Pondering productivity and welcoming our robot over-lords

Morning all,

Tera here, stepping in as guest editor. Following both Ruth and Giles is, frankly, a daunting prospect – but it’s August, and no one reads anything too carefully in August. So here we are.

With half the economics and policy world on a sun lounger, it’s been a good week to catch up on some fascinating research; from our perennial productivity problems to what machine learning can teach us about living well, and avoiding extinction by AI.

A huge thanks to the TOTC team for trusting me with the edit – and for making it all look easy. And thanks to you for reading – even in flip-flops. TOTC will be back in your inboxes in September!

Have a great summer,

Tera Allas

Chair, Pro Bono Economics 
Senior Advisor, McKinsey & Company
Honorary Professor, The Productivity Institute, Alliance Manchester Business School
#dataisbeautiful 

Serious slow down. In just three short years we’ll be celebrating commiserating two decades of stagnant productivity growth in the UK. Does that count as an epoch yet? Our low level of productivity is no puzzle, and some of it is clearly due to the stark slowdown in our productivity growth: rates have dropped from 1.9–2.1 per cent (1985-2006) to 0.4–0.5 per cent (2010–2019). But, despite untold spilled ink, there’s little consensus on what caused this exceptional slowdown. Josh Martin’s excellent review brings some welcome clarity and new insights: the slowdown pre-dates 2008 (so maybe we can commiserate as soon as next year!); it has been widespread across industries, although significant in manufacturing and ICT; and successful decarbonisation has contributed, by reducing the output of carbon-intensive good and services.  

Productivity and prescriptions. If there’s one sector where the productivity story feels especially urgent, it’s health. This is concerning in its own right, but has important consequences elsewhere. As the LSE’s Centre for Economic Performance has pointed out, the cycle of poor work and ill health is holding back our economy. Workers – especially young ones – are increasingly facing health conditions which interfere with their ability to work. The state of Statutory Sick Pay isn’t helping matters, with more than a million workers unable to claim because their earnings are too low, and those who are eligible having to scrape by on a tenth (yes, a tenth) of a full-time minimum wage job. This severely limits the economic participation of those in poor health. There are sensible proposals for reform out there (including some from my RF hosts on how best to support sick and disabled workers to stay in work) … but they’re not cheap, easy, or popular.  

Well, well, well. Health isn’t just critical to the nation’s economy, but also to our wellbeing. Something, according to this paper from Pro Bono Economics, we might need to start paying a little more attention to. The authors find that 5 per cent of adults in the UK – around 3 million people – experience ‘wellbeing poverty’, defined as scoring 4 or less out of 10 in ONS self-reported life satisfaction. So, what creates (or erases) wellbeing? Money matters (more below) but so does health (typically the biggest driver), the conditions we live in, and human connection. The authors’ projection finds that a further 300,000 people could fall into ‘wellbeing poverty’ by 2030, facing the reinforcing effects of deteriorating mental and physical health combined with increasing loneliness. Improvements in economic conditions and meaningful increases in public services spending could mitigate this but won’t get us back to pre-pandemic levels of wellbeing. Creative and decisive policies from the Government will be key, including improving the experience of renters, and establishing wellbeing poverty measures as a headline target.  
 

Wellbeing and incomes. So, back to the question of money. Of course, incomes impact wellbeing – but can money buy you happiness? Researchers have long argued that there is a certain point past which each extra pound of income contributes little to life satisfaction. This new research uses machine learning (excellent at spotting non-linear patterns) to find that this holds true in the UK and in Germany – but not in the US. In the UK, the relationship between income and life satisfaction flattens after about £25,000 – £40,000 (in equivalised net household income per year). Given that only 37 per cent of people in the UK are in households with higher incomes, it is safe to say there is still plenty of room for incomes to boost wellbeing. Meanwhile, what’s the second biggest driver of low life satisfaction in the authors’ ‘gradient boost’ model? Never kissing your partner. See – research can be actionable. 
  

The great unknown. Now along come the robots, to solve a lot of our problems, and create new ones. No one knows how AI will affect the economy (and anyone who claims to is probably selling you AI). That said, we can already begin to see the labour market effects of automation. Between 2022 and 2025 ads for roles highly exposed to AI fell by 38 per cent compared to 21 per cent for low-exposure ones. But the full story is more complex, with broader economic factors at play. Yes, AI has momentum – 92 per cent of global businesses plan to ramp up investment over the next three years – but just 1 per cent say they’ve reached “maturity”. Fully integrating tools into workflows and changing how people work is always challenging. But companies are already reviewing workforce strategies and pausing some recruitment. For young people, this could mean a triple-whammy: a general labour market slowdown; a decline in graduate-level jobs; and a reduced demand for lower-skilled roles often taken up by young people. If entry-level hiring continues to slow, organisations risk creating future talent gaps. And anyway – we might all be hallucinating the increased productivity after all (told you – no one knows what’s going on…).   

Chart of the week

Returning to the question of health – I wanted to see how disposable incomes were linked to healthy life expectancy around the UK, and how this has changed. Enter Chart of the week. Using freshly released ONS data, it plots local areas by their average real gross disposable household income (horizontal axis) and healthy life expectancy at birth (vertical axis) across 2011–13 and 2021–23. We see a clear and persistent pattern: areas with higher incomes tend to have longer healthy life expectancies. Worryingly, that link is strong (though not linear) and could be getting stronger.

What’s more, healthy life expectancy has dropped almost everywhere since 2011–13, even as inflation-adjusted incomes have risen slightly. In some areas, healthy life expectancy has fallen dramatically: at just 52 years, Blackpool has the lowest figure, 4 years less than a decade ago. The inequality is both staggering and growing: as well as substantially more income, residents of Richmond get 18 years more healthy life than those in Blackpool, up from 15 years a decade ago. That’s a whole generation! So, while health may matter more than money for overall wellbeing, income and health are clearly intertwined — part of a complex web of social and economic factors that shape life outcomes.