FT Alphaville " The BoE on Britain's productivity puzzle The minutes to the Bank of England's September meeting are out, and we can't help being drawn to the following comments about the UK's labour productivity puzzle (our emphasis): The labour market had remained surprisingly resilient in the face of the contraction in activity. The unemployment rate had fallen to 8% in the second quarter, its lowest level for around a year, and employment was estimated to have risen by more than 200,000, with a rise in permanent employees accounting for more than half the increase. It remained difficult to reconcile this with the persistent weakness in output. Contacts of the Bank's Agents had suggested that depressed trading conditions meant employees in some sectors had to work harder to generate new business. Some companies were likely to have needed to retain a certain minimum level of staff to continue operating, while the difficulty in recruiting labour with specialist skills may have led others to hold on to some employees currently underemployed. Alternatively, an environment of heightened uncertainty might have led companies to choose to rely more on increasing staffing as a means of expanding capacity, rather than investing in plant and machinery which took a long time to come on stream and was more costly to reverse if demand turned out to be insufficient. Some of the factors contributing to the weakness in productivity might have persistent effects, for example possible impairment to the efficient allocation of capital stemming from problems in the financial system. It was unlikely that any one factor alone could satisfactorily explain all of the conjunction of weak output growth and relatively strong employment growth. Wage pressures had remained muted. Private sector regular pay in the second quarter had grown by 2% relative to a year earlier, reflecting subdued settlements. But the continuing weakness in output growth and strength in employment growth meant that productivity in the second quarter had disappointed once again, even allowing for the impact of the extra bank holiday. As a result, notwithstanding the modest rate of wage inflation, growth in unit wage costs had risen. If productivity growth were to remain weak, wage increases would be held back, but it was also possible that inflation might fall more slowly than the Committee had previously expected. It seems that the BoE is as confused as everyone else when it comes to Britain's productivity puzzle, though in some sense agrees that companies may be hoarding labour to hedge for future uncertainty - because the alternative, investing in plant capacity, would be too much of a commitment. Related links: Are UK companies hoarding labour? - FT Alphaville Time to resurrect the "missing variable" - FT Alphaville Redefining labour - FT Alphaville This entry was posted by Izabella Kaminska on Wednesday, September 19th, 2012 at 9:58 and is filed under Capital markets. Tagged with bank of england, employment, labour, productivity, UK.