Policy Research in Macroeconomics

Ailing economy, failing solutions

By Jeremy Smith

PRIME has published its latest Analysis, which compares the state of the UK labour market and economy in 2012 with that of 2006, and looks at the impacts on national productivity.

We conclude that traditional productivity methodology has a fundamental flaw when it comes to measuring the performance of a national economy with a chronic high level of unemployment.

This is because it ignores the wasted capacity of a nation’s economically active, but unemployed, population.

The report argues that by far the most significant macro measure of productivity for a national economy is the value of output divided by the economically active population, i.e. the sum of those in employment and those unemployed but seeking work. On this measure, the output value per economically active person in the economy has fallen, between 2006 and 2012 by 3.24%.

To improve the economy and national productivity, we need a major labour-intensive investment programme for a sustainable future.

To download the full report, click here.  For the executive summary only (5 pages), click here.

In 2012, UK GDP was just 1.1% greater than in 2006, whilst the population had grown by over 4%. This means that GDP per head of population has fallen by around 3% between the 6 years. If GDP had grown by just 1.5% per year since 2006, it would be almost 8%, or £120 billion, greater in 2012 than the actual figure.

In 2012, the number of those in employment was 2% higher than in 2006, while the number of unemployed was 48% (800,000) higher.

Between 2006 and 2012, the UK workforce has undergone enormous changes; for example, the number of those employed in manufacturing has fallen by 14%, and in construction by almost 12%.

One Response

  1. “the sum of those in employment and those unemployed but seeking work. ”
    I see no reason why you shouldn’t include those ‘inactive – wants a job’ as well (dataset LFM2)

    If there were sufficient jobs, these people would not be inactive. They have indicated so on the workforce survey.

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