Measurement of Productivity in UK

Dear Mr Ridge

Thank you for your email of 12 April to Governor Carney concerning the measurement of the UK services sector productivity.  The Governor was grateful for your email and his office has asked me to reply on his behalf as he is currently engaged in policy meetings.

There are indeed several issues related to the proper measurement of the UK services sector, especially in the areas of public and financial sector services as well as the new economy. For more detailed analysis on the measurement issues related to the services sector, please see, for example, pp. 35-42 of the recently published Independent Review of UK Economic Statistics by Professor Charles Bean:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/507081/2904936_Bean_Review_Web_Accessible.pdf

While these measurement issues pose a challenge to measuring productivity, they are unlikely to be the main source of the weak productivity dynamics in the UK since the financial crisis. For more on the Bank estimates of these sources, please see the following Bank of England Quarterly Bulletin article:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q201.pdf

Furthermore, you are correct that the composition of the workforce, for example between the public and private sector, does affect the measurement of productivity. We looked at this specific problem in some detail in our Quarterly Bulletin article earlier this year (http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2016/q1pre.pdf) – while these compositional effects have had some impact on the measurement of productivity over the last couple of years, they are not enough to explain all of the recent weakness. In response to your particular enquiry we did not find a large role for the change between public and private employment and the main factors affecting compositional measurement of productivity were educational and occupational changes.

As to your question on the National Living Wage, in their analysis of the policy the Office for Budget Responsibility suggest that the impact of the National Living Wage on productivity will likely be positive. In responses to surveys many firms report plans to raise productivity in response to the National Living Wage, for example by increased staff training or through more efficient use of employees.

Thank you once again for writing to the Governor.

Yours sincerely

Mr Jozef Kucak
Public Enquiries Group
Bank of England|Threadneedle St|London EC2R 8AH|+44 (0)20 7601 4878
enquiries@bankofengland.co.uk

—–Original Message—–
From: Nicholas Ridge, CTA [mailto:nicholas@nicholasridgecta.co.uk]
Sent: Monday, April 11, 2016 12:13 PM
To: Enquiries
Subject: LETTER TO MR CARNEY – MEASURING PRODUCTIVITY IN THE UK ECONOMY

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Dear Mr Carney,

I am neither an economist nor a statistician; nor am I a politician.

However, I have been struck by the debate about levels of productivity.

Measuring productivity accurately is crucial to George Osborne’s projections of national wealth and taxes, and much dismay has been expressed at its apparently persistent low level – see for example your interview on BBC radio news last May.

Supposing though it was not so much the level of productivity that was the problem, as the means of measuring the services sector which forms so large a part of it. Is it possible, for example, that national statistics do not take account properly of the impact of relatively well-paid jobs in the public sector say being shed, and the persons affected being redeployed in equally or more productive work within the private sector, however at lower pay rates?

What impact might we then see from the introduction of the National Living Wage, from 1 April 2016, on the measurement of productivity in the UK-service sector.

Yours sincerely,

Nicholas Ridge CTA,
Oakleaf Ludwells Lane,
Waltham Chase, SO32 2NP.
Tel 01489899102

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— 
Nicholas Ridge CTA,
Oakleaf Ludwells Lane,
Waltham Chase, SO32 2NP.
Tel 01489899102