Wednesday, 20 May 2015

How UK employment changes just deepen the UK productivity puzzle

John Kay in today's FT on the employment growth at the same time as falling productivity kindly refers to our paper on this

"What have these additional workers been doing? Professor Jonathan Haskel and his colleagues at Imperial College London argue that they have not been employed in low-productivity industries, nor have they been particularly low skilled. Yet the BoE’s analysis is that — especially in the past three years — an increasing proportion of employment growth has been in low-skilled jobs.
In case people think there is a contradiction, the bottom line is that there is not.  First, the  data in our paper goes to 2011, and the effect the Bank talk about is only in the last few years.  Second,it is possible that high skilled individuals are in low skilled jobs, but even if they were, it is only a recent effect and would still leave much of the puzzle unexplained.

Here are some more details. 

The May 2015 Bank of England Inflation report, Chapter 3, has this graph.

If you look closely at it you see that from 2010 to end 2013, the blue lines are the highest, that is, employment growth was predominantly in high-skilled occupations.  It is true that since then there has been more growth in the low skilled, but that is only recent.  If you download the data underlying the chart which the Bank helpfully provides, you see the following: employment growth since 2010Q1 to 2014Q1 in high skilled = 1m, medium skilled = 0.5m, low skilled = 0.3m.  That is, employment growth over the whole period is in the high skilled groups. But John and the Bank are quite right to point out that in the most recent year there is faster growth in the low skilled.

Our paper that John kindly refers to looks at the productivity consequences of this (here, summarised on page 1, more detail in sections 5 and 6) .  There are a number of points.

First, our data only goes to 2011, and we also have much more growth in the high skilled, agreeing then with the Bank.

Second,  the effect on productivity can occur, as John points out, in two ways. 

  1. productivity can change in all industries as the "mix" of worker types employed changes.  Since the mix of types has changed to be high skilled, then this would tend to raise productivity, deepening the puzzle
  2. productivity can change if workers move from industries that are high productivity on average to those that are low productivity on average.  We find this is not the case, in fact, since 2008 it has been the opposite, namely workers moving to high productivity industries.  This again deepens the puzzle.
Is it possible that these high skilled workers are in low skilled jobs?   It is quite possible, but if that is the case, then we would expect them to be paid less than if they were in high skilled jobs. We weight the various types of labour by their wage, so if this effect were occuring then we  would expect changes in the weights would account for it.  We have no data on this in recent years, but don't see an effect in the period up to 2011.  So we don't think that labour composition, at least at this level of aggregation, will explain the puzzle.