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Andy Haldane’s Gobbledegook on Productivity

The creators of money

This is really rather sad. The Bank of England’s economist has got himself believing fashionable nonsense.

The decade-long productivity crisis may have been caused in part by labour market rules that make it too easy for bosses to hire and fire staff, the Bank of England’s chief economist has said.


Improving the quality of jobs may help to fix Britain’s so-called productivity puzzle, Mr Haldane wrote. “The greatest benefits to productivity may come from increasing the quality of work among the ‘long tail’ of companies currently with the poorest offering.”

Well, that bit’s true at least. Every economy works the same way too. Some small number of high level firms that are truly world beaters in their niche – usually called “exporters” – and then a morass of increasingly inefficient firms producing only domestically. And yes, the art is to get that long tail up to the productivity levels of the best.

The way to do this is through free trade – exposing that long tail to the competition of the best in the world. They either shape up or go bust and their assets be redistributed to those who can shape up. Or even activities at which it is possible to shape up.

The researchers concluded that “the best way to boost productivity is to improve working conditions and pay in sectors where ‘bad work’ is prominent, rather than focusing on ‘perfect’ work for everyone”.

That’s not Haldane but it’s still terribly stupid. Raising pay reduces productivity, not raises it. The correct measure of productivity being not hours in, output out, but cost of hours in, output out.

“A higher rate of pay can spur worker satisfaction and motivation, thus leading to higher levels of productivity,” he said. “This is called ‘efficiency wage’ theory. It suggests higher pay can itself hold the key to higher levels of productivity.”

Sure, efficiency wage theory exists. But as Paul Krugman has pointed out it depends upon paying a wage higher than other people. Not paying a higher wage in general or across the economy. Sure peeps like being valued, sure they put noses to grindstones a bit more if they think they are being. But this comes from getting more than the other people not so fortuned.

This should be obvious. The keepers of the Pharoah’s wealth could be trusted not to nick it with three squares a day and a weekly jump on the Temple maiden*. We have to pay Mark Carney £500k a year to persuade him not to run off with the cash. The efficiency wage is always relative to what everyone else is getting paid.

The “higher pay” is only relevant in consideration of Sowell’s question, “Compared to what?”

And all of this discussion is missing entirely the point. If we had the inflexible labour market of yore than in 2008/10 unemployment would have soared to 15 to 20%. Ish, ish. The entire point of all of the changes in the labour market was so that as and when a recession happened this did not. It worked too.

*Not quite le mot juste after she’d been trained into the job but…..

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4 years ago

Perhaps if we restrict the reserve army of the unemployed, employers will be forced to both compete for labour and use it economically, this raising both wages and productivity.

4 years ago
Reply to  Pat

No, they’ll import it instead. Today’s “reserve army of unemployed” is the entire world.

4 years ago

Who gave the chief economist of the Bank of England a mandate to improve worker satisfaction?

It is not easy to fire workers. It is not easy to hire them because of all the due-diligence you have to do to protect the company against the difficulty of firing the bad ones. Also, there is no productivity crisis, because on the margin, firms already face international competition.

Is there evidence this guy is any good at his real job?

Gavin Longmuir
Gavin Longmuir
4 years ago

It is simplistic to try to relate everything to hypothetical “Free Trade”. The natural human desire for “more” leads to individuals pursuing higher efficiency. Competition (whether within borders or across borders) magnifies this natural desire to achieve more output with the same or less inputs. But the High Street barber does not worry about his customers jetting off to Bangladesh to get a cheaper haircut. While the manufacturer struggling under the burden of Western regulations & taxes does have to worry about being undercut by his less-efficient Asian competitor who does not have to bear those overhead costs.

Quentin Vole
Quentin Vole
4 years ago
Reply to  Gavin Longmuir

To some extent that pressurises local governments to limit the overheads they impose. But ultimately, it’s futile to compete with the far east for simple metal-bashing jobs, however unpalatable that may be. And I write as someone whose male relatives on the distaff side all worked at ship-building on the Tees.

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