UK: Smith on Economics - Beyond the UK productivity gap.

UK: Smith on Economics - Beyond the UK productivity gap. - David Smith questions the use of labour productivity figures as a catch-all measure of economic performance when so many other factors are involved.

Last Updated: 31 Aug 2010

David Smith questions the use of labour productivity figures as a catch-all measure of economic performance when so many other factors are involved.

Gordon Brown has said he wants to encourage a national debate. To get it going, he recently set out some harsh facts about the UK's economic performance. Productivity levels in Britain were between 20% and 30% behind those of Germany and France, and 40% behind the US. The productivity miracle of the 1980s was, it appears, just that: a miracle. As an economy, we are still struggling, he said.

Gap between claim and GDP

But how reliable is this view? As always, it is unwise to take statistics in undiluted form. Even the chancellor's own figures, based on gross domestic product per worker and provided by the Organisation for Economic Co-operation and Development as independent arbiter, do not quite bear out his claim.

As the chart shows, labour productivity in Germany is currently only 16% ahead of the UK (which means, to mathematical purists, Britain is only 14% behind Germany) - productivity for Germany as a whole having been reduced by bringing the inefficient eastern states into the calculation.

On this basis, the claims for France and the US appear to be about right but what about Japan, only 8% ahead of the UK? Bearing in mind that the average Japanese worker puts in 10% more hours a year than his Brtish counterpart, it appears that, for every hour worked, UK workers are more productive than those in Japan. But this is less surprising when you look at the number of 'greeters' outside lifts in Japanese department stores and hotels. The country has highly productive workers in manufacturing but large numbers of barely productive service sector workers.

The point of this piece is not to play statistical games, however.

Productivity levels are one thing but pay is equally important. Data from the Institut der Deutschen Wirtschaft (DiW) in Cologne suggests that, in dollar terms, $16 average hourly labour costs in UK manufacturing are half of those of Germany, but only slightly below the US ($18) and France ($21). Broadly speaking, this suggests that even if the productivity figures are right, the UK's long-term competitiveness vis-a-vis Europe should not pose a problem, although America could be a slightly different story.

Non-wage labour costs in the UK, or social costs, are equivalent to 40% of wage costs, which is very similar to the US figure of 38%. In Germany, non-wage costs equate to 82% of wages; in France, 93%; and in most of the rest of Europe, the position is similarly high. In other words, in the UK, if you pay someone £10 an hour, your hourly labour costs will total £14; in Germany, £18.20; and in France, £19.30.

Where the UK has the edge

The other essential point is that there is more than one factor of production.

UK managers are adept at getting the most out of their plant and equipment, if not their workforce. In the past 20 years, total factor productivity - taking into account capital and labour - has grown faster in the UK than in any other G7 country.

This is all very well but more significant is whether traditional measures of economic performance, such as productivity, are relevant any more.

We live in an age of rapid technology transfer, when the competitive advantages of countries, and the companies and groups of workers in those countries, are more speedily eroded than in the past.

The interaction of productivity levels and labour costs is clearly important to, say, a multinational motor manufacturer deciding where to locate production.

With the right capital investment and the right management, however, any firm worth its salt should be able to produce roughly similar performance, in terms of labour productivity, wherever it locates. Look at Nissan, which achieved as high - and sometimes higher - productivity levels in the UK's North East as in Japan.

So what are the new measures? One is the level of expenditure on information and communications technologies as a percentage of GDP. Here, Switzerland, with just over 6%, tops the international league table, closely followed by the US at 5.7%. The UK, at just over 5%, is well placed compared with Germany at 4.5%; France at under 4%; or Italy and Spain, lagging well behind on 3%.

In the US, there are more than 400 computers for every 1,000 people, compared with under 200 in France, Germany and Italy. The UK is roughly in the middle. The US seems to hold most of the cards and Europe's real worry is not so much America's productivity lead as traditionally measured as the fact that, in this information age, it is starting to streak ahead.

Technology is speedily transferable but countries have to be prepared to embrace it.

Take another measure, the proportion of science graduates in the workforce.

In Japan, 1,700 men out of every 100,000 in the 25-34 age group are science graduates, in Korea, 1,500. The UK and Ireland are only fractionally behind Korea but ahead of the US with nearly 1,100; Germany with 1,000; and France, Spain, Switzerland and Italy, all well below 1,000. Such graduates are one thing but they must be used productively, however.

An entrepreneurial climate

Changing long-run economic performance, even now, is a slow process.

It requires the right supply of educated people, a willingness to embrace new technologies and, perhaps above all, the creation of an entrepreneurial climate. The Tories were much derided over their ambition to make the UK the 'enterprise centre of Europe' but it was a worthy goal and some of the ingredients, such as low marginal rates of tax for wealth creators, were surely necessary.

Of course, nobody is pretending that the UK has got it all right. But at a time when the Japanese model appears to have gone awry and the wider Asian experience has been at best mixed, its claims are better than most.

The idea of using labour productivity as a catch-all measure of economic performance is, however, seriously flawed. Times have moved on.

David Smith is economics editor of the Sunday Times.

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