Gross Domestic Product or GDP simply put is the sum total of all activity/output in an economy and the more people are in work, the higher the activity level is, something which should be reflected in GDP.
If most people within a country are working, the output per hour worked increases. If the input stays the same, companies will be able to produce more at the same cost and consumers will be better off and consume more, leading inevitably to a growth in GDP.
In our economies today, certainly in the UK and the US, unemployment is at a record low. It is at 3.8%, in the UK, in fact the lowest level since 1974 - but we are told, at the same time, that the economy is already in or going into a recession. Hang in minute, how does that work? Why does a high level of employment not translate in more GDP growth now?
A deeper dive into this historic low unemployment rate – a frequent reason for boasting by government officials everywhere – shows that (1) actually fewer people are working now than before the pandemic as many people left the workforce altogether since 2021, something referred to as the Great Resignation. Many front-line workers, low-paid staff and those 55-and-over threw the towel in the ring and these ‘leavers’ are not registered as job seekers, so are helping in bringing down the unemployment rate.
Other reasons why low unemployment is not translating into economic growth, are that (2) the remaining active labour force is working fewer hours than before the pandemic and that (3) the overall workforce is less productive. In fact, the UK workforce has one of the lowest average productivity levels in the G7 (workers in the financial excluded). Research shows that, if UK were to have the same productivity as Germany, the economy would be whopping £180bln bigger than it is now. It is mathematical.
A raging debate in the high employment- low productivity- low economic growth-triangle is that working-from-home is affecting productivity as fewer hours of work are put in when people work from home, it is believed. WFH was effective during the pandemic with zero distractions, but with life back to normal again, it could be that being at home is no longer proving to be productive enough. Reason why so many employers want people back at their office desks.
How to break this low labour participation and low productivity cycle? It seems the red-hot inflation is doing the job for us as it has forced Central Banks everywhere in hiking interest rates from around 0% to levels close to 2%. Economic theory, specifically by Keynes (1936) implies that higher rates will lead to an increase in unemployment, after all when borrowing costs for businesses are higher, the costs of production are higher and job losses will occur.
So, inflation could very well drive many ‘resigned’ workers back into the workforce as the costs of living bites and people need to work (more), just when businesses are beginning to announce hiring freezes. This role reversal of who holds the upper hand between employers and employees could have various effects: the (unnaturally low) unemployment rate will edge up, the risk of wage inflation could subside and the productivity per hour worked will increase once workers rush back to the office and have to compete for jobs. Will economic growth return as a result? Eventually yes, but some real pain lies ahead first in this transition. No mystery here. Work-work-work.
References & links:
https://www.pwc.co.uk/economic-services/ukeo/ukeo-november-2019-productivity-puzzle.pdf
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