Is Household Outsourcing Driving Down Productivity?

Featured Image: Photo by Ross Sneddon on Unsplash

By  Colin Mason
Adam Smith Business School, University of Glasgow.
colin.mason@glasgow.ac.uk

Economic activity occurs in both the formal economy which produces paid-for products and services and in the household economy which produces goods and services for their own consumption and hence fall outside the GDP boundary. These boundaries are constantly changing. The baby boomer generation will have grown up in households in which cooking and sewing were common. Indeed, the Singer Sewing Machine was a common domestic appliance. Now, of course, most of the food and clothes that are consumed by households is purchased from the formal economy.  An ONS commentary earlier this year on Productivity Measurement raised the possibility that some activity that used to be counted towards GDP has moved to the household sector and so now falls outside the ‘productive boundary’.[1]  Do such ‘production boundary’ shifts contribute to explaining the UK’s ‘productivity puzzle’?

Diane Coyle has suggested that this trend has accelerated with the expansion of online access enabling households to perform DIY digital intermediation tasks that were formerly purchased in the market economy.[2] One example is holiday bookings that were once booked in person in high street travel agents but now are booked by the traveller via the internet with little or no involvement with a travel agent.  Another activity that households now perform is online banking. The production of digital products by the household replaces market-intermediated services, removing them from GDP. Coyle notes that unlike the production of goods by households which are included in GDP, the production of services by households for their own consumption are excluded.

However, boundary shifts also occur in the other direction. It is apparent that low productivity service activities that were formerly undertaken informally the household economy and are now being outsourced to the formal economy and purchased by households and therefore now contribute to GDP. One example would be personal grooming (e.g. beauticians, ‘Turkish barbers’). Another is lifestyle activities (e.g. fitness, coaching). A third is food – particularly take-ways and coffee shops. Moreover, whereas in the past the consumer would perform the collection of the food themselves, increasingly the delivery is also outsourced. Similarly, online shopping involves the transfer of both the product selection activity and the delivery of the purchases to the market. This could also drive down productivity.

The scale of these changes is very apparent in every high street and local shopping centre across the country. For example, Sauchiehall Street, one of Glasgow’s major retail thoroughfares is now dominated by food outlets – bars, restaurants and take-aways. Very few retail units remain.  The increase in online shopping during COVID-19 has accelerated the shift of household-performed services to the market economy. For example, the Financial Times reports that Just East’s transactions have increased by 20% in recent weeks while Amazon spending jumped 82% in lockdown with average transactions up 18%.[3] No one is expecting online activity to return to pre-lockdown levels.

Two questions arise. First, what is the contribution of these substitutions across the production boundary to the observed slowdown in the UK’s productivity growth?  And second, are these changes more apparent in the UK than in other countries and hence able to explain the UK’s poorer productivity compared with its international competitors?

References

[1]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/productivitymeasurementhowtounderstandthedataaroundtheuksbiggesteconomicissue/2020-03-13

[2] file:///C:/Users/cm252t/Downloads/ESCoE-DP-2017-01.pdf

[3] Make the most of your saving in the time of pandemic, FT Money (Financial Times) 12th September 2020.