If the ONS can’t measure productivity, how are we meant to improve it?
The ONS’s shortcomings are far from trivial, its bad maths is holding back the UK economy, writes Paul Ormerod
The Office for National Statistics (ONS) has come in for a lot of criticism for the accuracy of its labour market data. More specifically, its estimates of how many people there are in employment have become less reliable.
In essence, the ONS has relied for many years on a survey which it carries out across households. The problem is that response rates to the survey have fallen rather dramatically.
These seem to be points only of interest to nerds. But they have very important practical implications.
Why is the ONS important?
Labour market data is one of the things the Bank of England Monetary Policy Committee (MPC) monitors closely, for example, when deciding the level of interest rates. The MPC believes changes in employment are a good indicator of the pressure of demand in the economy. And the higher the pressure, the more likely it is that inflation will rise, so the MPC has much less scope to cut interest rates.
But the ONS data is even more important than that. The total level of output produced in the economy divided by the number of people in employment is a key measure of productivity. And, ultimately, it is the level of productivity which determines how much as a nation we can afford – whether it is personal spending or national budgets for defence or the NHS.
Productivity measures the efficiency of the economy, and unless we become more efficient over time, we cannot afford to spend more, no matter how desirable this might be.
The ONS responds to criticism of its data and has been working on alternative ways of measuring employment. But no matter how they do it, the resulting numbers on productivity are very gloomy indeed.
What do the figures say about productivity?
The latest estimates suggest that since Labour came to power last July, productivity has fallen slightly. More fundamentally, there has been virtually no growth in productivity from its levels immediately before the pandemic at the end of 2019.
However the ONS measures it, the efficiency of the economy has risen by less than one per cent in the past five years.
But this fundamental point about what is affordable has simply not struck home, especially in the public sector.
In London, for example, the unions representing workers on Transport for London are demanding both wage increases and a reduction in weekly hours worked by drivers from 35 to 32. In Scotland, the unions are in a pay dispute with the publicly-owned company Scottish Water. In Birmingham, as has become only too well known, the city is becoming full of rubbish because the council wants to get rid of one of the jobs on the bin lorries and the workers are on strike in response.
Even Bridget Phillipson, perhaps the leading Luddite in the current Cabinet, has been moved to criticise the gross inefficiencies at the Student Loans Company (SLC), which appear to have left large numbers of students at risk of not having their loans paid.
According to a report in The Times, workers at the SLC manually input data and move it between eight separate IT systems. Six of these run on technology that is no longer supported and is neither compliant with data protections law nor cybersecure. With a half decent IT system, around half the workforce would not be needed.
It cannot be stated too often that, overall, the public sector has shown no increase in productivity since 1997, a period of almost 30 years. There are good reasons why productivity growth will be lower in the public than private sectors, but this is beyond a joke.
If Keir Starmer can get to grips with this massive underperformance of the public sector, better services will be delivered without having to spend more.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester and an economist at Volterra Partners LLP