Why is Britain's productivity lagging behind?

Unemployment may be at record lows but not all the figures are encouraging.

by Jack Torrance
Last Updated: 11 Oct 2017

Productivity growth really matters. It’s the difference between a future that’s more prosperous than the present or one of stagnant wages and crumbling public services. But on this crucial measure, Britain’s dragging behind many of our neighbours on the continent and across the Atlantic. 

Productivity can be defined as output per unit of input. Britain’s relative lack of it means workers here on average have to spend longer working to generate the same value of goods or services than their counterparts in the US or Germany do.

While it soared through the second half of the 20th century as new technologies and practices improved our ability to get work done, since the financial crisis the UK has been in something of a rut. Yesterday the government’s Office of Budget Responsibility said Britain’s productivity had grown by just 0.2% annually for the past five years, much less than expected, and that it had little hope for a big surge any time soon.

Observers have offered several reasons why this gap persists, and they probably all contain a nugget of truth. The OBR suggested it’s partly the result of a lack of investment by businesses. Capital, that is machinery and other means of production, makes workers more productive. Failure to upgrade it means workers are not reaching their potential. But businesses need to feel confident they will get a return on their investment. With economic jitters and Brexit on the horizon, they might feel now isn’t the best time to splash out on new kit.

The OBR also suggested low interest rates are to blame. Poorly performing ‘zombie’ companies that would normally have collapsed under the weight of their debts are crawling along thanks to the easy availability of credit. Bank of England governor Mark Carney has hinted at the possibility of a rise in the base rate as soon as next month, which would be the first rise since 2007. But the poorly performing economy could put that on the back burner.

Then there’s the labour market. Britain came out of the financial crisis with a relatively low unemployment rate, at least compared with other European countries, and the number of those in work is now at a record high. That partly reflects a general resilience in the UK economy, but it’s also because of our ‘flexible’ labour market.

Many of the new jobs that have been created since the crash are non-traditional, involving part-time work, zero-hours contracts and self-employment. That means less stability for workers, but it provides companies with labour on-tap, allowing them to adapt more quickly to changes in their market.

Read more: Seven ways to boost your business's productivity

That’s a benefit for employers in the short-term, but it’s also a disincentive to research and development. If the cost of labour is cheap then why risk a load of money investing in machines that can improve productivity? Businesses are also reluctant to spend money training transient workers that could be gone at the drop of a hat.

Perhaps the gap also reflects a difference in our attitudes to working and resting? New research by HR software maker Kronos’s Workforce Institute depicts Britain as a nation of technology-addicted procrastinators. Almost two thirds of young Brits admitted spending more than 30 minutes of their working day on their personal social media accounts, compared to just 50% of Germans and 42% of French.

At the same time, Brits aren’t getting enough downtime at home. A majority (53%) get less than 6 hours’ sleep per night, compared to 48% in Germany and 42% in France. Perhaps this combination of intermittent work and intermittent rest isn’t the ideal setup for getting lots done.

Whatever the cause of Britain’s productivity gap, there’s clearly no simple solution. Not a great situation to be in as we head towards a potential ‘no deal’ Brexit.


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