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Productivity Puzzling: A Study on Recent Behaviour of UK and Bangladesh

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European Journal of Business and Management www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.9, No.23, 2017

Productivity Puzzling: A Study on Recent Behaviour of UK and

Bangladesh
Susmita Roy Tumpa1 Zannatul Ferdus2
1.Lecturer, Department of Management, Bangladesh University of Business and Technology, Commerce
College Road, Mirpur-2, Dhaka
2.Assistant Professor, Department of Management, Bangladesh University of Business and Technology, Dhaka
Commerce College Road, Mirpur-2, Dhaka-1216

Abstract
Productivity is a multi-faceted concept; no single definition can holistically describe it. However, in the simplest
form, productivity signifies the ratio between the input and output. In achieving sustained economic growth of a
country, increased productivity remains as the key component. Productivity signifies a continual striving towards
the economically most efficient mode of production of goods, commodities, and services needed by a society.
Prior to the mid-1980s, labour productivity growth was a useful barometer of the world economy: it was low
when the economy was depressed and high when it was booming. In many larger advanced economies like UK
labour productivity growth slowed sharply and remained subdued for years after the credit crisis of 2007/08.
After the early 1980s productivity issues were considered as a priority area for action in Bangladesh: a small
economic country, but Productivity has slowed down again significantly during the last decade (2001-2012)
because of some reasons. In this paper, we tried to find out the reasons behind for productivity puzzling in UK as
well as in Bangladesh. For UK productivity puzzle, this study considered that workforce composition, lower
business investment, flexibility of labour market, Impaired resource allocation, and public sector productivity
were the major factors that might have caused productivity to fall and in Bangladesh, insignificant role of
allocative efficiency of resources within industry, poor performing public sector, inadequate public sector
investment, labor union, firm size and productivity are inversely related were the major factors that might had
caused low productivity. In light of these findings, it is found that there is a similarity between productivity
puzzling factor of UK and Bangladesh. Performance and investment in public sector and improper resource
allocation are common productivity puzzling factor for both the countries.
Keywords: Productivity Puzzling, UK, Bangladesh

1. Introduction
In the early 1980s and 1990s, there was very meager fall in productivity and then experienced substantial
recovery. Productivity had risen by around 14 percent in both cases after sixteen quarters after the start of the
recession (Grice,2012). Movement in the overall output and employment level in the UK have posed a
productivity puzzle since the starting point of the financial crisis in 2008. Between the first quarter of year 2008
and the second quarter of 2009, the UK experienced 6.3 percent fall in GDP level but only 2 percent fall in
employment. The third quarter of 2011 and the second quarter of 2012 confronted 1 percent fall in the GDP
level with 1.4 percent growth in the employment level (Patterson,2012).
Labour productivity means the amount of output produced for a single unit of labour input. Accurate
estimation of productivity bears great importance because it is used as an estimator of efficiency in the business
and economic growth. Total factor productivity is a parameter of efficiency with which all inputs like capital and
labour are combined to produce output (Disney and Miller, 2013). In UK Across the whole period, 2008Q1 to
2012Q2, output reduced by around 3 percent and employment increased by 0.2 percent thus output per worker is
below its pre-recession level by 3.2% (Disney,Jin and Miller,2013). Apart from this behavior of companies,
flexibility of labor market, structure of the labor market, structure of the economy, role of financial sector and
behavior of the company might have played a role in idiosyncratic behavior of the productivity from the past
trend (Patterson, 2012). Overall circumstances have puzzled many economists and policymakersand they are
skeptical about the accuracy of the GDP estimates and the labour market statistics (Grice, 2012)
In Bangladesh, before the early 1980s productivity issues were never considered as a priority area for action.
Productivity was neither theoretically nor practically understood in its real context. Bangladesh became a
member of the APO (Asian Productivity Organization)after one decade of independence. The understanding of
productivity depends on a better knowledge of the close relationship among labor, capital, and management and
the impact of the human element on each of these factors. In a country like Bangladesh, where resources are
limited and per capita income is low, productivity can be raised only by emphasizing labor, i.e., awareness of
labor efficiency. The overall productivity to Bangladesh, to some extent, is reflected by the Gross Domestic
Product (GDP). The growth of GDP has been slow in 1980s, but it accelerated to 3 percent in the 1990s.
Productivity has slowed down again significantly in Bangladesh during the last decade (2001-2012) because of
some reasons.

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Fig: Growth of Manufacturing productivity of Bangladesh during 1976-2010 (Source: the data of Bangladesh
Bureau of Statistics)
In this paper, we will try to find out the reasons behind for productivity puzzling in UK as well as in
Bangladesh.

1.2 Strongest reasons for productivity puzzling in UK

1.2.1 Workforce composition
Increase in part-time and decrease in full-time workers are evident from various surveys and research. Such shift
caused aggregate productivity to fall. There has been a significant rise in the proportion of workers who are not
full time. From 2008 Q1 to 2012 Q3 the percentage increased from 25.5% to 27.5% in the part-time work group.
Disney, Jin and Miller (2013) observed that moving towards part-time and self-employed workers caused fall in
productivity because part-time workers are 30% less productive compared to the full time employees.
Patterson(2012) showed the increased number of part-time workers who couldn’t get full time job in figure 2. If
this is the case, then 2% shift towards part-time labours or workers will result in fall in aggregate productivity
(hourly) by approximately 0.4%. However, if continued increase in workers’ length of experience and the shares
of workers with degrees were being properly utilized, these would tend to increase output level. It has been
argued by Disney, Jin and Miller (2013) that if self employed are 40% less productive then there would be a fall
of 0.46% on aggregate productivity. Currently self-employed workers differ from those who were self employed
before the recession. Some of them became self-employed after losing the job are basically considered as less
productive. It is obvious that these reasons might have createdproductivity gap.
Output gap is ascertained by the difference between potential level of output and actual level of output
(Mishkin,2012).
Output Gap= Actual output (Yt) – Potential output (Ye)
Average output gap in 2012 was around -2.9 % ( OBR,2012). 30% less productivity among the part-time
worker group along with the lack of utilization of skills has kept the potential output lower than the actual output
resulting in increased output gap or less productivity.

Here labour force consists of employed and unemployed workers and works as the input factor of
productivity i.e.labour. Since increase in number of part-time and self-employed workers, which are less
productive but increased employment rate might have created productivity puzzle.

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Figure 1: Full-time and part-time employment, seasonally adjusted

(Source: Patterson, 2012)

Figure 2: Percentage of part-time workers who could not find a full-time job, seasonally adjusted

(Source: Patterson, 2012)

1.2.2 Low Business Investment:
As investment is a component of GDP, reduction in investment will lead directly to reduction in output. In the
UK, construction and the distribution sector confronted 45% fall in investment from the start of 2008 to the post
recessionlows(Disney,Jin and Miller,2013).They also revealed that investment in the manufacturing sector
reduced by over 30% between the year 2008-2010. By 2012, total annual investment remained 16% below the
previous peak. It has also been assumed that capital might have been reserved for investing to the sector for
which demand is now relatively high. This can cause misallocation of capital, which results in reduction in TFP.

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Figure 3: Business Investment

Source-(Disney, Jin and Miller, 2013,p-77)

Cost of capital is one of the determinants of investment that has risen over time. Brodbend(2012) stated
that cost of capital has risen by around 4.2% between the year 2010-2012. This motivates firms to substitute
towards labour because it is cheaper and reducing capital and output per worker. It is also evident that cost of
capital is now higher than before the crisis time (BOE,2012).
If user cost of capital keep rising, investors will be less likely to borrow and make investment. This may
lead reduction in investment results in less production. Consequently, aggregate productivity may fall and
recession might be longer than expected. If the user cost of capital(UC) shifts upwards from UC1 to UC2, the
capital stock(K*) and investment will be reduced. That means increased UC results in decreased investment
level(Figure 4). SMEs are experiencing financing constraints. Such hindrances are resulting in low corporate
births(Brodbend,2012). If financing constraints increases, Capital stock and level of investment from the small
and medium entreprises in the economy will be reduced that will result in less output (Figure 5).
Figure 4 : ( UC and Investment) Figure 5:( Financing constraints& Investment)

Source: (Figure 4 &5 , Mishkin,2012, page 496 & 497 respectively)

1.2.3 Flexibility of labour market
Gregg et.al(2013) showed that wages have become more responsible to local employment rates since early 2000.
Substantial increase in labour supply resulted from combination of policy change and reduction in the value of
household wealth can cause reduction in real wage(Blundell, Crawford and Jin,2013). Lower wages enables
firms to hold more staffs given the fall in output demand. Output remains low and the number of labour is
increasing leading to fall in productivity(Disney, Jin and Miller, 2013).
Pessoa and Reenen(2013), mentioned in their paper flexibility of real wage causes fall in productivity.
Production function is
Q=A
Here Q is output, L is labour, K is capital, and A is TFP. If we consider the first order condition, labour
productivity is related to real wage.In figure- 6, for simplicity, supply curve has been considered as inelastic.
Generally, in a recession with negative output shock can shift the demand curve downward, hence employment

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will move from L* to L. The equation below (here w=wage and P=price) holds in a normal recession wages are
rigid (downwardly). This holds that output and employment are lower, their ratio remains identical. Here both
wages and labour productivity remains unchanged.
=
Figure 6: Negative output shock & rigid wages- Labour productivity Stable

Source: (Pessoa and Reenen, 2013)

It can be seen from the figure-8 that the flexible wages leads to fall in labour productivity. In this case real
wages fall to guarantee full employment, but labour productivity has fallen = < . The flexibility of real
wages has sheltered jobs, but ascertained productivity is lower (Pessoa and Reenen, 2013). Due to recession
shock, demand falls that lead to lower wages. Firms require same number of workers to operate machine which
capacity has been reduced might have associated with lower productivity and created puzzling (Disney,Jin and
Miller, 2013).
Figure 7: Negative output shocks & flexible wages –Labour productivity falls

Source: (Pessoa & Reenen,2013)

1.2.4 Impaired resource allocation
Another important puzzles in productivity is the slowdown in the reallocation of resources — capital and labour
— to more efficient and productive uses. Economic theory suggests that more efficient companies should be able
to attract more inputs, be they capital or labour, relative to companies that are less efficient. Over time, the less

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efficient companies are forced to become more efficient or go out of business. Caballero and Hammour (2000)
depict that this process of ‘creative destruction’ drives a more efficient allocation of capital and labour across the
economy and leads to higher productivity growth at the aggregate level . Several academics’ like , Disney,
Haskel and Heden (2003) studies have shown that resource reallocation was indeed an important driver of UK
productivity growth prior to the 2007–08 crisis. However, if there are impediments to the free movement of these
factors of production, then it is possible that differences in the level of efficiency across companies may persist,
leading to slower productivity growth at the aggregate level. In practice, differentials in productivity levels
across markets and sectors are likely to exist even in normal times( Bernard and Jones (1996). Some sectors are,
by their nature, less labour intensive (hence more productive), and a healthy, dynamic economy requires such
firms to coexist with others that may be more labour intensive, as both perform important economic functions.
But if resource allocation is restricted, one would expect to see increased differences in productivity, prices and
rates of return across firms and sectors relative to their levels before the crisis. Chart 8 shows that, since 2007
and up to 2013, the difference between trend and actual productivity across UK industry sectors has been
significantly more dispersed than during the pre-crisis period, indicative of little reallocation having taken place
since that time.
Figure 8: Productivity dispersions across industries(a)

(a) The chart shows the standard deviation of productivity shortfalls (relative to a trend calculated between 1970
and 2006) across 1-digit Standard Industrial Classification (SIC)sectors.
It is possible to examine the role of reallocation in more detail using ONS firm-level data from the Annual
Business Survey. Chart 9 decomposes private sector productivity growth into growth that can be attributed to
changes in productivity within individual firms (the blue bars), and changes stemming from the reallocation of
labour from less productive to more productive firms (the red bars). The reallocation of labour here includes the
decisions by existing firms to expand or reduce their headcounts, hiring decisions associated with the creation of
new firms, as well as the laying off of employees by failing companies.( Barnett et al (2014)

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Figure 9: Decomposition of labour productivity(a)

While the ‘within firm’ component accounts for the vast majority of the fall in productivity in 2008–09, the
changes in the component that captures the reallocation of labour across UK firms are also striking. This
component could explain more than half of labour productivity growth in the four years prior to the recession. At
the beginning of the recession in 2008 and 2009, the contribution from reallocation fell slightly, rather than
increasing significantly as a result of higher insolvencies or firing behaviour, as one might have expected (Riley,
Rosazza Bondibene and Young (2014). Following this, the contribution from reallocation declined even further,
becoming negligible between 2010 and 2012. This result is in line with Weale (2012), who finds evidence of
reduced labour movement through fewer job changes. Specifically, he finds that an apparent change in the
workings of the labour market has resulted in there being fewer opportunities for career advancement through
changing occupation or industry of employment than there were in the few years before the crisis, and that this
could explain about 0.3 percentage points per annum of the fall in labour productivity.
1.2.5 Public sector productivity
Public sector measured output growth was substantial in the decade up to 2009. From 2000Q3 to 2009Q3, output
of ‘public administration and defence’ rose by 17%, ‘education’ by 11% and ‘human health and social activities’
by 44%. 1However, this increase in output was accompanied by an increase in input volumes, notably in the
employment of such groups as civil servants, police officers and staff, teachers and nurses.
The ONS has produced a number of alternative measures of productivity growth in the production of
government services over this period. Some of these are illustrated in below Figure. The two green lines show
measures of labour productivity. What differentiates them is the measure of output used. The dark green line
uses a measure of value added – effectively, this is output excluding all spending on intermediate inputs that are
not labour. The light green line uses a measure of gross output derived from an index of spending on all inputs
(labour and capital). Under this measure, labour productivity can increase if there is additional spending on non-
labour inputs. The grey line is a measure of total factor productivity, which is an index of gross output relative to
an index of capital and labour inputs. Two of the three measures show declining productivity, while one measure
reports an increase over the period. Table also showed a small increase in output per hour in total government
services in the decade before the recession.

1
ONS tale ‘GDP(O) low level aggregates at constant and current prices’ (http://www.ons.gov.uk/ons/about-ons/what-we-do/publication-
scheme/published-ad-hocdata/economy/december-2012/gdp-o--low-level-aggregates-at-constant-and-current-prices.xls).

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Figure 10: Measures of public sector productivity

There are important differences across different parts of the ‘government services’ sector. Between 2009Q3
and 2012Q3, output fell by 5% in ‘public administration and defence’ (this should not be surprising given that
measured output in these sectors is heavily dependent on the volume of inputs), fell very slightly in the education
sector and actually rose by 8% in ‘human health and social work activities’. A priori, a larger fall in employment
relative to outputs suggests that, in the short run, measured labour productivity (and probably total factor
productivity also) has increased in the public sector.
Figure 11:. Output per worker in government sectors

Figure 11 shows indices of the volume of output in the three subsectors defined in the National Accounts as
‘government services’ – public administration and defence, education, and human health and social work
activities – relative to indices of employment in these sectors derived from recent editions of ONS Labour

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Market Statistics, which contain broadly consistent time series of employment.

The figure shows a broad upward trend in output per worker in all three sectors of government services
since 2012, which is slowest in ‘public administration’ and with a high degree of year-to-year variation in all the
sectors.

1.3 Strongest reasons for productivity puzzling in Bangladesh

1.3.1 Insignificant role of allocative efficiency of resources within Industry
Productivity in any given industry in any given year may grow/ decline because its firms become more/ less
productive and/or because output is reallocated towards the more/less productive firms. In fact, industry level
productivity (weighted-average TFP of all firms in the industry) can be broken into two components: (i)
industry- level unweighted-average TFP and (ii) a term measuring the covariance between firms’ shares in total
sales and firms’ TFP. The covariance term measures allocative efficiency: if it is positive, then the more
productive firms in the industry have higher market shares and the allocation of resources is efficient.
Figure-12: Decomposition of Industry - Level TFP

As seen in above figure, the industry-level TFP patterns of Bangladesh are explained mostly by the firm-
level TFP performance, not by the allocative efficiency of output across firms in any of the industries. In the
garments industry over the entire period, and in the food industry since 2001, the allocative efficiency has made
a positive contribtion to industry-level productivity.

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In the pharmaceuticals, textiles, and leather/footwear industries of Bangladesh, allocative efficiency has
made a negative contribution to industry level productivity. This in efficiency in these three industries may be
related to the lack of competition – including import completion- or to ineffective bankruptcy rules and the lack
of markets for used capital that prevent the exit of less productive firms.
1.3.2 Poor performing public sector
National Productivity Organization in Bangladesh estimated that in the 90s, there was hardly any difference
between the public and private sector regarding productivity of employee. While Base: 1990-91=100, the
productivity in public sector was 104.41 in 1991-92, which become 116.80 in 1996-97 where average in that
decade was 113.43. The average productivity of employee in private sector in that same decade was 118.48
(114.31 in 1991-92 and 122.35 in 1996-97).
Table: Comparative trends of productivity and salaries paid to the employees both under public and private
sector management in Bangladesh.

While Base: 2002-03=100, the productivity of employee in public sector in 2008-09 was 75.5 and the
wages and salary was 140.42; the same for private sector are accordingly 94.11 and 194.51- which indicates
decrease in productivity in public sector . It can be seen in above figure, the productivity trends of public sector
employees decreasing than the employees’ of private sector of Bangladesh.
1.3.3 Inadequate public sector investment
Investment is a perquisite for creation of new firms and expansion of the existing ones, thus increase in
productivity. According to Barkat (2006) development without investment is improbable. According to
Bangladesh Economic Review (2011) in FY 2009 -10, investment was 24.41 per cent of GDP and the shares of
public and private sector were 5.01 per cent and 19.40 per cent respectively. In Fiscal year 2010-11, the
investment is 24.73 per cost of GDP and the shares of public and private sector are 5.28 per cost and 19.46 per
respectively. According to Barkat (2006) in 1990’s the real GDP wroth averaged 4.8 per cent ( with declined
volatility) credited to increased private investment and further integration with global economy reflected in the
increased export, especially in the RMG sector. According to Bangladesh Economic review (2010), the share of
private investment in total investment was about 60 percent, which stood over 80 per cent in FY 2009-10. An
analysis if the investment data reveals that while the contribution of public sector in total investment is gradually
decreasing, where as the contribution of private sector investment is increasing steadily. Inadequate private
sector investment might have created productivity puzzle.
1.3.4 Labor Union
There is lot of debate on the relationship of labor union and productivity- some argue that, labor union increase
productivity, some argue that it hinders productivity. According to the Economist (2007) there are some areas
where unions will produce higher productivity.
1. There are opportunities for deploying capital to replace low skilled labor
2. There are significant transaction costs to finding and retaining labor.
3. The work easily lends itself to classification and regularization and
4. Productivity is easily measured.
However, labor union is indeed an effective tool to protect the interest of the workers. Which is one of their

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rights too.
But unfortunately, real labor union has not been formed in Bangladesh which could be instrumental to have
positive impact on the benefits for the labor as well as on the increase of productivity. According to Rahman
(2009) labor union in Bangladesh could not develop independently because of their overwhelming dependency
on the political parties and leaders. The political affiliation of trade unions is the root of many other formidable
problems faced by organization (Akkas, 1998). At this back drop, where common worker are not adequately
protected by their unions as well as productivity is not directly been influenced positively by the activities of
unions. The relationship between Owners and workers also have create puzzle in productivity of the organization.
1.3.5 Firm size and productivity are inversely related
Here, the size classification made according to Bangladesh census of Manufacturing Industries (CMI), which
are : small firms have less than 10 workers, medium firms have between 10 and 50 workers and large firms have
less 50 workers. We further divide the large firm category into 3 sub-categories: relatively large firms have
between 50 and 150 workers, very large firms have between 150 and 500 workers and extremely large firms
have more than 500 workers. As seen in the below Figure relative to the extremely large size firms firms of
smaller sizes are more productive. Medium sized firms are the most productive firms – in average 32 percent
more productive than extremely large sized firms. Thus contrary to finding for developed economics in
Bangladesh the large firms are not the most productive. Although it is not possible to verify at this point, this
may be because of the serve corporate management deficiencies and the resulting dearth of qualified middle
manager in Bangladesh which become increasingly binding as the firm size increases, preventing exploitation of
available economies of scale.
Figure- 13: Firm size and average productivity are negatively correlated

1.4 Conclusion
Labour productivity behavior in the UK has been puzzling and it has been persistently weak (Hughes and
Saleheen,2012), labour productivity behavior in the Bangladesh also been puzzling; as employment was resilient,
the productivity fell between 2008 and 2012 in both UK and Bangladesh. However, having discussed the UK
productivity puzzle, this study considers that workforce composition, lower business investment, flexibility of
labour market, Impaired resource allocation, and public sector productivity are the major factors that might have
caused productivity to fall and in Bangladesh, insignificant role of allocative efficiency of resources within
industry, poor performing public sector, inadequate public sector investment, labor union, firm size and
productivity are inversely related are the major factors that might have caused low productivity. From the above
discussion , it is found that there is a similiarity between productivity puzzling factor of UK and Bangladesh.
Performance and investment in public sector and improper resource allocation are common productivity
puzzling factor for both the countries.
Along side of this,there might be some other latent factors which may influence on the productivity to
decline.

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