BOE's Haldane Calls for Help for Least Productive U.K. Firms

  • Chief economist says productivity puzzle a pressing topic
  • Higher interest rates would boost productivity but cost jobs

Bank of England Chief Economist Andy Haldane said measures to help U.K. companies with the weakest productivity could have a big effect on boosting wages.

About one-third of British firms have seen no productivity growth this century, Haldane said in a speech in London Monday. Different regions across the country have seen sharp disparities in the levels that have been achieved, with the capital around 75 percent more efficient than the North East, potentially amplifying inequalities in living standards.

“Whether in supporting living standards, or in shrinking their distribution, tackling the global productivity puzzle is among the most pressing public policy issues,” Haldane said. “There is unlikely to be any single measure which puts productivity growth back on track. But measures which support the long tail of companies, currently operating at low levels of productivity, have the potential to do considerable good.”

Haldane highlighted an argument often used by those who campaigned to keep Britain in the European Union: that global competition boosts productivity by forcing companies to up their game. Firms that export are on average a third more productive than their domestically focused counterparts and foreign-owned businesses are twice as productive, he said.

Need for Openness

“The productivity benefits these external-facing firms bring underscore the importance of openness to trade and foreign direct investment in generating rising productivity and living standards over time,” he said.

The British economy has struggled to improve its productivity since the financial crisis and the BOE’s loose policy has been blamed for economic inequality. Haldane acknowledged that while higher interest rates could have benefited overall productivity, it would have come at the expense of jobs at those companies that would have failed.

“Should monetary policy makers have sacrificed 1 1/2 million jobs for the sake of an extra 1 or 2 percent of productivity?” Haldane said. “Hand on heart, I can tell you this one would not knowingly have done so.”

The chief economist also said greater productivity and investment demand could also help reduce the reliance on monetary policy to boost demand by raising the natural rate of interest. That would allow borrowing costs to be higher without hurting the economy.

“A ‘pivot’ in the mix of policies, with somewhat less of a contribution from monetary policy and more from structural policies, would probably be desirable,” Haldane said. “Not least, it could help mitigate any adverse impact of accommodative monetary policies on productivity or the distribution of income and wealth.”

People Matter

Britain’s corporate landscape is dominated by companies with low productivity growth, something Haldane said needs to change. That could be due in part to the U.K.’s heavy reliance on services, which lags manufacturing in terms of efficiency growth. It may also be linked to the shortcomings in the quality of business leadership. A one standard deviation improvement in the quality of management can raise productivity by an average of 10 percent, suggesting “potentially high returns” to policies that tackle the issue, he said.

Another reason may be the fact that the flow of people between firms has slowed since the financial crisis, limiting the spread of ideas, innovation and good management practices, he said.

“That’s true of firms and also of countries. Immigrants can bring different skills,” Haldane said during a question-and-answer session after his speech. “The evidence shows that’s important.”

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