Productivity Growth, Labour and Capacity Utilisation
Following Thatcher's rise to power in 1979, enormous changes took place in the UK economy. Dramatic financial liberalisation sowed the seeds of the later consumption and house price boom, tough economic measures were enacted to lower inflation, and, together with reforms of labour market regulation, these changes eventually destroyed the power of the trade unions.
From 1979 to 1986, around a third of employment in UK manufacturing disappeared. Some—in particular the government—claimed a revolution had begun in productivity growth. To assess such claims, Mendis and Muellbauer (1984) and Muellbauer (1986, 1990) examined evidence on productivity growth in UK manufacturing accounting for hard-to-measure changes in labour and capacity utilisation, and measurement problems in value-added.[208] Assuming a stable distribution of actual hours around normal hours, the authors derived the mean of actual hours relevant for measuring productivity from the observed upper tail, which produced convincing results. Part of the productivity gain in UK manufacturing was genuine, but output per head substantially overestimated the gains. Thus, measured productivity growth proved sensitive to controlling for utilisation rates. In his critical assessment of real business cycle models, Muellbauer (1997) suggested that the pro-cyclical movement of supposed “productivity shocks” driving such models was largely due to mismeasurement—from omitting variation in utilisation rates.3.6