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U.K. jobs hit record high amid slumping GDP. What gives?

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At last count, 29.7 million people had jobs in the U.K., the highest level ever. That is cheering news, up to a point. While employment is rising, GDP has fallen. In the beginning of 2008, real GDP was 3.3 per cent higher than now – and employment was 0.7 per cent lower. In other words, the two counts – jobs and output, are moving in opposite directions. Economists express that discrepancy as a fall in productivity, output per worker. What's going on?

The simplest explanation, a sudden increase in workers' laziness, is unlikely. There are several alternatives.

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Genuine decline in efficiency. The sharp recession and slow recovery have cut into capital investment and worker training, the main sources of productivity. The problem with this theory is that industrial and human capital are run down slowly, while productivity fell quickly.

Cyclical adjustment. Many of the new jobs are part-time. That reduces measured productivity, but this employment shift isn't large enough to explain all the output-headcount discrepancy. More speculatively, employers may be keeping some idle workers on the payroll, because it's so expensive to train new workers when business picks up. Such hoarding is easy to talk about, but hard to find.

Sector shifts. The "finance and insurance" sector accounts for 10 per cent of British GDP, but less than 4 per cent of employment. The relatively bad performance of these businesses has more effect on output than the relatively few jobs lost in central government, which accounts for about 5 per cent of U.K. GDP and 6 per cent of the labour force. Statistics on output by sector do partly support this explanation, but on their own are not sufficient to explain all of the puzzle.

Statistical artifact. When in doubt, doubt the statistics. Perhaps there has not really been a fall in productivity, because GDP measures are too low now, or were too high before. And the employment count may miss changes in illegal jobs. This explanation is sensible, but insufficient.

There are probably many reasons for the productivity decline. But one response is certainly justified: pleasure that at least one British economic indicator is in good shape.

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