Housing and the Productivity Puzzle

by Ken Gibb

Last week IPPR published a new report on the productivity gap or puzzle (Tony Dolphin and Izzy Hatfield are the authors of ‘The Missing Pieces: Solving Britain’s Productivity Puzzle’). This is a thought provoking report on one of the critical economic policy questions of our time. It also inevitably spills over into wider questions of interests such as the nature of work, wages, in-work benefits and indeed the long term effects of housing and housing tax policies.

What is their diagnosis and what do they propose to improve the situation? First of all, UK productivity performance is significantly poorer than European competitors such as Germany, the Netherlands, Belgium and France. At the same time over time the UK’s current productivity performance has notably worsened compared to its long term average up to the watershed year of 2007. Dolphin and Hatfield use a number of techniques to try to understand what is going on to create these worrying stylized facts.

Their analysis suggests that:

  • Poor performance against European competitors can be explained by lower productivity within UK industries not due to the overall composition of industry output being biased toward low productivity sectors.
  • Lost output growth per worker since 2008 within the UK has been due to broad performance weakening: the decline of oil & gas and financial sectors are a small part to this trend but actually the poor performance occurred across all sectors.
  • Poor productivity during the UK recession is related to labour hoarding and the fall in wages shifting the capital-labour ratio. But the recovery phase is characterized by a jobs growth that was disproportionately in low productivity low pay sectors.

The IPPR study therefore suggests that new job growth needs to be increasingly shifting into higher productivity sectors like manufacturing and finance. Firms should also be encouraged to increase training in their workforces (including increasing productivity in lower value-added sectors where so many work). They also argue that the Government’s catapult centre initiatives are focused on the high end of productivity enhancing sectors but this misses the importance to the economy of the domestic services: wholesale, distribution, caring services, food and retail. How are we to increase productivity here? The authors argue that the living wage proposal may be a positive step, if unemployment remains low, but cuts to capital spending, infrastructure, further education and science budgets are not conducive to this key engine of improving the economy (and reducing the budget deficit).

Housing matters to increased productivity and should be part of this debate. First, housing costs are an important part of the financial triangle facing people at the margins of work: what wages and working hours can they command; what in-work benefits and tax credits do they have access to that can augment their disposable income and, what are their housing costs and what housing options are there if a move rather than commuting is required for work? We know that the welcome higher levels of statutory minimum wage will often be offset by cuts to things like tax credits. Moreover, unpublished qualitative research I have been recently nvolved with suggests that labour market choices are significantly influenced by the cost and insecurity of private renting versus the perceived security of social renting (even if it is therefore traded off against work further afield).

Second, sufficient supplies of accessible and affordable housing and alongside it opportunities for subsequent trading up are essential to well functioning labour markets supporting careers but also longer distance mobility. This is about housing planning and the economics of the supply side but it is also about wider planning questions and the interdependence of the different parts of the housing system as a whole, for instance, concerning how housing investment across different segments and tenures complements business investment in the allocation of new land development opportunities. More than a decade ago I was in a project team led by Geoff Meen that suggested, at a regional level, that housing investment in new homes led business investment (jobs followed people). These are big complicated questions but they need to be part of the debate.

Third, writers like Duncan Maclennan have a longstanding interest in the notion that the housing sector impedes wider economic productivity because of the inflexibility of the housing system more broadly conceived – this is as much about insufficient investment as it is about misallocation of resources because affordable housing and land are often in the wrong place and not where housing and labour demand is high. Housing is also key infrastructure for the future and while not as obvious as the case made for high speed broadband or fancy transport or water industry investment – it is a necessary condition of sustainable growth. While it is not always clearly evidenced there are a range of arguments indicating that better housing and communities lends itself to improved education, employment and health outcomes (though it is often hard to decisively sort out causality).

Finally, and to return to a hobby horse, a tax system that encourages undiversified saving in less productive assets like second hand housing, promotes excessive borrowing and acts to encourage market speculation cannot be a positive productivity driver.