A quick guide to Britain's productivity crisis

The British get less done from our work than our leading international competitors. Why?

by Arun Kakar
Last Updated: 30 Nov 2017

You’ve probably heard Britain has a productivity problem, and it appears to be getting worse. The OBR recently downgraded its already modest forecasts for the country to a paltry 0.9% this year, with little prospect of dramatic upswing any time soon.  

The government’s come to the rescue with that most practical of solutions, a 255-page white paper. Inside the white paper are all sorts of plans for boosting our productivity through a comprehensive industrial strategy.

But we’re getting ahead of ourselves. Here’s everything you wanted to know about productivity, but were afraid to ask.

Erm, what actually is productivity?

Broadly, it’s total output per hour worked. The lower our productivity, the harder we have to work for the same end result. Significantly, this means that we will need productivity growth if we want to be more prosperous as a society in the future – the reason we can produce so much more stuff than we did in 1750 isn’t because we work any harder, it’s because we’re more productive.

In the words of Nobel Laureate Paul Krugman ‘it isn't everything, but in the long run it is almost everything.’

On an individual level, it’s how much we get done with our time. Let’s say you’re a baker: if you can bake more bread per hour, you can sell more. With the proceeds, you could invest in a better oven, hire more staff or just buy more sausages from the butcher’s next door. Everybody wins.

Why can it be difficult to measure?

Measuring productivity can be tricky once you start looking below the level of the economy. It’s easy to know how productive a baker is – look at the number of loaves they bake - but how about their tax accountant?

For businesses, measuring productivity can be particularly complicated because it can itself manipulate incentives and behaviours. Take this example, used by the National Academy.

If we are to measure the productivity of a waiter by the amount of customers they serve in an hour (and pay them accordingly), they would be intent on serving as many customers per hour as possible and this would presumably affect the kind of service that is offered.

If, on the other hand, you decided to measure productivity by the amount of money per transaction (and also pay accordingly), then the waiter is more likely to offer more expensive menu items, regardless of the time taken.

What’s going on with the UK?

Not much over the past ten years. Growth from World War II until 2007 had a pretty steady trend in the UK (about 2% year on year), but after the crash it fell dramatically and never really recovered. Over the last five years, the rate of growth has been trickling along at about 0.2%. Yes, growth in the western world has been slower in general too but the UK currently lags behind the EU (1.6%) and the G7 (0.7%) averages.

So what went so wrong?

It’s difficult to pinpoint the precise reasons why productivity has slowed. One explanation is that a decade of rock-bottom interest rates has stopped ‘zombie’ companies - firms that instead of clearing their debts can only pay back debt interest – from dying. This in turn leads to a lack of investment: the risk of hiring cheap labour is lower than the risk of investing in new equipment or technologies that would make their existing workforce more profitable.

This is a leading cause, but it can’t be the only one. After all, private investment has been growing (up 1.8% in Q3 of 2017, year on year). Quantitative easing (where the central bank buys government debt, effectively expanding the money supply) is another regularly named culprit, alongside inadequate infrastructure, short-termism in the boardroom, bad management, an obsession with investing in unproductive property and even plain laziness.

The broadly unimpressive trend for the country as a whole also masks significant regional disparities. Britain’s most productive regions including London, parts of greater Manchester and the south east are more productive than ultra-productive Germany. Stoke, the UK’s least productive city, is 25% below the national average. All of this points to a more nuanced problem than sweeping generalizations about the country might suggest.

What is the government doing?

Taking the reins with a brand new industrial strategy built on infrastructure, skills and investment-friendly policy. The government’s white paper focuses on addressing the four key challenges that it believes lie ahead for the UK: becoming a global leader in AI, the future of mobility, an ageing society and creating green growth. An extra £2.3bn will be invested into R&D, and it pledges more inward investment, skills training and focus on innovation.  

All of that’s welcome, but it won’t be enough to improve UK productivity in a meaningful way, without the participation of business.

‘Business leaders will welcome the Government’s grand ambition to turn around the UK’s woeful productivity performance, said Stephen Martin, director general of the Institute of Directors.

‘Now more than ever, the public and private sector need to join forces on this long-term vision that targets all dimensions of the UK economy – people, place and business. In a moment of heightened political volatility, much will depend on whether there will be a guardian of industrial strategy to shield it from the rigours of a short-termist political cycle. If this is to be the new independent industrial strategy council, it must be given the necessary teeth for the task.’

The government's focus is on the UK’s technological future is something the Institute of Directors’ own research found lacking. Over half of the business leaders surveyed said they must make better use of technology and improve their organisational efficiency.

Will it work?

The jury is out. Words and pledges are all very well, but a lot of people will believe it only when they see it. ‘The hard work starts now, said CBI Director General Carolyn Fairbairn. ‘[The industrial strategy] must be the beginning of a strategic race, not a tactical sprint. And it needs to last. This is a time for consistency and determination, not perpetual change with the political winds.’

Image credit: Geralt/Pixabay

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