The Importance of Not Being Idle – Northern Ireland’s productivity problem

Since the financial crash of 2008, and the Great Recession which followed, the UK has been struggling with a productivity crisis. Productivity, defined here as the increase in GDP per hour worked, increased very steadily in the UK for fifty years until 2008. Since then, productivity growth has halted entirely.

As is becoming traditional when looking at any sort of economic analysis, the situation in Northern Ireland is particularly bad. Northern Ireland has always had lower levels of productivity than England, Scotland, and the Republic of Ireland, but the stagnation in productivity growth over the last decade has seen the gap in productivity levels across the Irish border turn into a chasm. Whilst in 2004 productivity was 27% higher in the South, by the end of 2014 the value of the output of the typical worker in the Republic was 56% higher.

Productivity by Country

Whereas in 2004 productivity in Northern Ireland was in line with Spain, stagnation in productivity means that Northern Ireland has been overtaken by Slovenia, and other 2004 accession EU countries such as Poland and the Slovak Republic are not much further behind. Meanwhile, productivity in the Republic has overtaken Germany, and is now level with London.

Productivity is not just a dry, academic, concept. It matters, as it one of the key drivers behind wage growth and living standards. Countries and regions with falling or stagnating productivity levels are losing the global race to attract high quality, high paying jobs.

Admittedly, a key driver of the increase in Irish productivity was the fact that unemployment shot up during the Great Recession, meaning that output per worker increased due to a decrease in the number of workers. A similar effect was seen in the United States, and the subsequent recovery where output increased (but employment didn’t) was known as a jobless recovery. But the jobs came eventually, as the recovery continued, and the jobless recovery became a recovery of the ordinary sort.

There are a number of potential causes for Northern Ireland’s productivity problem. A key reason is the reliance on the public sector for employment. During the recession, few jobs were shed in the public sector, and as a result there were the same amount of workers producing less and less in terms of economic output.

The fact that public sector employers pay significantly more than private sector employers in Northern Ireland also distorts the labour market, as public sector workers will be disincentivized from moving to private sector jobs.

Northern Ireland has also been subject to many of the same factors affecting the rest of the UK. These include the fact that much private sector job creation has generally been of the low wage sort.

However, a key reason behind the productivity lag in the UK has been historically low levels of investment. Investment, in the economic sense, refers to the purchase of plant and machinery by firms, and the purchase of new houses and real estate by people.

Investment & Productivity Growth

The y-axis shows annualized growth in productivity since the financial crash, and the x-axis shows average investment as a portion of GDP. Whilst there is significant variation between countries and regions, there is a trend showing that countries with higher levels of investment are being rewarded with stronger productivity growth.

So, how can Northern Ireland encourage the investment that is so badly needed to boost productivity, wages, and living standards? In short, the Executive would need to be doing the precise opposite of what it has been doing.

The current brouhaha over welfare reform, and the ensuing nonsense regarding petitions of concern and ghost budgets, is creating an atmosphere of severe economic uncertainty. Businesses tend to crave stability and certainty when deciding whether to make investments or not.

The current impasse in Stormont has led to the situation where firms have no idea what the Corporation Tax rate will be in three years hence. I have previously been sceptical about whether a reduction in the CT rate is really the shot in the arm that Northern Ireland needs, but having made the decision to go for it, the current deadlock has complicated investment decisions for firms, and has made the Northern Ireland Executive look parochial and short-sighted to boot. Neither is a good look when trying to attract inward investment.

The continual strategy of threatening to bring down the Executive in order to extract further concessions from the Government in Westminster, is exacerbating the impression of Northern Ireland being an unstable place to invest in. It is also utterly self-defeating. If Northern Ireland is ever to get to grips with its productivity and living standards crisis, then brinksmanship must be replaced with grown-up politics which puts economic growth front and centre.

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  • jimjam

    Another great piece of analysis from Salmon. Does anyone know if any work has been done to compare public sector productivity with that elsewhere?

  • murdockp

    many of us have been saying this for years but you say it more elequently than any of us could.

    opening a business here is torture. the public sector lives in fear of the private sector.

    I believe stormont should collapse. Westminster understands business. stormont does not.

    bring it on.

  • chrisjones2

    The problem in NI has never been a lack of capital for investment – it has been a lack of worthwhile investment opportunities

    Dont rely on Stormont to help. It hasn’t a clue

    Don’t rely on inward investment. All American businesses want is to steal ideas and take them away or a source of low wage labour

  • chrisjones2

    “the public sector lives in fear of the private sector”

    …… and where it does privatise it forces wages down to the minimum wage while staff in the same roles in the public sector are paid 30%+ more and have pensions

  • Muiris

    Good analysis.

    As a citizen of NI, I would want the better standard of living that productivity brings. As a nationalist, that makes some form of reunification possible. As a unionist it gives me respect in the British ‘family’, and the wriggle room to vary from the family norms where I wish to.

    Economic politics is deciding how the cake is cut, all politics should be about baking a better (bigger?) cake.

  • chrisjones2

    Baking the cake means you need a working oven. We don’t have one and are reduced to sticking the mix outside in the sun and praying something will happen

    Perhaps one day the Executive will discover fire. Even then it will end up patented and under the control of a company where one or two MLAs or their children mysteriously obtain places on the Board or where it is owned by a well insulated ‘community group’

  • Eamon Hanna

    Excellent bit of work, as always, Salmon. As someone who provides services (finance/tax) to some small business I am always interested when people say things like murdockp ‘opening a small business here is a torture’. What steps could be made to simplify company creation, reducing bureaucracy. cutting red tape and the like? I hate to be a Job’s comforter but when someone comes to see me with a business idea I sometimes give them the dreary statistic that 80% of small business start ups don’t reach the five year mark.

  • steaming

    “The fact that public sector employers pay significantly more than private sector employers in Northern Ireland also distorts the labour market, as public sector workers will be disincentivized from moving to private sector jobs.”

    Why not: “”The fact that private sector employers pay significantly less than public sector employers in Northern Ireland also distorts the labour market, as public sector workers will be disincentivized from moving to private sector jobs.”

    Weirdly though, on the raw figures, the public-private pay disparity is more or less the same (around 45%-48%) in Northern Ireland and the Republic of Ireland. But 27.6% of employees in NI are in the public sector and 18.4% of employees in the Republic of Ireland work in the public sector. So the similar income imbalance can’t explain the very different employment levels alone.

    Also, at least in the Republic, once you factor in education levels, demographics (public servants tend to be older), additional pension benefits, the levy, organisation size etc, the pay gap is actually somewhere between 6% and 17%, depending on how you do the sums. I imagine it would be the same is true in NI. So again, the incentive effect might be there, but it can’t be as profound as the raw figures suggest.

  • steaming

    Sad but (kind of) true: at 35.5% Northern Ireland has the lowest 5 year survival rate of business start ups by region in the UK (table 4.1 in the spreadsheet linked to here). Though that’s not much lower than London (37%), it’s still pretty awful compared to the rest of the UK.

    I imagine this isn’t a ‘red tape’ problem though, since the amount of red tape would be more or less the same across the UK and we do worse than other devolved regions in business survival rates, business births and the like. It is more likely a problem of access to markets and local income-based demand. London aside, the business survival rates by region are roughly organised by income levels per region.

  • NMS

    Steaming, This CSO paper http://www.cso.ie/en/media/csoie/releasespublications/documents/earnings/2010/publicprivatepay.pdf demolishes the supposed differential between Private & Public sector in Ireland. One of the main explanations, apart from those mentioned by you is that women in the Public sector do not suffer the same level of pay discrimination as they do in the private sector. Indeed the research would that men in senior positions are paid far less in the Public Sector than the Private Sector.

    The NI Civil Service is not much smaller than the Irish one, but has far less responsibilities and serves just 40% of the population. Ireland also has a higher birth rate requiring more teachers and also had substantial inward migration of children.

    Public Sector pay in NI is also not set locally, but is fixed to UK norms, yet NI has the lowest level of private sector remuneration in the UK.

    I would suggest that the differential is huge for these reasons, but a reduction of pay for some groups, doctors and nurses come immediately to mind, would lead to their departure.

  • scepticacademic

    Agreed. Blaming the public sector is a red herring. The key question here is why the NI private sector is so weak; small size, low productivity, low export intensity, limited international scope and low wages. The red tape argument doesnt wash; no notable differences to rUk. Grant dependency and rent-seeking by larger local firms going way back at least part of the issue – private sector in denial about this. Peripherality certainly a factor. Poor educational attainment at the non-grammar end and the non-existent vocational skills system deserve more attention. Contrast with ‘down South’ (RTCs, which became institutes of technology).

  • scepticacademic

    Is it any harder to open and run a small business in NI than rUK or RoI? If so, what specific factors make it so? Businesses everywhere like to complain about ‘red tape’ but the Uk business envt is very benign by intl standards. Most small businesses fail within 5 yrs, that’s the case everywhere not just in NI. A high start up rate and high churn rate are healthy for the economy. I believe the weak incumbent medium and large business base is part of the problem. Not enough quality spin-offs and experienced start-ups being spawned. Weaknesses in the vocational education and training system and in the quality of management and business leadership are overlooked factors.

  • barnshee

    “Indeed the research would that men in senior positions are paid far less in the Public Sector than the Private Sector.”

    Proper order– The invention of the caste of “directors” in the public service is a major fraud on the taxpayer– Real directors are responsible for raising funds , ensuring the profitability and survival of businesses . Where they fail the- the orgainsation fails and they lose their jobs.,

    Senior positions in the public sector get handed money they had no part (or ability) in raising -when they fail they get promoted.

  • NMS

    Barnshee – In my experience senior managers carry out broadly the same functions whether the organisation is in the Public or Private sector. Indeed I would argue that many senior Civil Servants are in a much more invidious position because in the place of shareholders they have politicians and the wider public interests to consider.

  • Skibo

    One of the main issues with small business surviving is cash-flow. Particularly in the construction industry where 30 day payment terms often stretch to 90 days for some and up to a year for other clients. Would it be worth introducing some legislation to give small businesses some teeth to insist on their payments on time?

  • barnshee

    Repeats

    ” Real directors are responsible for raising funds , ensuring the profitability and survival of businesses . Where they fail the- the organisation fails and they lose their jobs.,”

    “Senior positions in the public sector get handed money they had no part (or ability) in raising -when they fail they get promoted.”

  • chrisjones2

    I recall a few years back chasing up an invoice with one of our councils. They were 60 days overdue and when i asked for payment were quite shirty. I pointed out that they were supposed to have a payment target of 10 days. She laughed at me “None of that nonsense here” she said

  • Sir Rantsalot

    Couldn’t people sue ? Get more potentialy?

  • Spike

    Does stormont understand business? Do the electorate understand business? You would think being a propped up state for so long that we would have done more to encourage enterprise. But what do we do?-we chuck it away and vote in an austerity government because of scaremongering about the union and pacts. Time for us to grow up about our politicians and who we vote for-being green or orange shouldn’t be the sole criteria but that’s what it seems like. Stormont needs an overhaul and performance standards and benchmarking brought in

  • Spike

    I see the sand dredgers in Lough Neagh are now suspended from work. One of the few traditional industries left here, producing results and keeping people in work – what does Stormont do? shuts it down. Seriously, we are striving to keep people industrious and then ministers pull the rug out from under their feet. whats next? kill the fishing industry and then move onto the farmers??

  • Ernekid

    Those sand dredgers do huge damage to the Lough’s ecosystem. It was a sensible decision to prevent them doing more long term harm to the Lough’s flora and fauna

  • Spike

    Think you’re reading too many sensationalist headlines. A huge area of northern Ireland drains into the lough and the phosphate pollution from farms and septic tanks are actually the main threat to the flora and fauna. Sand is actually replenished (albeit at a slower rate) from rivers eg. from Kildress via the Ballinderry River, and the dredging takes places in the middle of the lough and not at the edges. There are more pleasureboats on the lough than sand barges so I fully expect to see farms and the leisure industries on the lough also shut down on the wishes of environmentalists. unless………this is just a red herring and is just another government method to extract money from businesses…..

  • Accountant

    Get your point, jimjam, but not sure we need the research – does anyone seriously believe we have public services so much better here than the rest of the British Isles that we should have 50% more civil servants than anywhere else ? The money for SF’s “unaffordable (£300m p.a., reducing – then net contributing) Corporation Tax cut” might just be sitting in this extra 25,000 posts (£1 billion p.a. costs) – or in equalising public pay with the private sector (£2 billion p.a. ?). Remember what a responsible government (RoI) did when it found it couldn’t afford its excessive public sector pay ? This isn’t the hardest economic case study I’ve ever seen – we just need some politicians with some real world experience (or, quicker, Westminster).

  • jimjam

    No doubt about that, but if we had the comparative figures say just for health and education we’d have a better idea about just how much could be saved/reinvested. It would also be interesting to see how the public sector productivity gap (vis à vis GB) compares with that in the private sector.

  • johnerskine

    Any idea of the impact of emigration from the North, specifically middle-class Protestants like myself? I took the Stranraer ferry in 1980, never to return, and the prospect of returning to a province where ‘my’ community were represented by bigots of various shades never seemed particularly attractive. Most of my contemporaries at a well-known comprehensive on the Belmont Road thought likewise.

  • Mícheál MacGrianna

    DUP and PSF have fucked up no end but lets not pretend that Fine Gael are not fucking up the Free State economy.