British Puzzle: Less GDP, But More Jobs

An employee polishes a wing component for an Airbus SAS aircraft at GKN's aerospace factory in Filton, U.K.

Photograph by Chris Ratcliffe/Bloomberg

An employee polishes a wing component for an Airbus SAS aircraft at GKN's aerospace factory in Filton, U.K.

In Britain, employment is rising—even though gross domestic product is falling. No one is quite sure what to make of it. Not even the Bank of England, Britain’s equivalent to the Federal Reserve, which described the phenomenon in its latest quarterly bulletin as a “productivity puzzle.”

It’s a puzzle because employment usually falls when output is declining. Heck, sometimes employment falls even when output is rising, as happened in the early stages of the U.S. economic recovery. The logical explanation is that workers are becoming less productive. The question is: Why?

The mystery continued on Oct. 17 when the Office of National Statistics reported an unexpected drop in U.K. jobless claims, along with record-high payrolls. The strength in the labor market, while encouraging, “makes the so-called productivity puzzle even more baffling,” Nida Ali, an economist at the Ernst & Young ITEM Club in London, told Bloomberg.

Economists have advanced a range of theories for the unusual phenomenon. One is that hiring was boosted by the Summer Olympics in London. While certainly a factor, that’s not big enough or long-lasting enough to explain it all. (And after all, if the Olympics were all that important to jobs, they should have added to economic growth as well.)

Another theory is that economic output is understated—that actually, it’s rising. But the Office of National Statistics says “implausibly large” revisions to output would be needed to solve the puzzle.

What is true is that a big part of the employment gain has come in self-employment and part-time work, which are overlapping categories. Those add to total employment without boosting output very much. For example, a person who lost a job and put out a shingle as a freelancer might count as employed even if he or she isn’t doing much work.

While it’s nice to see jobs being created, it’s not a good thing for living standards when it takes more labor to produce less output.

The productivity puzzle is less paradoxical when one takes the long view, as Barclays Capital economist Blerina Uruci did in a research note on Oct. 17. First of all, Barclays notes, while unemployment may be falling, it remains very high. And while part-time work has grown, the number of full-time workers is down 355,000 since the same point in 2007. “We think that with the economy still weak and consumer and investor confidence subdued, the underlying conditions are not ripe for a significant improvement in the labor market in the near term,” Uruci writes.

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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