UK: SMITH ON ECONOMICS - IN THE PRODUCTIVITY FAST LANE. - Britain's improved productivity is no miracle, says David Smith. Much of it is due to the decline in union power and to managements concentrating on areas where the UK has comparative advantage.

Last Updated: 31 Aug 2010

Britain's improved productivity is no miracle, says David Smith. Much of it is due to the decline in union power and to managements concentrating on areas where the UK has comparative advantage.

In the run-up to the general election, a lot of claims and counter-claims will be made about the performance of the UK economy. When politicians get hold of economic statistics, my general advice is to reach for the salt cellar, and to treat everything with a liberal pinch.

But one fact should stand out clearly. The rate of productivity growth in manufacturing improved in the 1980s and has performed encouragingly thus far in the 1990s. Output per head in UK manufacturing (the generally accepted definition of productivity) rose by 57% between 1980 and 1990, compared with increases of 18% in the 1970s and 35% in the 1960s. Since 1990, productivity has risen by a further 20%, so our 1996 worker is three times as productive as his 1960 equivalent. Compound growth rates, truly, are a wonderful thing. If we compare productivity performance internationally, gains are still evident. Manufacturing productivity rose at a faster rate in Germany than in the UK during the 1970s. In 1973 German workers were 19.4% more productive; by 1979 this gap had increased to 40%. Germany had higher levels of productivity in 20 out of 30 industries in 1973 but by 1979 had a virtual clean sweep - 27 out of 30. By 1989, though Germany was still ahead, the productivity gap had shrunk and Britain had clawed back the advantage in four of the 27 industries.

No credit to Thatcherism

One reaction to figures like these is to praise the 'miracle' of productivity revival delivered by Thatcherism. There is, however, a slight difficulty with this.

For one thing manufacturing, where the productivity miracle has been concentrated, did not appear to be particularly well-served by the Thatcher government. Manufacturing bore the brunt of macroeconomic turbulence, in particular through big variations in the value of sterling, and its overvaluation in the 'petrocurrency' period of the early 1980s.

Ministers in the Thatcher government made a virtue out of their lack of concern for manufacturing (the then chancellor Nigel Lawson effectively suggested in the mid-1980s that such concern was mere romanticism). Not until John Major was well into his premiership, and Kenneth Clarke chancellor, did ministers start to say that manufacturing had a special place in the economy.

While the UK has enjoyed good productivity growth, there has not been an accompanying increase in output. While manufacturing productivity is nearly double its 1979 level, output has barely risen. Britain is producing virtually the same output with half the number of workers. Part of the productivity improvement reflects a reduction in the overmanning prevalent in the 1970s, and the closure of inefficient plants (on the so-called batting average explanation, getting rid of the weaker players improves the average of those remaining). Clearly, the UK has withdrawn from or scaled down its presence in sectors where (perhaps aggravated by macroeconomic mis-management) industry could no longer cut the mustard against foreign competition.

But at the micro level, rising productivity is rarely associated with stagnant output. One of the oldest laws in economics, Verdoorn's law, which says that output growth and rising productivity are positively related, has been applicable at the level of the individual industry or firm.

Positive signs at micro level

The experience of the steel industry in the 1980s, where productivity rose by an astonishing 500%, is a clear example of this. By concentrating on specialised steel, an area in which the UK had comparative advantage, output gains were possible. But there is also evidence, at the industry level, that rising productivity can be associated with rising employment.

This was true of electronic data processing and also of chemicals, where productivity rose by 60% during the 1980s and the industry's share of manufacturing employment also rose, by 11%.

One clear result, emerging from a new book from the National Institute of Economic and Social Research - Sources of Productivity Growth, edited by David Mayes - is the difference in performance between foreign and domestic-owned enterprises in Britain.

In 1979, foreign-owned plants were 25% more productive than their domestic counterparts, but by 1990 this gap had increased to 45%. Does this tell us that foreign managements are intrinsically better than their British equivalents? Not necessarily. It tells us that foreign investors are likely to seek to invest in those sectors where the potential for industrial success is greatest. They may also be quicker to withdraw from underperforming sectors. Yet the contribution both of a willingness to invest in the latest technology and of management methods to improved productivity performance does suggest that domestic-owned firms have something to learn from the foreign-backed competition on their own doorstep.

Animal spirit of entrepreneurs

Has the UK's recent productivity performance in manufacturing been a 'miracle'? My view is that most of it is explicable. It owes much to the decline of union power which allowed a reduction in overmanning and a correction of many of the problems that came to a head in the 1970s. In addition, managements appear to have become more attuned to pinpointing areas where Britain had comparative advantage, and concentrating on these.

That still leaves, however, an unexplained element of productivity performance.

Keynes put this down to the 'animal spirit'

of entrepreneurs. Conservative ministers prefer to use the catch-all phrase 'enterprise economy' - the combination of skilled, incentivised management, flexible working practices and a capable, committed workforce. The UK came close to achieving that combination in the 1980s, until macroeconomic mismanagement intervened. The productivity record is now pretty good but we could still do with some more of those animal spirits.

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