MNI INTERVIEW(CORRECTED): Return To Work And UK Productivity

(Corrects to make clear it is not certain that productivity will be negatively affected by the return of service sector workers.)

The return to work of employees in services sectors hardest hit by Covid could drag on UK productivity growth in coming quarters, Josh Martin, Head of Productivity at the Office for National Statistics, told MNI.

While output per worker worked gained 23.4% in the second quarter versus the same period of last year, productivity data has been boosted by widespread closures in less productive industries. This effect is about to reverse, as workplaces reopen and workers return from government furlough schemes, Martin said in an interview.

"The industries that have been worst affected by the pandemic, hospitality, arts and entertainment, retail, have typically been the less productive industries in the economy in normal times. These are labour intensive industries, there is less opportunity for automation and capital," Martin said.

"As the economy reopens and those industries start to go back to their original size ... then the positive effect that they have incurred on the data so far will begin to unwind which could drag down on aggregate productivity growth through this year," he added.

Martin noted though, that the looming hit to productivity will be diminished if the coffee, sandwich and traditional bars that have served office workers fail to return to previous levels of activity amid a large-scale shift to home working.

If that occurs, "you would bake in the positive allocation effects on a permanent basis. You would get a step change in productivity, not because of any advance in efficiency or innovation just because the structure of the economy has changed," Martin said.

CREATIVE DESTRUCTION

While Covid restrictions have been removed in the UK, milestones for what happens to productivity still lie ahead. At the end of September the government furlough scheme ends, forcing firms to either take back their workers or lay them off, as they make a judgement on whether their pre-Covid customers will return.

"There are still a million-odd workers on furlough, so even if the restrictions are no longer fully in place … there are still changes in consumer preferences and patterns of demand, limitations on international travel and so forth," Martin said.

Up until now, positive productivity allocation effects have shown up not just in sectoral but at employee and firm level – with those who continued to work throughout the pandemic tending to be higher paid, better educated and more productive.

"If the low productivity workers are the ones who have been furloughed then the average worker in the economy is more productive and, again, we have seen that in the data. They are on average higher paid and more educated and work longer hours," Martin said.

It is also possible that the full re-opening of the economy and end of furlough could prompt some creative destruction, with an acceleration of corporate closures as some 'zombie firms' that have acted as little more than conduits of government cash to inactive workers throughout the pandemic. (See MNI INTERVIEW: Labour Market To Hamper UK Recovery-OBR's Bean)

"The labour market has been in stasis for the past year, we won't see the full impacts until furlough ends. The number of business going out of business has been relatively subdued … it might just take time for that to really show up in the data," Martin said.