The FT reports today that Scotland had a large – 11% – productivity gap with the rest of the country. The reason that this gap is so much larger than you might have thought is that the academics correctly use Total Factor Productivity to assess the question.

The usual story only looks at Labour productivity (which would show only a 2.6% gap) -how much you produce per hour of work. This matters obviously, because it correlates with pay etc. But it can lead to distorted judgments – in this case, a country with one massive capital using sector, oil.

Ignoring TFP discounts how flexible economies can substitute between factors. If capital or intelligence is scarce and costly you can substitute in more labour. It may be second-best, but the falling per capita production totals overstate the problem. Imagine a house filled with highly paid lawyers who choose to pay someone to wash dishes rather than buy a dishwasher; per capita production averages fall. It doesn’t signify all that much.

If labour supply is very elastic, this sort of lower productivity may not be as damaging to a long term ability to keep adding GDP. That is ultimately what matters for the UK. Sadly for Scotland, TFP is what matters most.

 

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