Exploring the Data on UK Productivity Performance

Recent data show a deterioration in measures of UK productivity. Should we be alarmed?

The Office for National Statistics (ONS) published a flash estimate of UK productivity on 21 November using GDP figures from the third quarter of 2023. This estimate indicates that output per hour worked in the third quarter of 2023 was 0.3 per cent lower than a year ago and that output per worker dropped by 0.1 per cent in the same period. However, these figures should be taken with caution. All macroeconomic data are subject to revision, but this is a provisional estimate and as such is more likely to be revised. More importantly, the ONS produced this estimate without using data from the Labour Force Survey (LFS). This adds an extra layer of uncertainty around the output per hour worked figure. More generally, the latest figures change very little our view of the long-term slowdown in productivity gains in the United Kingdom. Many economists believe this slowdown became clear in the data after 2008. However, there is some disagreement on the exact mechanisms behind the slowdown and when these mechanisms were set in motion.

Why is Labour Force Survey data important for productivity measurement?

First, it is useful to state that country-wide productivity can be captured using two standard measures. The first is output per worker. This is the output produced by a country divided by the number of its workers. This notion helps economists compare the performance of two countries with different workforce sizes (say the United Kingdom and Qatar). It also helps take into account changes to the country’s workforce over time. For instance, more women entered the labour force after the Second World War in the United Kingdom. This increased the country’s GDP but did not necessarily improve output per worker. The second measure of productivity is output per hour worked. This measure enables us to account for increases in output due to a higher intensity of labour supply (more hours worked per worker). For this reason, output per hour worked is usually preferred to output per worker as a measure of productivity. However, measuring output per hour worked is harder than obtaining output per worker in most economies. This is because measuring output per hour worked requires measuring the aggregate hours worked in a country. Most statistical agencies calculate aggregate hours as the number of workers times the average number of hours supplied by each worker. To produce average hours worked estimates many countries, including the United Kingdom, use labour force surveys as a primary source. The non-availability of LFS data can substantially affect the estimate of the average hours worked per worker, thus affecting the estimate of output per hour worked.

Do we have reasons to believe UK workers decided to stay longer at work?

The current high-inflation environment has led to small improvements in nominal wages and a significant erosion of wages corrected for inflation, also called real wages. Given the erosion of real wages, workers may have attempted to safeguard their living standards by increasing their hours. In that sense, an increase in measures of the aggregate hours worked is unsurprising. However, this effect, if it indeed exists, is unlikely to endure. Moreover, workers cannot increase their hours indefinitely. Thus, the long-term impact of higher hours has to be limited. In the long run, productivity trends reflect structural features of the economy. Accordingly, improving productivity outcomes in the United Kingdom requires long-term planning and commitment beyond the life of a single government

How can we improve productivity outcomes?

As I mentioned above, long-term thinking, planning and execution are required. Whatever the latest productivity data say, it is unlikely to change the view that productivity growth in the United Kingdom has substantially slowed down in the last fifteen years. Improving productivity outcomes requires structural change that is sustained longer than the lifespan of any single government. Policy churn and short-termism are hurting long-term economic growth in the United Kingdom. During events associated with TPI’s National Productivity Week (from 27 November to 1 December), many economists underlined the need for a dedicated institution with a statutory footing to keep the focus on productivity while being protected from policy churn. Such an institution will not be the silver bullet that would immediately ignite productivity growth in the country, but it can be a step in the right direction if it is given a well-designed mandate and the means to deliver on it.