Losing the productivity race

Recent figures from the ONS suggest that the UK lags well behind its competitors in terms of labour productivity. In terms of output per hour worked, Germany produces 22% more than the UK, France produces 26% more, the USA produces 27% more, the Netherlands 31% more and Ireland 43% more. The first chart illustrates some of these figures.

(Click here for a PowerPoint of this chart.)

And in the past few years the problem has been getting worse. This is shown in the second chart. This, however, is a relatively recent phenomenon. Until 2006, the gap was narrowing, but since then it has widened. (Click here for a PowerPoint of the second chart.)

What has caused this widening of the gap? Part of the problem is a historical lack of investment in the UK. Between 2005 and 2012, the UK invested on average 15.7% of GDP. The USA invested 16.5%, Germany 17.9% and France 20.1%. And part of the problem has been the cut back in private-sector investment in response to the recession (which has been deeper in the UK) and in public-sector investment as part of the government’s austerity measures.

Part of the problem has been lower levels of inward investment. Inward direct investment to the UK in 2011 was only 24 per cent of that in 2007. In France, Germany, Italy and the USA, the figures were 43, 50, 66 and 105 per cent respectively.

Part of the problem has been the size of the financial sector in the UK. This is considerably larger as a proportion of the economy than in most the UK’s major competitors. And it was this sector most hard hit by the crisis of 2007/8.

With this poor productivity performance, you might expect unemployment to have soared. In fact, the UK has one of the lowest unemployment rates of the developed countries and in recent months it has been falling while other countries have seen their unemployment rates rise.

In fact, low productivity and high employment are compatible. If people produce less than their counterparts abroad, then more people will be needed to produce the same level of output. The problem, of course, is that this only works if wages are kept down. Indeed, wages have fallen in real terms and now stand at the level of 10 years ago.

The problem of falling real wages is that this translates into a lack of demand – especially when people are trying to reduce their debts. Not only does this result in a lack of economic growth, it discourages firms from investing – and investment is one of the prime drivers of future productivity growth!

The following articles explore the problem of low productivity and its relationship with employment and with both short-term and long-term economic growth.

Articles

UK has widest productivity gap since 1993 City A.M., Ben Southwood (14/2/13)
Productivity ‘key to UK’s economic future’ SnowdropKCS (7/2/13)
Low wages and lack of investment – why UK’s productivity has slumped Wales Online, David Williamson (2/3/13)
Recovery in jobs gives a fillip before the news on growth Independent, Russell Lynch (23/1/13)
U.K. Triple-Dipping as Productivity Falls Slate, Matthew Yglesias (25/1/13)
UK productivity puzzle baffles economists BBC News, By Andrew Walker (18/10/12)
Is low productivity a structural problem in the UK? BBC Today Programme, Bridget Rosewell and Andrew Sentance (4/1/13)
We Need to Talk About the Middle Huffington Post, Stewart Wood (14/2/13)
UK Wages Slump to Lowest Level in a Decade – ONS International Business Times, Shane Croucher (13/2/13)
Britain’s low-wage economy serves as a bind on the country The Guardian, Philip Inman (13/2/13)
Real wages fall back to 2003 levels in UK The Guardian, Hilary Osborne (13/2/13)

Data

International Comparisons of Productivity – Final Estimates for 2011 ONS (13/2/13)
International Comparisons of Productivity, datasets ONS (13/2/13)
Changes in real earnings in the UK and London, 2002 to 2012 ONS (13/2/13)

Questions