productivity means that we actually record the opposite effect: lower public sector wages means we are spending less on government and thus we record that value gained from that labour as having fallen. We record labour productivity as falling when we cut public sector wages.

And what has been happening since 2011? Yes, that's right, there's been a deliberate attempt to reduce, relative to the private sector, public sector wages. As ONS tells us:

The average pay difference in favour of the public sector has narrowed since the year 2010, which in part reflects the restraints on public sector pay over this period

And we can look in more detail here (page 19 of the .pdf on that page). By the (controversial) way that ONS measures public sector pay (controversial because while it tries to measure qualifications, organisation size etc it's not adding in pensions accruals and job security etc.) this was lower than private sector in 2001 or so, grew higher than private through the years of the Brown Terror and now there's a deliberate attempt to manage it down again.

Whether you think those actions of the Brown Years, or the current ones, are justified or not is entirely up to you. But the implication of this for our recorded labour productivity figures is that some portion of that growth in labour productivity over the period 2001 to 2010, and some portion of the fall in it since, is simply the result of the boom and then restraint in public sector pay.

It is, in short, a measurement fault rather than an actual description of anything that is actually happening to labour productivity.

As at the top, we can't tell you how important this is: that would require a great deal more research. We can however tell you that this absolutely is at least a piece of the puzzle. Why is UK labour productivity falling? Simply because we measure public sector labour productivity by the amount we pay them in wages and we're deliberately squeezing those wages currently.

My thanks to the prolific commenter Luis Enriques for sparking this line of thought.

Sir Paul Nurse has finally decided to fire Paul Ehrlich from the Royal Society

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We have to say that we're not quite sure whether "fire" is quite the right verb for getting rid of a Fellow of the Royal Society. But given the manner in which Paul Ehrlich has been wrong in every single prediction he's ever made about human beings, population levels, wealth, the economy or the environment it is about time that Britain's leading scientific organisation dispensed with his services. So we can only say Hurrah! to this statement from Sir Paul Nurse, the leader of that most prestigious of Britain's scientific organisations:

Britain's most senior scientist has launched a fierce attack on influential figures who distort scientific evidence to support their own political, religious or ideological agendas.

The president of the Royal Society, Sir Paul Nurse, said scientists must challenge serial offenders from all spheres of life who continually misused science to support their preconceived beliefs.

Speaking ahead of an inaugural speech he will give next week as the incoming president of the British Science Association (BSA), Nurse said it was not enough for scientists to sit on the sidelines and sneer when public figures expounded unscientific nonsense.

Quite right too and we might even add to that Hurrah! with a "Well done Sir Paul" and even an "about time too".

We could mutter something about why on earth was he there in the first place, possibly even grumble about it taking so long to do the right thing, but as the Good Book tells us more joy in heaven over one sinner that repenteth etc. So we should simply rejoice.

Apparently Owen Jones doesn't know what socialism is

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This is a slightly strange error for Owen Jones to have to cop to. The One who would lead us all to the sunny uplands of a socialist economy doesn't seem to know what socialism is:

"The urge to punish all bankers has gone far enough," declared a piece in the Financial Times just six months after the crisis began. But if there was ever such an "urge" on the part of government, it was never acted on. In 2012, 2,714 British bankers were paid more than €1m – 12 times as many as any other EU country. When the EU unveiled proposals in 2012 to limit bonuses to either one or two years' salary with the say-so of shareholders, there was fury in the City. Luckily, their friends in high office were there to rescue their bonuses: at the British taxpayers' expense, the Treasury took to the European Court to challenge the proposals. The entire British government demonstrated, not for the first time, that it was one giant lobbying operation for the City of London.

Bankers are employees of banks. The employees of an organisation having an ownership right in the profits of that organisation is a form of socialism. In a capitalist organisation the profits would flow, uninterrupted, to the shareholders, not the employees.

The current structure of banking pay in London, with those bonuses, is more like the profit share at John Lewis, of the divvie to the customers at the Co Op, than it is to anything reminiscent of hard line capitalism.

Socialism, despite what Jones may think, is not just whatever he approves of just as the definition of capitalism or free markets is not the same as whatever we approve of here.

By the way, shouting about how 12 times more bankers got big paychecks in the UK than the rest of the EU is simply evidence of the fact that the European finance (indeed, the largest portion of the international, global) industry is largely based in London and The City. It's no more surprising than finding out that the majority of people paid to make Parma ham are in Northern Italy, the majority of those making Stilton are somewhere north of Watford Gap or that there's a definite shortage of those paid to herd reindeer in lands where olive trees thrive.

Good grief, even Karl Marx managed to get to grips with the implications of Ricardo and comparative advantage. Might be worth Jones giving that a crack.

David Attenborough has decided to nationalise your garden

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Isn't this nice of David Attenborough? He has decided that your garden is no longer your property, for you to do as you wish with, he has decided that your garden, the one that you bought, you maintain and you pay the taxes upon, is now to be used as he wishes:

Nature reserves and national parks are not enough to prevent a catastrophic decline in nature, David Attenborough has told politicians, business leaders and conservationists, saying that every space in Britain from suburban gardens to road verges must be used to help wildlife.

Britain’s leading commentator on wildlife called for a radical new approach to conservation which did not bemoan the past but embraced the changes brought by climate change and a rapidly growing human population.

“Where in 1945 it was thought that the way to solve the problem was to create wildlife parks and nature reserves, that is no longer an option. They are not enough now. The whole countryside should be available for wildlife. The suburban garden, roadside verges ... all must be used”.

In other walks of life we call this theft.

If a wealthy octogenarian wishes to improve the life opportunities of hedgehogs then he can donate some portion of his substantial fortune to St. Tiggywinkles. This naked grab to nationalise (or Attenboroughize) our property for his purposes should not and cannot be allowed to stand.

The entire point of private property is that we get to use it and dispose of it as we wish. You do so with yours Sir David and we'll do so with ours.

Do we need Children’s Services?

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Of course our children need care and protection from abuse. The question is whether the responsible bureaucracies give value for money, or indeed provide that care and protection at all. Following each scandal, we are told that no one is to blame: the problem is systemic. Then we are told that the bureaucracies will work better together in the future. Then history repeats itself. Rotherham should be a wake up call. In fact, the problem really is systemic and it needs a systems solution. It is not a question of money. From 2001 to 2010 English and Welsh councils’ child social care expenditure nearly doubled from £4.7bn to £8.6bn at 2010 prices. Would anyone suggest that the quality and extent of child care has doubled?

Of course the problem is hugely complex and there is no single, simple solution but at the root is the excess of bodies paddling in the same swamp: Local Authority children’s services, schools, doctors and hospitals, police and charities such as Barnardo’s and the NSPCC. Each case is like Gerard Hoffnung’s performance by solo violin and massed conductors.

Serious child abuse of any form is a crime. Where a teacher, doctor or any social worker believes that a crime may have been committed, or may still be in progress, then that should be reported to the police like any other possible crime. The police should investigate without fear, favour, concerns for being branded racist or other politically correct excuses for doing nothing – or passing the buck to social services.

The bigger question is then whether children’s services are necessary at all. If the current Local Authority bureaucracies did not exist, what would we put in their place?

Rotherham demands a systemic solution and that in turn demands we start with a blank page.

Clearly we need the youth justice system and adoption facilities though those are also offered by the voluntary sector, e.g. Barnardo’s. Given Local Authorities’ manifest incompetence in adoption maybe that should be turned over to the voluntary sector and perhaps arrangements for fostering too. If taxpayer value would be improved, as it is being for schools, by channelling taxpayer funding through the voluntary sector, then why not? Equally well if something like the existing services can be radically rebuilt to give our children the protection they need, then so be it. But if we just go on tinkering and adding more boxes to tick, more Rotherhams will follow.

Yes, the Club of Rome and Limits to Growth is still piffle, why do you ask?

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Perhaps because The Guardian seems to be giving the piffle another run for its money:

The 1972 book Limits to Growth, which predicted our civilisation would probably collapse some time this century, has been criticised as doomsday fantasy since it was published. Back in 2002, self-styled environmental expert Bjorn Lomborg consigned it to the “dustbin of history”.

It doesn’t belong there. Research from the University of Melbourne has found the book’s forecasts are accurate, 40 years on. If we continue to track in line with the book’s scenario, expect the early stages of global collapse to start appearing soon.

Yeah, real soon now.

There's two very basic logical and or evidential flaws in the original study, ones that continue into the various updates that Graham Turner (a physicist, just the person you want to be pronouncing on things like resource availability, eh?) has spent the last few years turning out.

Firstly, they talk about the availability of minerals. And they manage to get this entirely wrong. They start by saying that mineral reserves are x. OK, that's cool enough. Then they compare reserves to annual usage, add a bit for growth in usage as the economy grows and that's fine enough too. They also (and here they're better than many that do this exercise) tell us that of course mineral reserves are not all that matters. There's mineral resources out there too, things we know about that we can convert to those reserves. All of this is fine so far.

Except they then assume (yes, this is a specific assumption they make, one they tell us they make) that mineral resources are ten times mineral reserves. So, if we've got mineral reserves of 30 years then we've got resources for 300: then we run out, civilisation collapses and AIEEE! We! All! Die!

This is complete and total piffle. There is absolutely no relationship whatsoever between reserves and resources. Running from memory here but mineral reserves of potassium are of the order of 60 years or so. Resources are 13,000 years' worth. Reserves of aluminium are around 30 years and resources will last us until the heat death of the universe. There are no reserves nor resources of tellurium anywhere on the planet. Yet we still manage to produce the 120 tonnes a year we use quite happily and can continue to do so for hundreds of thousands of years yet.

There simply is no connection at all between these two definitions of minerals available to us, not in the quantities that belong in each category.

Their misunderstanding gets worse too. It costs a lot of money to convert a resource (something we know where it is, what it's made of, that we can process it using current technology at current prices and make a profit doing so) into a reserve (exactly the same except that we have proven all of these points to certain technical and legal standards). There's a nickel mine out there that is currently producing large amounts of nickel. But it's not making a profit: so the ore that it is mining is still a resource, because it's not been proven yet that the new extraction method is profitable. It's just not a reserve yet even though it is producing. And it's taken $4 billion to get to this point too.

So, if converting a resource into a reserve costs these sorts of sums then people only do it when they're about to start actually mining it. Which means that reserves, for obvious economic reasons, tend at any one point to be some 20-50 years' worth of usage. Why spend $4 billion *proving* something now when you're not going to dig it up for half a century?

Now we can see the piffleness of their assumption. If, for economic reasons, reserves are only say 30 years' worth of minerals then assuming that resources are ten times reserves means that whenever and whatever else you do with your calculations then we run out of minerals in 300 years' time and AIEE! We! All! Die!

The basic assumption that the Club of Rome started with means that, inaccurately, the answer to Limits to Growth is always going to be that we run out of minerals in a couple of hundred years. It's simply not true and it's not true because one of their basic assumptions is piffle of the highest, almost Boris-like, pifflyness.

Turner then makes another hilariously piffly assumption. It's detailed here but essentially he says that we cannot substitute for fossil fuels. We'll not be able to use aluminium, or steel, or silicon, instead of coal and oil:

To account for substitutability between resources a simple and robust position has been taken. First, it is assumed here that metals and minerals will not substitute for bulk energy resources such as fossil fuels.

This is piffle of such magnitude that it ascends nonsense and rises to the level of argle bargle. Consider what is a windmill: it's the use of aluminium, rare earths, steel, concrete, as a substitute for fossil fuels. Solar cells are the substitution of silicon and gallium for fossil fuels. Tidal power is the substitution of concrete and turbines for fossil fuels.

In fact, all renewable energy technologies are the substitution of metals and minerals for fossil fuels.

So, he's telling us that we can't have energy because we can't use renewables and he's also telling us that we don't have enough minerals anyway. But both of these statements are wrong. No, not just mistaken, not arguably a bit extreme, not even well meaning errors. They're out and out fabrications stemming from the piffle nature of the original assumptions. Those two, entirely incorrect, assumptions make the Limits to Growth calculations always turn out this way. That in 300 years' time AIEE! We! All! Die!

Start again with the correct, non-piffle, assumptions, that we've plenty of minerals and we can use metals and minerals to substitute for fossil fuels and all the problems fade away. For if we have metals, minerals and energy then we don't all end up dying (AIEE! etc.) in 300 years' time from a lack of energy, metals and minerals, do we?

I've the notes around to do an entire book on this point but I've never actually bothered to sit down and scribble it out. Surely no one actually believes this piffle anyway so why bother refuting it? I might have to reconsider that.....

And Zoe Williams proceeds to get renewable energy wrong

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One of the saddest things in this whole debate about climate change is that people simply manage to get, even assuming that the predictions are correct, the right course of action for the future so wildly wrong. As with Zoe Williams here:

The interesting thing about energy policy, as it comes into focus for the start of manifesto season, is that it gives each party the chance to be dreadful in its own unique way. The Conservatives are going with the line that bills are too high (they are), this is because of Labour’s high taxes (it isn’t), and can be rectified by “slashing green levies”. This is their offer: it makes very little financial difference (an average of £50 a year) and no demands on energy companies except to simplify their bills. It looks like a lot of bluster about the “mess they inherited” paired with some ineffectual flapping.

In fact it isn’t, it’s an extremely bold statement; by casting green levies as expendable, they show they are not serious about transforming the energy market. They’re not serious about renewables. They’re not worried about carbon targets. They’re not going to prioritise investment in green infrastructure. They’re not 100% convinced that climate change is even happening, and – this bit is crucial – they’re not going to do anything to undermine the market dominance of existing companies selling fossil fuels. Only alternatives will challenge the energy oligopoly, and alternatives need investment.

It's that last line that is wrong. But so wrong that it undermines everything else that is being said.

So, let us start from our usual position around here, whether or not you believe it just, for the sake of the argument, work with this for the moment. That the IPCC, the Stern Review, they're all correct. Climate change is a problem, one we're causing and one that we should do something about.

OK, great, what? Well, firstly, as a matter of public policy we've an externality, those carbon emissions, and we should be getting them included into market prices. This is the great lesson from Stern (and he's backed by all other economists who look at the subject, Nordhaus and Tol for example). Super: so, by a fairly inefficient kludge of the ETS, the minimum carbon price and the rest we've managed that. So, on that point we're done. We don't need to be stomping around the country shouting "Invest!" for we've already changed prices to take account of that externality. We're done and dusted: we just need to wait for the effect of that price change to work through peoples' investment decisions over the next few decades.

The second is that point that all of the solar PV boosters keep telling us. That solar power is, if not right now then definitely within the next couple of years going to be, price competitive with fossil fuel derived energy. And as a matter of public policy of course our carbon price has aided in this. So, do we now need to point a wall of "investment" at this technology?

Well, no, no we don't. If, after the carbon tax, solar PV is not price competitive then we don't want to install it. For that tax already includes the future damages the use of fossil might cause. And if it is price competitive then we don't need to "invest" (when someone in The Guardian says invest of course they mean public subsidy) because as it's already price competitive then people will install it anyway as the cheapest option.

Which brings us to a point we've made repeatedly around here. According to the standard works on the economics of climate change we in the UK have already done everything that it is necessary to do. That combination of technological advance in solar plus the public policy of pricing carbon is it: we're done. We simply don't need to do anything else but wait.

Dear Dr. Sarah Wollaston MP

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I write this open letter to you in the hope that you have been grievously misquoted by the Daily Mail. For it would be painful to have to believe that a sitting MP, and a qualified doctor to boot, could be quite so ill-informed about food, prices and obesity. It is thus my hope that your words have been manipulated by the newspaper rather than that you actually believe any of this tosh. For example, you are quoted as saying that:

'There is a huge amount of personal responsibility. But it is now so serious we need to state to step in and take some measures.

'The choice is you either do nothing and carry on saying it's all down to personal choice and you continue to pick up a huge bill through the NHS.

'We have to take out junk food calories and help to get people moving and more active.'

The problem there is that obesity does not cost the NHS anything at all. Indeed, the price to the NHS of obesity is negative. The reason being that the NHS is a system of lifetime health care and those who are obese die earlier. Yes it is true that they incur healthcare costs while alive and fat: but these are more than outweighed by the savings to the NHS when they are dead and buried and not requiring those longer years of health care.

This means that there are substantial private costs to people of being lardbuckets, entirely true, but it is not true to then say that there are public costs to their being so, as you well know.

'One of the reasons why the most disadvantaged people are running into difficulties is partly because the healthy food is more expensive.

'If you are struggling on a budget, you are much more likely to pick food on special offers. But all of the special offers tend to be on crisps, sweets and junk food.

That is also not true. Rice, beans, onions and tomatoes may not be a very interesting diet but it is still both healthier and vastly cheaper than any form of junk food calorie for calorie, whatever the BOGOF or discount that is being offered. This is something that we both know and so for the Mail to be quoting you as it did is obviously something you'll want to correct.

And finally the paper seems to be making a good attempt at making you look like an idiot:

She warned voluntary agreements with big chains had not worked and regulation was now needed to force stores to offer discounts on fruit and vegetables.

This is price fixing and price fixing does not work. By definition price fixing does not work: clearly a Tory MP is well aware of this fact for the following obvious reason. If we fix prices below the market clearing price then we will have fewer suppliers willing to produce at that price. We will also have more people desiring to consume that good or service at that price: the result is instant shortages of those goods and or services. We need only to look at the provision of toilet paper in Venezuela, well reported recently, to see that. Similarly, if we fix prices above the market clearing price then we find that consumers desire to purchase less of these goods and services while producers will be squeezing every extra unit out they can. Leading, as the European Union showed us when they did it, to vast gluts in the form of butter mountains and wine lakes.

Price fixing thus leads to either dearth or glut unless we fix those prices at the market clearing price itself. In itself that has a problem for as you well know we don't in fact have any other mechanism than the market itself to work out what that market clearing price is. But even if we did, again as is obvious to both of us, what's the damn point of fixing prices where they would be anyway?

Quite clearly you'll want to make sure that the Daily Mail corrects this terrible misrepresentation of what any sane or sensible person could possibly believe on this subject. My suggestion is that you start by calling 020 7938 6000 and ask for a certain Mr. Paul Dacre. He should be able to sort out matters for you.

Yours etc

Tim Worstall

It's our dreadful colonialism that caused the South Sea Islanders to get fat

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This just in: that appalling colonial thing we white folks did is what made the people of the South Pacific so dreadfully fat today:

Anthropologists Dr Amy McLennan and Professor Stanley Ulijaszek found that islanders lost many of their traditional food cultivation, preparation and preserving skills after settlers insisted that they learn western ways of eating.

They taught the locals to fry fish rather than eat it raw, and forced them to import unhealthy produce after co-opting farmland for mining.

“Under colonial rule, much changed in how food was sourced, grown and prepared and the social change was swift,” said lead author Dr McLennan

“What happened to the land also changed as colonial agriculture and mining industries expanded. There was an increase in family size meaning food was increasingly imported.”

It's that last sentence that should have been a clue to our intrepid scientists. A change in diet, a change in the amount of food available (for that's what imports manage) leads to a removal of the Malthusian limits on family size. They couldn't have large families before because there wasn't enough food to feed them. After that dreadful, hateful, arrival of the colonialists food supplies increased and it was possible to raise larger families.

Or to make the same statement another way: the colonialists improved the diets of those who lived on such islands. It might not be an improvement by the standards of the modern prodnoses but population does respond quite well to food availability in a subsistence economy. That population and family size did increase is proof perfect that the diet was "better".

From the Annals of Rampant Stupidity

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The latest bright idea is that apparently granny would like to scrabble in the dirt for a few potatoes the day after her hip replacement:

Even if hospital patients have always hated their food, whether it’s microwaved meals, over salted vegetables, or fresh fruit, there are still things we can learn from the past. One obvious change in food provision is the loss of the hospital garden. Until the nineteenth century many hospitals had outdoor space, part of the therapy for recuperating patients, a place for Apothecaries to grow healing herbs, and a site for kitchen gardens to feed the staff and patients. Outdoor space was lost in the nineteenth century as giant hospitals were built in crowded urban areas, and as convalescent and elderly patients were moved to homes and hospices elsewhere. There’s quite a trend for ‘urban farming’ in the twenty first century – perhaps that could extend to give hospitals back their gardens too?

The idea of a little herb garden where patients can convalesce in the sun amid the mint, rosemary and the butterflies they attract is obviously wonderful. The idea that anyone should be trying to grow bulk foods in an urban environment is simply ludicrous.

For we've invented this thing called "transport" as well as "economy of scale".

Hospitals are, as they note, in urban settings. Because that's where all the people are and it's sensible to treat people near where they live, near where their families live so they can visit them. Excellent: but that means that land is expensive where hospitals are because that's where all the people are. A few acres of urban land can be worth millions upon millions of pounds: using that to grow £50's worth of vegetables is simply not sensible. What is sensible to to use that agricultural land 50 miles away, worth perhaps £5,000 an acre, to grow the same vegetables and then splash a fiver or so per tonne of food on the petrol to transport them. We thus use fewer resources to get to the same goal, feeding the sick, and this is a process that makes us richer as a whole.

It's also true that agriculture is subject to the most enormous economies of scale. We can tell this: food grown in those 50 acre monocrops is markedly cheaper than food used to be when we all had our little 15 acres of the country to cultivate. This is true even if we don't include the labour we used to perform "for free". The urban poor would spend 80% of their income on food and rent in centuries gone by. Today the average is 10-15% on food.

The idea of feeding the sick from hospital gardens is simply bonkers: guess that's why it's being suggested in The Guardian.