Must-Read: The more I look at the British labor market, the more likely it seems to me that low productivity growth is the result of two things: (a) the reduction in financial services's profitability in London, and (b) a reemployment system gone mad which is creating an awful lot of low productivity matches between workers and jobs: people who are to be holding out for a job with more hours at which they could be more productive, but were being driven to take whatever will get the social insurance system off their backs--hence the huge number of zero-hour jobs and the large number of people who are not employed, really, but are rather casual labor who might be called on next week. And if aggregate demand in Britain picked up, my guess would be that a lot of the low productivity would turn out to be a mirage.
Free Lunch: Below potential, But How Far?: "The central issue in the Inflation Report published yesterday by the Bank of England is...:
...the poor productivity growth that has burdened the UK economy since the crisis.... Monetary policy makers must soon think they are getting close to the point where monetary stimulus leads the economy to overheat rather than pick up slack, and rate rises are in order even if growth is slow.... That raising productivity is hard does not mean it is impossible.... There are some deep lessons to draw for policy thinking from the importance of 'tweaking'. One is that 'capacity is not well defined', as Hendel and Spiegel write. Another is that productivity gains may rely on protecting or putting in place conditions where workers themselves can and want to figure out how to do things better. This complements the conjecture that labour market flexibility may be behind the UK's poor productivity growth. At the very least it should make us question what sort of flexibility works best. High rates of churn and the shorter employment relationships they imply may help reallocate labour from low-productivity to high-productivity sectors, but also impair workers’ ability or incentive to improve productivity on the job.