Cheap labour, not the lifestyle economy, is damaging the UK’s productivity growth

I wrote here last week about productivity and why its growth is so low. I've had a lot of replies on it. Mostly, it seems, from people who simply refuse to accept the perfectly reasonable idea (backed by research from the Bank of England and various academics) that a fast and large rise in the supply of labour (thanks to the introduction of the tax credit system and to the enlargement of the EU) has probably had an effect on the UK's productivity.

There are, of course, all sorts of other reasons for productivity growth falling around the world: there is Facebook; there is Twitter; there is Instagram; and there is lifestyle preference. One interesting response to my blog came from Douglas McWilliams at the CEBR.

McWilliams reckons that a large part of the problem is that "people are increasingly taking on jobs that offer less remuneration than those that their predecessors might have accepted, but that offer a more attractive lifestyle or more opportunities for helping others." This, he says, has reduced GDP growth by 4% of GDP since 2008 and "could explain slightly under a quarter of the measured productivity shortfall."

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There's nothing new about "lifestyle work"

The idea of lifestyle work is hardly new. As McWilliams notes "most of the creative economy is part of the lifestyle economy" (people put up with low incomes in order to do what they love), as is the "caring economy" (working for charities or in the medical, political or religious sectors) But what is new is the "extent of this phenomenon". Both "young and old are turning to lifestyle jobs on a scale which seems unprecedented", says McWilliams.

There is no actual historical data to prove this (we have little idea why people have chosen the work they have over time) but his research suggests to him that in 2008 around 20% of the UK economy was "essentially lifestyle based" and that that number has now risen to 30%. That matters for all our statistics: choosing life over work is a pretty benign thing to do but it isn't captured in GDP or productivity data and it certainly isn't taxed (there are therefore knock-on effects to tax revenues to the choices McWilliams thinks UK workers are making).

All this is entirely possible. But I'm not sure that it goes any way to answering the real question which is why is UK productivity growth worse than that of other developed nations?

The key factor is the rise in the labour supply

It is possible that we have a larger lifestyle economy than other countries but if we do, our tax credit system (which effectively provides a basis income guarantee for anyone prepared to work) has to be a large part of the explanation. But that aside, this analysis would hold for everywhere else too. We can't then use it to explain the British productivity puzzle. For that, we have to look for a factor that is unique to the UK: the huge rise in the supply of labour is the only one I can see.

PS I am asked about US productivity higher than ours despite also having a constant influx of cheap labour. The interesting point on this (and possibly the explanation) is that they haven't experienced the same scale of shift as us. First, they have no equivalent tax credit system; and second, they have had no sudden population shifting event on a par with the enlargement of the EU. The foreign-born population of the US was 12% in 2004 and 13.4% in 2015. In the UK, those numbers were 8.8% and 13.5%.