Precisely because it is an aggregate measure, the more rapid the growth in factor inputs, the more rapid is growth in headline GDP. Thus, for example, the more labour we allocate towards productive output, the more quickly will GDP grow. In the early stages of its expansion, the extraordinary rates of growth in China were due to rapid rates of population expansion which, between 1980 and 2000, boosted economic output by more than 20%. Strictly speaking, of course, we should use employment or labour force growth rather than headline population, but this is a decent proxy and in any case is easier to obtain on a cross-country basis. This methodology essentially gives a rough measure of the extent to which growth is driven by productivity and how much is simply attributable to labour expansion.
In a 1994 book, Paul Krugman noted that “productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” So it is perhaps surprising to note that in the US between 1980 and 2007 fully one quarter of the increase in GDP was the result of an expansion of labour input, just as in China (see chart). This may go a long way towards explaining why although the US economy appeared to be growing rapidly and creating huge numbers of jobs, it never created the prosperity that politicians claimed. By contrast, over the period 1980 to 2007, the UK experienced an average real GDP growth rate of 2.7% with GDP per capita growing at 2.4%. Thus, population accounted for just 9% of the rise in UK output over that period.
What is remarkable is how much of a change we seen across many industrialised economies since 2008. US GDP per head has slowed from 2.1% over the period 1980-2007 to 0.7% between 2008 and 2016. The corresponding figures for Germany are 1.7% to 0.9% and in the UK 2.4% and 0.4%. This is the much-discussed productivity puzzle which has exercised many fine minds over recent years. Nobody has a convincing explanation for such a slowdown, let alone how to resolve it, but a slowdown there has definitely been. If we accept Krugman’s view, the western economies appear to have a substantial problem in boosting living standards at the same pace as they did prior to the recession. And it is perhaps no surprise that people are unhappy with their economic circumstances with the result that we saw electorates vote for Brexit and Trump.
Indeed, although UK per capita GDP growth has slowed sharply since 2008, to the point that it took until 2015 for output per head to recoup the losses suffered during the recession, the slowdown in measured GDP has been less dramatic. What this implies, as the economist Simon Wren-Lewis has pointed out, is that immigration into the UK has helped to support measured GDP growth in recent years. Moreover, if immigration is curbed as a result of Brexit, an absence of any pickup in productivity suggests that UK measured GDP will also slow. With the UK government possibly poised to trigger Article 50 proceedings as early as next week, this is a message worth taking on board.
It also suggests that we should beware the pronouncements of politicians who extol the virtues of rapid GDP growth, as UK Chancellors are wont to do. An economy’s output performance depends on the quality of its inputs. GDP is not necessarily a measure of living standards: It just means that we produce more, but if there are more of us that is what we should expect – as anyone who regularly battles London commuter traffic will know only too well.
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