The Truth about the Growth Slow-down

To understand the growth slow-down we need a theory. The economy has to maintain successive changes from one satisfactory short term situation to another: both demand and capacity must expand repeatedly and in balance. The government is responsible for expanding demand, the private sector for expanding capacity. For that, the private sector needs confidence in the government. If actual growth is slower than required to sustain the labour market, a slow-down in productivity may be induced. If so, in place of a growing physical gap between the supply of and demand for labour, there may be growing employment at low wages. Slow growth may induce low productivity in a number of ways; direct and indirect, temporary and wage-related. Low wages may reduce productivity by imparting a labour-intensive bias to new investment, or by attracting workers into low-value-added sectors of the economy. It follows that to answer the question of whether the growth slow-down was or was not demand-related we need to look for statistical evidence of induced productivity slow-down. One way to begin is to separate the statistical record of manufacturing from non-manufacturing. It is also necessary to consider the potential influence of other events or factors which have affected historical productivity, including so-called ‘catch-up’ effects and the effects of ‘exogenous’ shocks such as the energy-price shocks of the nineteen-seventies.