Productivity a danger for UK and NI
Posted on July 16, 2014 by Paul Mac Flynn
There were conflicting messages in the statistics released today on the Northern Ireland economy and labour market. On the labour market side, both measures of unemployment have fallen significantly for the three months from March to May of this year. The claimant count (literally a count of those receiving unemployment benefits) shows a consistent decrease over the last 18 months. However a claimant count is an imperfect measure of unemployment as it only includes those entitled to claim benefits and is unresponsive to changes in those entitlements. More importantly the Labour Force Survey measure of unemployment decreased as well.
There is quite a lot of turbulence in the monthly in the LFS monthly figures, but the trend is certainly moderating from highs rates seen in 2012/2013. There was a small increase in economic inactivity this quarter, but the trend here is also more positive over the last 12 months. Also the increase in employment was in full-time employment and there was a further fall in the rate of youth unemployment. While the numbers categorised a long-term unemployed decreased, they represent a larger percentage of the total numbers unemployed.
Overall the employment numbers look moderately positive, which is why the figures for the Northern Ireland Composite Economic Index, also released today, look so disappointing. They show that output in the Northern Ireland economy fell by 0.4% in the first quarter of 2014. While this is a small reduction and it could well be revised up slightly, it still represents a stark contrast to the labour market figures. Northern Ireland's economic output has yet to reach anything approaching the velocity required to lift it out of the crater into which it descended during the recession.
There is a narrative emerging within the UK economy that is not dissimilar to NI. At UK level GDP growth has recovered and compared to other G7 economies it looks quite impressive. However when compared to the recovery in the labour market, GDP growth looks less impressive. Total hours worked in the UK economy is exceeding the rate of growth in output. In other words, while more people are employed the economy is generating less activity - the UK is becoming less productive. A similar trend may be emerging in Northern Ireland.
This also ties in with another unsettling UK trend, the fall in real wages. Wages adjusted for inflation continue to decrease despite an easing of inflation earlier this year. The decrease in wages is linked to productivity. Decreasing real wages depress consumption, which in turn causes producers to reduce their output and consequently the wages they pay. There are disagreements about which causes which, but the UK economy is being undermined by both of these trends. While we don't have up to date reliable wage figures for Northern Ireland, it is possible that the growth in employment we are seeing may not lead to the gains in output that we expect. Given the productivity gap that already exists between Northern Ireland and the rest of the United Kingdom this would be a very worrying trend indeed.