Economists call it the productivity puzzle: why has productivity in the UK slumped more in the recent recession than previous ones and why has its recovery been slower?
Productivity matters. It refers to the country’s output or GDP per hour worked and it is productivity that drives a sustained increase in the standard of living. It is almost unheard of for a major capitalist economy to have flat productivity – save in the very short term – but since 2008 the British economy has stagnated on this front, with GDP currently around 17% lower than the G7 average.
To understand some of the perverse forces making this possible you don’t have to look much further than the nearest hand car wash. Car washing is big business. Datamonitor has estimated that UK car owners spend more than half a billion pounds a year on commercial car washing. Perversely, instead of using the high-tech cleaners at garages we choose to pay others to wash our cars using the most inefficient of methods – a hose, bucket, water, soap and sweat. The hand car wash has grabbed around half of the commercial car wash market in the UK.
Joseph Schumpeter praised capitalism for its creative destruction. Weak companies are destroyed by entrepreneurs who build productivity enhancing new companies and sectors. But most entrepreneurship does not take this form. Entrepreneurship expert, Scott Shane, has stressed how it tends to be concentrated in economic sectors that are going nowhere. Much of the rise in self-employment in the UK is of this type.
The late economist William Baumol distinguished between productive, unproductive and destructive entrepreneurship. Entrepreneurs are an important element of fostering economic growth in society. But, as Baumol theorised, entrepreneurship can take many forms and has a dark side. It can lead to well-paid jobs, but entrepreneurs can also lead a “parasitical existence that is actually damaging to the economy” for example in the form of criminal activity or just businesses that do not add to the economy. This can be seen in the recent growth of the hand car wash sector.
Technology adopted and discarded
A hand car wash is labour intensive and forgoes technology that has been developed to replace it. Normally technology is used to increase the efficiency of output and make an economy more productive – economists call this capital deepening and it’s traditionally a marker of good economic growth.
As the economies of wealthier nations evolved, the machine car wash was one of many technical changes that accompanied capital deepening. Major garages and petrol stations are equipped with expensive machines that now stand idle, while people queue for the hand car wash. This, despite the machines being good at what they do. They are unlikely to scratch your car. They wash it cleaner, use less water and the detergents are more safely taken away. Some countries even ban hand car washing because of the waste and pollution involved.
The return to an inefficient, labour-intensive model – as with the hand car wash – is therefore an odd regression. It is only possible in a rich economy like the UK’s because labour is relatively cheap – and those working in hand car washes tend to be paid at the minimum wage or below it. They experience long periods of under-employment as they wait for customers and few have proper contracts or conditions. People working these kinds of jobs, in part, explains the UK’s productivity problem.
A backwards economy
The hand car wash also shows something else – the shift towards a grey, informal economy – again something more associated with developing countries. Car washes should be subject to local authority licensing and planning. But councils struggle to bring them into line, as people take the opportunity to set them up on any piece of land, or in disused petrol stations by a main road.
Then there is the small matter of taxes. Many hand car washes are part of the cash-in-hand economy, where there is no record of the VAT, national insurance and tax that is being paid and passed on. And, inevitably in a country concerned with migration, there are suggestions that some of those working in your hand car wash are illegal or even trafficked workers.
Hand car washes are taking the economy backwards. They are part of the low-wage, low-productivity trap. Their proliferation in the UK shouldn’t be seen as merely a quirk of people’s preference for them over the machine wash. And they shed interesting light on Britain’s productivity puzzle.