The Daily Update - Can I have a P please Bob? The UK’s productivity conundrum

On average, why does it take a worker here in the UK the whole working week to do a job when in France the self-same worker could finish the job by Thursday afternoon and enjoy a 3-day weekend? The UK’s productivity conundrum is a question being asked at the very top of government, and it is hard to overstate the worry. Since the mid-1800’s, gross domestic product (GDP) in the UK has risen 20-fold, driving our living standards, however, if productivity had remained flat over that period, GDP per head would only have doubled. Since the 70’s UK labour productivity rose at around 2% yoy until the Global Financial Crisis (GFC). However since 2007, here in the UK productivity now remains only slightly higher.

While weak productivity is not a problem solely attributed to the UK, if you take a comparison with our trading partners, the UK is certainly lagging badly. One argument for the poor productivity is the UK’s accommodative monetary policy which some believe has hindered the ‘creative destruction’ of poorly run or low productivity companies, or so called ‘zombie companies’, thus allowing the more productive companies to prosper; a situation that happened in Japan for many years (which makes the UK position all the more worrying as unlike the rest of the world, UK PLC have failed to learn from the Japanese mistakes). Indeed, only Japan has a worse productivity than the UK. The Office for National Statistics reported in 2014 than on average the UK was 18 percent behind G7 countries. Amongst our major competitors, we are 30% behind the US, 31% behind France, and a massive 36% behind Germany. As Frances O’Grady, the TUC general secretary correctly states, ‘For all the good news on rising employment, the UK is still not creating enough quality jobs. The yawning productivity gap between us and other countries shows how much room there is for us to do better’.

Earlier this year the Bank of England's Chief Economist Andy Haldane issued a report of his thoughts on the problem. Haldane analysed a cross section of companies across the UK. His findings were that there are a small minority of productivity leaders, those embracing technology, automation, cloud computing and so forth. However there was a long tail of laggards, those of much lower productivity that are nowhere near keeping up with the leaders. Shockingly, more than half of the firms have a lower productivity than the cross section average by a massive 50%. As Haldane reports, ‘This empirical evidence suggests a long tail of countries and companies with low, slow productivity growth. These productivity laggards have been unable to keep-up, much less catch-up, with frontier countries and companies’.

So… what is to be done? Well maybe, just maybe, Brexit may be part of the answer. As Haldane explains, take France as an example. Due to the powerful unions, highly regulated labour market and high wages, make hiring and firing workers a more costly proposition than in the UK, companies have invested heavily in technology to make the most efficient use of their labour force. Because of this France has one of the most productive labour forces in the OECD. One of the main arguments of those wanting Brexit was that foreign workers were driving down wages. Now that the UK is going to leave the EU, along with the rise in the minimum wage, there will start to be some upward pressure on wages, maybe incentivising businesses to invest in technology and focus on efficiency. Those businesses that fail to adapt will more than likely be the ‘zombie companies’ mentioned, will go bankrupt or have to merge allowing the market place to be freed up for more efficient companies.

However, as Haldane explains, there is unlikely to be one event or policy that will boost productivity, but if you direct measures towards those low-productivity companies, the UK could go a long way to addressing the problem.

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