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Ian Brinkley
Economic Advisor
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Ian Brinkley

The UK’s productivity challenge

Authors: Ian Brinkley Ian Brinkley

19 September 2012

The new productivity statistics that came out this morning show the UK falling behind some other major economies. Between 2007 and 2011 there was no growth in productivity (measured by GDP per hour worked) in the UK. In contrast, productivity went up by 7 per cent in Japan, 6 per cent in the US, and 3 per cent in Canada.

Productivity matters for several reasons. Firstly, it is the biggest single factor in how much average living standards can increase in real terms. Secondly, if productivity is rising faster in other economies, it implies the UK is losing international competiveness. Thirdly, policy decisions that will impact on future economic growth are strongly influenced by expectations of productivity growth.

Productivity statistics are however not for the unwary. The Office for National Statistics publishes two tables. One shows productivity measured in current prices. This can be used to compare countries in any one year, but cannot be used to accurately show changes over time. The second table shows productivity measured in constant terms (after allowing for inflation). This can be used for changes over time, but not for year to year comparisons. It will be interesting to see how far non-technical commentators cope with these technical distinctions, especially as the Party Political Conference season is about to descend on us.

The first point to make is that the UK is not alone in experiencing a productivity pause. This is much more a story of Europe versus the rest than one of UK exceptionalism. Between 2007 and 2011 productivity grew by just 1 per cent in France and fell by 1 per cent in Germany and Italy. Allowing for measurement errors, productivity across the major European economies has behaved in much the same way.

This in turn helps explain why some of these economies, including the UK, have had much better labour market performance than we might have expected from past experience. In effect, they have kept more people in work over the recession and early years of the recovery by sacrificing productivity growth. But it also means that explanations for the productivity pause cannot depend entirely on causes allegedly unique to the UK.

What we cannot answer from these figures are three big questions. Firstly, how long will the European productivity pause continue?  Secondly, will the UK’s experience start to diverge from other major European economies and in what direction? For example, between 1990 and 2007, the UK’s productivity increased at a faster rate than in the three other major European economies. Thirdly, when productivity growth resumes how strong will it be?

When we look at the productivity measures in current prices to get some idea of how we compare on productivity levels, the UK looks much more of a stand-out. The UK’s productivity levels in 2011 were 27 per cent below the US, 25 per cent below France, 22 per cent below Germany, 4 per cent below Italy. Productivity levels are roughly the same as in Canada, and 10 per cent higher than in Japan (this however disguises the fact that Japan has a very competitive, high productivity internationally traded sector and a much less competitive lower productivity domestic sector which is largely sheltered from direct international competition). Compared with the average across all the major economies, the UK was 15 per cent less productive in 2011.

The UK still has a major problem of low productivity against most of the other major economies and it has got worse during the current crisis. The European productivity pause has not yet had much impact on the competiveness of Germany or France against the US or Japan, because they started from such strong positions. The position for the UK is significantly worse, because we started from a much weaker position. Winning back the lost ground against countries such as the United States will be a major challenge.

The policy message should be clear. Measures that increase long term productivity levels and productivity growth across the economy are the priorities – investment in the infrastructure, in innovation, in science, technology, and design and in human capital. These were all highlighted in the recent speech by the Business Secretary on future industrial strategy, but without more resource and commitment from the rest of the Coalition it will be hard to put these intentions into practice.  Policies that focus on further deregulation of one of the most deregulated labour markets in the OECD labour market are at best irrelevant and at worst damaging to future productivity growth.

 

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