Productivity in the UK is not such a Mystery

I see that the low productivity in the United Kingdom is still a mystery. (WSJ article by Paul Hannon).

uk prod

Since the beginning of 2013, productivity in the UK has been stalled.

Last week I posted a model of effective demand that showed how productivity stalls at the effective demand limit. This model is new and unknown. Yet, it shows that productivity in the US stalls every time that the economy hits the effective demand limit. The UK does not know about this model of effective demand. But would the model apply to UK as it does to the US? Yes…

When an economy is up against the effective demand limit, one thing that you will see is that capacity utilization drops as unemployment comes down.

uk unrate

Unemployment is definitely coming down.

uk capu

And capacity utilization has also fallen since the beginning of 2013.

It may seem contradictory to employ less capacity as more labor is being employed, but that contradiction describes how firms are able to maintain profit rates at the effective demand limit.

Once effective demand begins to grow in relation to real output, productivity will be able to increase again. But this scenario usually means a recession is forming.

So the productivity in the UK is not a mystery, neither is the stalled productivity in the US.