Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Labour Productivity Misconceptions

Economics / Economic Theory Jul 10, 2015 - 07:54 AM GMT

By: Alasdair_Macleod

Economics

In the media warm-up for Wednesday's UK budget, we were told of Britain's poor productivity and Chancellor Osborne subsequently confirmed that his priority is to address it. Comparative figures for Europe quoted by the BBC were sourced from the OECD and are replicated in the chart below.


LAbour Productivity

It represents GDP per hour worked, using the US dollar on a purchasing power parity basis across different EU nations. And it shows the UK as lagging other European countries badly, which presumably is why the Chancellor feels the need to act.

These statistics are misleading. France is shown as even more productive than Germany, which cannot be true. France's unemployment is at 12% and private sector employment is only 62% of the OECD's "economically active population". This is not a productive economy. Furthermore the public sector is 57% of GDP, compared with 44% for the UK.

Trying to measure average hourly productivity the OECD way is simplistic and based on assumptions. The formula is GDP divided by total hours worked, so we are being asked to take GDP for granted, when it is in fact an incomplete summation of production value. And in GDP there is no distinction between product commanded onto the market by government and goods and services freely demanded by consumers. And we cannot know hours worked because very few businesses today clock employees in and work out beverage, comfort and lunch breaks.

We can construct a better and more relevant productivity indicator, based on the cost of employment, which is not addressed by the OECD approach. Government, which is an economic cost, should be eliminated from all estimates of production by removing the sector from GDP entirely to isolate the part we actually want, the private sector. The private sector's costs in supporting the state, the taxes that fund unproductive government spending, should also be removed from private sector GDP. And because we produce to consume, this means as proxy for the cost of government subtracting all taxation from private sector GDP, whether it is on production or consumption.

Next, only the employed and self-employed in the private sector should be included in the divisor by eliminating public sector workers and the unemployed. The result of all these changes produces a very different result, shown in the chart below.

Annual production per private sector worker

This information is not only more relevant than the OECD's misleading estimate of productivity, but it is more useful for international businesses interested in the relative costs of employment.

We should take this one step further and consider the position from our statistically averaged employee. The following table shows the estimated net income of an employee whose cost of employment to an employer is equal to the national average production per private sector worker as shown in the revised chart above.

We now have a new perspective on the subject of productivity. In order to match the high productivity rates shown in the OECD's productivity statistics, a French worker takes home only €834 per month, and the Italian not much more. For them there's little point in working. However, the Brit's take-home pay is more than any of the others, including that of the average German employee.

What this exposes is that the principal determinant of productivity is not the relative skill and dedication of workers as suggested by the OECD's figures, but the cost of employment. An employer after paying employment and income taxes can less easily afford to pay a living wage in France and Italy. It seems bizarre that official indicators of productivity ignore employment costs, which is after all far more relevant to prospective employers.

Let us hope someone draws this to George Osborne's attention.

Alasdair Macleod

Head of research, GoldMoney

Alasdair.Macleod@GoldMoney.com

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2015 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Alasdair Macleod Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules