MNI INTERVIEW: UK Jobless Drive Productivity Rise - Saunders

A jump in UK productivity is a one-off gain reflecting an increase in structural unemployment, limiting the disinflationary effects of a weaker labour market, former Bank of England Monetary Policy Committee member Michael Saunders told MNI.

Recent increases in employers' National Insurance Contributions and the minimum wage leave surplus workers looking for jobs at cost levels where firms cannot employ them, Saunders said in an interview. This effect is concentrated among the lower-paid, and is pushing up the natural rate of unemployment, or u*.

"Rising [unemployment] is not necessarily a symptom of labour market slack that will push down pay growth, it's a symptom of a rising u*," Saunders said. (See MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard)

"You're just getting rid of a growing pool of low-productivity workers and excluding them from employment, and so that's not good. That doesn't help potential growth," he said.

The number of 18-24-year olds not in education, employment or training rose above one million in the first quarter, sparking political debate. In October, the Resolution Foundation think tank found that three fifths of NEETs are economically inactive, rather than unemployed.

PRODUCTIVITY AND TARGET COMPATIBLE PAY GROWTH

The Bank estimates that trend productivity growth is around 1%, leaving inflation target-compatible pay growth around 3.25%, according to the BOE. This compares with firms’ year-ahead wage-growth expectations of 3.4% in the three months to May, according to the Bank's Decision Maker Panel.

But if productivity growth has grown for the reasons Saunders outlined, this would mean that higher wage growth could not be sustained.

"This is essentially a sort of one-off step level rise in the level of productivity, but it follows that it's not a lasting rise in the pace of sustainable pay growth."

LSE Professor John van Reenen, the former chair of the government's Council of Economic Advisers, has calculated that productivity growth has risen to 1.6%, using administrative data in place of the troubled official Labour Force Survey. Saunders, now at Oxford Economics, puts the underlying pace at 1.1-1.2% using the same data.

The BOE estimates trend productivity growth at around 1%, though Saunders noted that the difference with his own numbers is too fine to anchor policy divisions.

"1.2% is not that different to 1% ... you have to accept all pay growth measures come with an uncertainty margin that is probably greater than 0.1 or 0.2," Saunders said and that small difference along with higher u* dampens the impact for policy.

"You couldn't say, ‘Oh, now my equilibrium pay growth rates is 3.3 rather than 3.2 ... and that's going to have a material influence on monetary policy’, and that's just over precise, right? So you could say productivity growth is higher, raise your [u*] assumption. I don't think that would affect monetary policy either way," he said.

EMPLOYER NICs

Greater Manchester Mayor Andy Burnham, who is standing for election to return to Parliament which would allow him to challenge for the premiership, has raised the idea of cutting levels of NICs to boost employment.

Although this would weigh down on a headline productivity measure, Saunders noted that it would be better fiscally to have more people in even low-wage employment than unemployment.

"There's evidence showing that a long span of unemployment has a big lifetime cost on people's earnings," he noted.

AI AND PRODUCTIVITY

Saunders and van Reenen have both explored whether AI adoption has led to the much-hyped productivity gains. (See MNI INTERVIEW: AI Boom Doesn't Justify Lower Rates - Haskel)

However, looking at ONS firm survey data on usage of specific AI products sector-by-sector, Saunders found low-pay sectors with relatively low AI use had tended to see the strongest productivity growth, suggesting AI is not driving gains and that UK AI usage is not an outlier.

"There's a similar survey in the EU and similar surveys in the US. The levels of AI use are similar in the U.S., the EU, and the UK," he said.

"There's a bit more digging that needs to be done on the causes of higher productivity and … whatever explanation you come up with has got to be consistent with the sectoral evidence," he said. (See MNI INTERVIEW: UK's ONS Finds AI Widening Productivity Gap)