A recent interview with one of the chief BBC political editors of the highlighted the positive state of the British economy with relatively high levels of employment and positive GDP growth, but emphasized key concerns, particularly as we prepare to separate from the EU, of our worker productivity. Estimates of UK productivity suggest that the productivity in the UK is 18 percentage points lower than the average for the rest of the G7 advanced economies.
It’s widely agreed that this low level of labour productivity is the core economic challenge faced by Britain, but why is it happening and how can we reverse this trend?
When economists and politicians talk about productivity, they generally mean labour productivity: the value of goods and services produced per hour of labour used. It’s normally calculated by dividing GDP by the numbers of hours worked. Strong and growing productivity has always been recognised as being key to a healthy economy and many economists believe that growth in productivity is the ultimate economic foundation of future growth – which is why everyone is so worried about it.
So what are the key reasons behind this gap?
- When the financial crisis hit in 2008, redundancies in the UK were comparatively low. Instead, the pain of recession was spread widely, via lower wages, but at a cost of employee motivation and contribution
- Low interest rates may have allowed uneconomic businesses to stay alive, slowing the reallocation of resources to new and more dynamic businesses.
- Our economy is undergoing substantial structural changes. A rapid drop in North Sea oil output has resulted in the loss of high value-added activity and a lowering of the average productivity figures. The drop in banking and investment activities have had a similar impact. In addition, the UK’s heavier balance of services (rather than manufacturing of goods) makes its productivity figures look worse as labour intensity is often seen as better service rather than as worse productivity.
- The UK has a more flexible labour market and more entrepreneurial culture, encouraging less productive part-time jobs, rather than more productive full-time ones.
So what can we do about it? Although there is reasonably broad agreement on how the UK needs to tackle this issue – there is also a recognition that there are no quick wins.
- We need to rebalance the economy away from services (75% of GDP) towards making things (10%).
- We must reverse the long-term record of under-investment in plant and machinery, and physical infrastructure, adopting new technology at a much quicker rate.
- We need to create a business climate based on innovative products and processes that produce high-productivity jobs.
- We must improve the capabilities of our workforce. Britain has too many workers who lack basic skills, aren’t receiving sufficient training and are destined for low-productivity jobs.
Productivity is a long-term problem – the solutions will be, too; however, the urgency to close the gap has never been greater and the need to invest never more critical than now.
We can expect to hear a lot more about this key topic in the coming weeks.