22 November 2000 - Whilst concluding that "The overall performance of the
UK economy remains impressive" and labour market policies "continue to be
exemplary" in comparison with other European countries there is still a problem
with employee productivity.
The IMF praise government efforts to get people off welfare and into work and the
drive on improving productivity but they say that "the UK's comparatively weak labour productivity
performance...may be the Achilles' heel of an otherwise strong
economy." But they also say that "as regards productivity growth,
the authorities' approach to this complex issue - combining a stable
policy environment with key structural reforms - is certainly
appropriate in terms of direction and emphasis."
Extracts from United Kingdom - 2000 Article IV Consultation
Concluding Statement of the Mission
"1. The overall performance of the U.K. economy remains impressive.
Output is growing at a brisk pace, the unemployment rate is at its
lowest level in a quarter century (...) These achievements reflect ...
sound macroeconomic policies ... as well as a decade and a half of fundamental
structural reform that should, in many respects, be an example for
many other European countries. (...) some aspects of the
economic performance remain disappointing. In particular, the U.K.'s
comparatively weak labor productivity performance in relation to
other countries-due mainly to past underinvestment in physical and
human capital-may be the Achilles' heel of an otherwise strong
economy.
" 2. Looking to 2001, the ongoing economic expansion appears set to
continue with output growth in the range of 2 1/2 to 3 percent.
Private demand growth may slow down, but total domestic demand would
still be buoyed by a sizeable increase in government spending. (...)
"3. Given these broadly favorable economic developments, (...)
uncertainty stems from two sources: first, how much further the unemployment
rate can fall before setting off wage pressure; and second, how fast
productivity can grow on a sustained basis. On the first, the moderate
behavior of wages in 2000 is suggestive of a substantial fall in the
economy's structural rate of unemployment since the mid-1990s. However,
this moderate behavior could also reflect, at least in part, pressures
from the appreciation of sterling in recent years as well as a lag in
the response to the increase in headline inflation this year. On the
second, productivity gains in recent quarters are tantalizing, but cannot necessarily be
extrapolated forward. Thus, we agree with the authorities that
further efforts must be made to increase labor supply and the trend
growth in productivity. (...)
"6. Turning to medium- and long-term issues, the authorities have
set their policies with the broad purpose of enhancing the economy's
productive potential. The strategy is rightly multifaceted.
Macroeconomic and financial sector stability underpinned by strong
policy frameworks should continue to make an important contribution
to raising both productivity and private investment. This is
complemented by many targeted initiatives to enhance productivity as
well as investment and private saving, encompassing medium-term
fiscal plans to increase public investment in human and physical
capital, policies to enhance prospects for the "New Economy", labor
market reform, pension reform, deregulation, and measures to promote
competition-including in the provision of financial services. While
we support the broad thrust of these initiatives, some adjustments in
specific areas would be desirable.
"7. (...) areas such as education-where there is a clear need to improve the
U.K.'s relative performance-may benefit more from well-targeted,
cost-effective reforms (e.g., to address low skill levels) than from
greatly increased spending.
"10. Turning to structural issues, we broadly agree with the
priority areas identified by the authorities for fostering
productivity growth: promoting innovation and research and
development (R&D); strengthening competition; and encouraging
enterprise. (...).
"11. An important aspect of the productivity issue is the potential
for accelerated gains from the production and use of ICT as
illustrated by the "New Economy" experience of the United States. The
productivity growth of some ICT-intensive sectors in the United
Kingdom provides some early, circumstantial evidence that the New
Economy may be taking hold following years of relatively high rates
of ICT investment on par with those of the United States. However, we
would caution against relying too heavily in the next few years on
the effects of ICT investment to raise economy-wide productivity
given the difficulty of determining the timing of potential
productivity gains associated with the use of ICT equipment.
Preliminary evidence suggests that the productivity gains realized to
date in the United Kingdom come mainly from increases in the ratio of
ICT capital per worker, underscoring the need to maintain high rates
of growth in private investment accompanied by improving skill
levels. The multifaceted approach envisaged by the authorities to
enhance productivity growth in general will, of course, also enhance
the development of ICT. However, there may be a need for more
targeted measures, such as the recent decision to set up ICT learning
centers. A good example would also be the removal of existing
hindrances to low cost connections to the Internet. Looking ahead,
given the recent sharp decline in equity prices in the high-tech
sector, care should also be taken to ensure that avenues remain open
for financing viable enterprises.
"12. The labor market is an area where - particularly by comparison
with most other European countries - U.K. policies continue to be
exemplary. The targeted measures adopted over the past three years,
including various New Deal initiatives and in-work benefits for
low-income workers, appear to have created further incentives for and
facilitated transitions from both unemployment and nonemployment to
work. In many respects, these measures have complemented and built
upon the reforms initiated in the 1980s and early 1990s. Yet, some
concerns remain. While employment and activity rates have continued
rising for women, these measures have been declining for men,
indicating the increasing marginalization of men with low skills.
Moreover, notwithstanding recent progress, the nonemployment rates
for some groups such as lone parents remain very high. Hence, more
emphasis is needed on integrating various components of the welfare
and unemployment benefits systems; programs directed towards raising
participation rates of specific groups such as lone parents and those
on disability benefits; and measures to increase the supply of
workers with vocational and intermediate skills-an area where the
United Kingdom remains deficient. Furthermore, unemployment benefits
could be tapered in a manner that increases disincentives for
rotating through the different options of the New Deal while
remaining unemployed over long periods. An important concern going
forward is that, although the National Minimum Wage (NMW) appears not
to have affected employment or inflation thus far, significant
increases in the NMW or changes that would bring the youth rate up to
the standard NMW could have adverse implications for the prospects of
integrating low-skill and younger workers into the workforce."
The IMF comments follow another positive report from the OECD pointing to recent
sustained growth in the UK economy and noting government labour market policy.
This report can be seen at
http://www.oecd.org/publications/outlook68.
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