BLAIR’S BRITAIN, 1997–2007
Page 46
Performance’, Fiscal Studies, 22, 2001: 271–306.
19 HM Treasury, Productivity in the UK 6: Progress and New Evidence (London: TSO, 2006).
10 Luca Benati, ‘UK Monetary Regimes and Macroeconomic Stylised Facts’, Bank of
England Working Paper no. 290 (2006).
11 See the review of the evidence in Stefan Norrbin and Pinar Yigit, ‘The Robustness of the Link
between Volatility and Growth of Output’, Review of World Economics, 144, 2005: 343–56.
Table 13.1. Investment/GDP (%)
1976/8
1994/
2003/5
France
22.3
17.8
19.3
Germany
20.3
21.2
17.5
UK
18.8
15.3
16.5
USA
18.3
16.9
18.5
Source: OECD, Historical Statistics, 1960–1986 (Paris: OECD, 1988), and National
Accounts (Paris: OECD, 2006).
table 13.1 reports, investment as a share of GDP has increased by about
one percentage point compared with the mid-1990s but is still lower than
in other major economies.
Similarly, the academic literature suggests that the R & D tax credit
should increase R & D and total factor productivity (TFP) growth. A
careful study of its possible impact suggested there was a strong case for
its introduction in that it would be cost-effective and might raise TFP
growth in the long run by 0.3% per year.12 However, there is no study
available so far that has quantified the actual impact for the UK, and UK
R & D in 2004 was actually slightly lower as a percentage of GDP than it
had been in 1995 (1.9% compared with 1.7%).
The expansion of educational provision has had favourable implications for productivity. The skill level of the UK labour force has been
increasing quite rapidly; in 2004 15% of workers in the market economy
were high-skilled and 14% low-skilled compared with 8% and 30%,
respectively, in Germany.13 This reflects in particular the much greater
proportion of graduates in the UK labour force and has its origins in the
Conservative period. The graduate wage premium continued to increase
until 2000, since when it has been constant.14
The new view of competition policy as central to improving productivity performance is the most radical change. This represents a move to a
rules-based system with ministerial discretion removed, pro-active powers
for the competition authorities and serious penalties for anti-competitive
behaviour. The adoption of a substantial lessening of competition tests for
12 Rachel Griffith, Stephen Redding and John van Reenen, ‘Measuring the Cost-effectiveness
of an R & D Tax Credit for the UK’, Fiscal Studies, 22, 2001: 375–99.
13 Estimates from www.euklems.net.
14 Stephen Machin and Anna Vignoles, ‘Education Policy in the UK’, Centre for the
Economics of Education Discussion Paper no. 0057 (2006).
mergers removes the public-interest gateways allowed in earlier legislation. It is too soon to assess the impact of these reforms on productivity
growth, but the evidence that competition is good for productivity growth
is strong and the experience of the 1956 Restrictive Practices Act suggests
that there could be a significant positive effect.15 The OECD has constructed indicators of product market regulation which are designed to
reflect the extent to which the regulatory environment is conducive to
competition, and empirical work shows that this indicator is associated
with better productivity performance.16 Here the UK has continued to
have the best overall score in the OECD.
Business may well feel that policy towards enterprise has been less convincing. Reducing administrative burdens of regulation is at most an
aspiration, and the British Chambers of Commerce claim that the additional costs of regulation since 1998 now amount to over £55 billion. The
statutory rate of corporate tax was reduced from 33 to 30% in 1997 and to
28% in 2007. Here the UK has been following a general trend reflecting
greater capital mobility as globalisation progresses, but has been outpaced by other EU countries. This is perhaps unfortunate since, as evidence of the effects of reductions in corporate tax has accumulated, it
now seems likely that the revenue-maximising rate is below 30%.17
Table 13.2 captures some of the flavour of New Labour supply-side
policy. There is continuity from the Thatcher reforms in terms of relatively little subsidy for industry and light regulation of product market
entry. Taxation has edged up but remains well below levels in the high-tax
European countries. In the absence of a return to protectionism, New
Labour has seemed content to see further de-industrialisation, and
employment in industry fell from 26.7% of the labour force in 1997 to
22.1% in 2005 (table 13.3). It is reasonable to see the overall picture as
one of building upon the approach of the Conservatives, but important
improvements have been made, notably in terms of competition policy
and the R & D tax credit.
15 The classic reference is Stephen Nickell, ‘Competition and Corporate Performance’,
Journal of Political Economy, 104, 1996: 724–46; on the impact of the 1956 Act, see George
Symeonidis, ‘The Effect of Competition on Wages and Productivity: Evidence from the
UK’, Review of Economics and Statistics, forthcoming.
16 See the review of the evidence in Nicholas Crafts, ‘Regulation and Productivity
Performance’, Oxford Review of Economic Policy, 22, 2006: 186–202.
17 For data on corporate tax rates and an assessment of the elasticity of revenues, see Michael
Devereux, ‘Developments in the Taxation of Corporate Profit in the OECD since 1965:
Rates Bases and Revenues’, paper presented to the Alliance for Competitive Taxation
(2006).
Table 13.2. Some aspects of supply-side policy
(a) State aid/manufacturing GDP (%)
1981/6
1994/6
2005
France
4.9
1.8
1.5
Germany
3.0
3.8
1.7
UK
3.8
0.9
0.9
(b) Product market regulation (1–10)
1978
1998 (1)
1998 (2)
2003
France
10.00
7.17
4.17
2.83
Germany
8.67
4.67
3.17
2.33
UK
8.00
2.33
1.83
1.50
USA
6.17
2.67
2.17
1.67
(c) Distortionary taxes/GDP (%)
1975
1995
2004
France
23.2
31.2
32.3
Germany
25.8
26.8
24.6
UK
26.5
22.7
24.5
USA
20.0
22.9
20.8
Sources:
State aid: European Commission, 2nd Survey of State Aids (Luxembourg:
European Commission, 1990), 6th Survey of State Aids (Luxembourg: European
Commission, 1998) and State Aid Scoreboard (Luxembourg: European
Commission, 2006).
Product market regulation: 1978 and 1998 (1) from Paul Conway and Giuseppe
Nicoletti, ‘Product Market Regulation in the Non-manufacturing Sectors of
OECD Countries: Measurement and Highlights’, OECD Economics Department
Working Paper no. 530 (2006); 1998 (2) and 2003 from Paul Conway, Veronique
Janod and Giuseppe Nicoletti, ‘Product Market Regulation in OECD Countries,
1998 to 2003’, OECD Economics Department Working Paper no. 419. Higher
scores denote more regulation.
Distortionary taxes: OECD, Revenue Statistics, 1965–2005 (Paris: OECD, 2006),
based on definition in Richard Kneller, Michael Bleaney and Norman Gemmell,
‘Fiscal Policy and Growth: Evidence from OECD Countries’, Journal of Public
Economics, 74, 1999: 171–90.
Table 13.3. Structure of employment (%)
Agriculture
Industry
Services
1979
France
8.9
36.1
55.0
Germany
5.4
44.2
50.4
UK
2.7
38.6
58.7
USA
3.6
31.2
65.2
1997
France
4.4
25.3
70.3
Germany
2.9
34.8
62.3
UK
1.9
26.7
71.4
USA
2.7
23.9
73.4
2005
France
3.5
22.6
73.9
Germany
2.4
30.0
67.6
UK
1.4
22.1
76.5
USA
1.6
19.8
78.6
Source: OECD, Labour Force Statistics (Paris: OECD, 2006).
The productivity record since 1997
It is instructive to distinguish between real GDP per person and real GDP
per hour worked. The latter is a measure of labour productivity whereas
the former reflects differences in demography, labour force participation
and unemployment, as well as output per unit of labour input.
With regard to real GDP per person, as table 13.4 reports, there was an
increase of about 0.5 percentage points per year compared with the
Conservative years from 1979 to 1997 and growth in the period 1997 to
2006 was appreciably faster than in either France or Germany. The result
is that by 2006 the level of real GDP per person was higher than in those
countries and the change in relative positions since 1979 has been quite
striking. The UK was already on course to overtake France before 1997
but had to improve its performance to do so after 1997.
Trends in real GDP per hour worked have been somewhat different.
Since 1997 there has been a small decrease in its growth rate, as table 13.4
shows, which has been quite similar to that in France though well ahead
of the German rate. There has been an acceleration in American labour
productivity growth which none of these European countries was able to
Table 13.4. Real GDP per person and per hour worked
(a) Levels (UK ϭ 100)
(i) Real GDP per person
1979
1997
2006
France
113.7
103.8
98.6
West Germany
115.9
106.7
Germany
95.3
87.1
USA
142.7
140.7
136.2
(ii) Real GDP per hour worked
1979
1997
2006
France
119.0
119.4
118.6
West Germany
121.9
128.1
Germany
102.5
97.7
USA
139.1
115.1
118.5
(b) Rates of growth (% per year)
(i) Real GDP per person
1979–97
1997–2006
France
1.40
1.83
West Germany
1.45
Germany
1.39
UK
1.92
2.41
USA
1.84
2.04
(ii) Real GDP per hour worked
1979–97
1997–2006
France
2.40
2.00
West Germany
2.67
Germany
1.53
UK
2.39
2.08
USA
1.32
2.40
Source: Groningen Growth and Development Centre and the Conference Board,
Total Economy Database, January 2007 (2007), www.ggdc.net.
match. The gap in the level of real GDP per hour worked between the UK
and France (and probably West Germany) is still much the same as in
1979 at around 20%. Seemingly, then, UK performance in terms of productivity has been less impressive than in terms of GDP per person.
The difference lies in employment patterns. Increasingly over time, the
workings of French and German labour markets have tended to exclude
low-productivity workers who are too expensive to be employed (especially young people) or for whom early retirement is a very attractive
option. Making a correction for these labour market distortions would
reduce the current gap in real GDP per hour worked by about 8 percentage points, whereas no such correction would have been warranted in
1979.18 Thus the underlying productivity gap with France and West
Germany has fallen since 1979. Similarly, the apparent decrease in UK
labour productivity growth since 1997 is probably accounted for by lower
unemployment.
HM Treasury’s approach to productivity has clearly focused on
increasing hours worked as well as output per hour worked on the basis
that at the margin an hour worked is worthwhile provided that the extra
output is worth as much to the employer as the cost to the worker of the
hour worked, even if this reduces average labour productivity. It might
then be reasonable to give more weight to the increase in the growth of
real GDP per person rather than the decrease in growth of real GDP per
hour worked since 1997.
A closer look at productivity growth in the market economy
Although most discussions of economic growth relate to the whole
economy, including both private and public sectors, i
t is informative,
especially in the present context, to examine performance in the market
economy. This is partly because there are well-known difficulties in measuring public sector output but also because the marketed sector is the
locus of industrial policy.
Table 13.5 reports the results of a growth-accounting exercise for the
market economy. Growth accounting is a technique to decompose the
growth of output into contributions from increases in factor inputs
(capital, labour, etc.) and from TFP. This latter is the residual after the
18 This comment and the following discussion is based on the estimates in Renaud Bourles
and Gilbert Cette, ‘Les évolutions de la productivité “structurelle” du travail dans les principaux pays industrialisés’, Bulletin de la Banque de France, 150, 2006: 23–30.
Table 13.5. Sources of market economy real GDP growth (% per year)
Hours ICT Other
Labour TFP
Real
Real
GDP/
worked
capital
capital
quality
GDP
hours worked
inputs
inputs
France
1980–95
Ϫ0.4
0.3
0.6
0.5
0.8
1.8
3.0
1995–2004
0.4
0.5
0.5
0.4
0.7
2.5
2.0
Germany
1980–95
Ϫ0.4
0.2
0.7
0.2
1.2
1.9
2.4
1995–2004 Ϫ0.5
0.5
0.5
0.1
0.5
1.1
1.7
UK
1980–95
Ϫ0.6
0.5
0.7
0.3
1.6
2.5
2.9
1995–2004
0.4
1.0
0.5
0.5
0.9
3.3
2.7
USA
1980–95
1.0
0.5
0.6
0.2
0.7
3.0
1.9
1995–2004
0.3
0.8
0.6
0.3
1.7
3.7
3.1
Source: Mary O’Mahony and Catherine Robinson, ‘UK Growth and Productivity
in International Perspective: Evidence from EU KLEMS’, National Institute
Economic Review, 200, 2007: 79–86.
input contributions have been accounted for and results from improvements in technology and/or efficiency. In this case, the contribution from
growth in labour inputs is further divided into that from hours worked
and that from improvements in the quality (skills) of the labour force.