Why is Britain becoming less productive? Economists blame everyone from government to investors to statisticians

 
Jake Cordell
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Productivity is a measure of economic output for every hour worked. It's going down. Should we be worried
Productivity is a measure of economic output for every hour worked. It's going down. Should we be worried? (Source: Getty)

The UK’s productivity has been trundling along at a less than spectacular pace for a number of years. This morning, figures from the Office for National Statistics (ONS) revealed it actually fell 1.2 per cent in the final quarter of 2015, raising concerns about the general state of the UK economy.

But what is productivity, why is it so important and what can be done to shake Britain out of its slumber?

The crucial question, according to economist Howard Archer of IHS Global, is this: was the fall at the end of last year a “temporary relapse” or a sign that “the UK has an ongoing serious productivity problem"?

What is productivity?

Productivity - more specifically, labour productivity - is a measure of how much economic output is generated from every hour of work. In simple terms this means if the size of an economy is growing faster than the number of hours worked, productivity is rising - we’re doing more with less.

If, on the other hand, the number of hours we slave away for is ticking up faster (or falling more slowly) than GDP, we’re becoming less productive.

This is precisely what happened in the final quarter of last year. The economy grew 0.6 per cent, but the total number of hours worked increased by 1.7 per cent.

Just how bad is the UK performing?

There are two different ways to look at productivity to assess how the UK is performing - over time and compared to other countries. Neither looks pretty.

The ONS that if productivity had carried on going up at pre-crisis trends, it would be 14 per cent higher than where it stands today. Instead, the amount we produce in goods and services for every hour of work has barely budged in a decade.

This performance comes into sharper focus when we look at how the UK fares against the rest of the G7. Only Japan squeezes less out of its workforce than Britain - with the United States, Germany and France each 30 per cent more productive.

What’s behind the slump?

There are almost as many theories on why Britain’s productivity isn’t performing brilliantly as there are people commenting on the fact Britain's productivity isn’t performing brilliantly.

“There are deep-rooted structural problems in our economy that have dampened productivity - from skills shortages, to infrastructure bottlenecks and limited growth finance,” said Suren Thiru, head of economics at the British Chambers of Commerce.

Nesta, the innovation body, has said the plethora of startups born in the downturn could have knocked two per cent from productivity, due to the fact they perform "significantly worse" than both established firms and the startups that came before them.

Philip Booth, academic and research director at the Institute of Economic Affairs (IEA), meanwhile, told City A.M. a large government is to blame, pointing to “a high level of government spending” as a drag on productivity.

It also said financial sector regulations are playing a role, draining “the most productive sector in the UK in terms of gross value added”, while regulation on things like minimum capital requirements for banks “reduces bank lending and raises the cost of investment”.

Read more: Productivity held back by financial services regulation

For some, we’re looking at the wrong numbers. The Institute of Directors (IoD), “believes we have to be careful that we are not equating efficiency with productivity”. Its chief economist, James Sproule, said he expects productivity will remain weak for some time, but added the key thing is "not to get too worried about one statistic”, pointing to the UK’s strong jobs record as the flip side.

How do we solve it?

This is the part where it gets slightly woolly.

With tongues only partly in cheeks, economists will tell you the quickest and most reliable way to raise productivity is to stop the least productive people from working in the first place.

“More jobs are clearly a good thing for the people who get them, but much of the increase in employment in 2015 came in areas like accommodation and food services, which add little to the productivity statistics,” said Sproule.

Read more: Poor productivity drags on pay rises

“Productivity improvements require UK businesses to invest for the long term,” said Andrew Ninian, director of corporate governance at the Investment Association.

He suggested the way firms spend their cash and where they choose to invest determines how productive they are.

"This means investors can play a fundamental role to help improve UK productivity and support long-term investment."

The IEA argued it was up to the government to address the productivity crisis - by getting out of the way. “Land use planning can be liberalised, including for businesses, means-tested benefits can be reformed further, the financial sector can be deregulated and government spending should be reduced as a portion of national income,” according to Booth.

Which means what?

If economists can’t agree on the causes, solutions or even whether our productivity puzzle is a problem in the first place, silver bullets look unlikely to appear anytime soon.

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