Understanding the Causes of the UK’s Low Productivity
In the 1960s, a worker in South Korea produced around $3 of output per hour. By the second decade of this century, the productivity of a comparable worker had soared to $39. While a British worker was more productive in the Swinging Sixties—at $19 per hour—and remained so in the decade after the financial crisis—at $59—the difference between the 13-fold increase in South Asia and the merely three-fold increase in the UK illustrates our long-standing productivity puzzle.
Our productivity level is also significantly below that of many leading economies: during the pre-Covid decade, both German and American workers produced around $73 per hour. While most commentators typically focus on output or inflation to derive people’s wellbeing, the patterns in national productivity are in fact the best guide to national efficiency and prospective increases in household income. Our new Commission will seek answers to the question of why our productivity performance has so disappointed.
So why does productivity matter? Crudely speaking, productivity is the ratio of our outputs to our inputs, and it tells us how efficiently we deploy those inputs and add value through knowhow and networks, as well as labour and management practice. The labour productivity ratio—the value produced per hour worked—tends to drive our real wages and standards of living. It is connected to our notions of wellbeing and tends to respond positively to a well-balanced economy, where attention is paid to all sectors and regions, and plans are made for the long run rather than for political expediency. Poor productivity performance signals not only that we are assembling our goods and services in a costlier way that we might, but also that we are not developing the new opportunities that may come our way. Over time, this failure causes us to slither down the ladder of prosperity and global influence.
But another, subtler aspect to faltering productivity performance is that it creates disappointment and frustration. We plan and expect for our prosperity to increase at a rate in line with our main trading partners. But when it does not, this can breed resentment directed at those other, more productive countries. It can lead us to question the benefits of trade and migration, and whether the gains of globalisation are fairly distributed across the regions and devolved nations of the UK. We believe that measuring and understanding the economics of productivity will lead to better institutional capability, in turn smoothing the impact of global and domestic shocks.
This objective will help us as we emerge from the Covid pandemic. We have suffered an enormous disruption to the economy that has increased home working and use of remote communication, and brought into sharp relief the importance of public services such as those for education, health and social care. We seem to be developing an economy that is more focussed and reliant on the digital sector—but also one that may need a large state to support it. This itself throws open an interesting dilemma: an economy with a higher digital component, if we look at the digital giants, may be one from which it is harder to collect the very taxes we need to support this greater demand on public goods and services. But more importantly, is it enough, having observed a perturbation to the economy, just to hope that its various bits and pieces will dynamically become more productive?
And even if improvements materialise, how do we ensure they provide consistently improving standards of living for all, and are not dominated by the same old regions? Positive spillovers from London—for example, thanks to the financial services sector—are surprisingly small. We need to improve our ability to grow internationally competitive industries at all points on the UK compass. This will generate and sustain high levels of local demand, and support wages. There simply is not a sufficient number of emerging centres or clusters of global excellence.
It is, of course, expected that the government should promise transformative regional and industrial policies—a cry we have heard echoing down Whitehall over the years, and with new enthusiasm after Covid and Brexit. The key is getting them right. Directed lending, state support and picking winners is no way to promote internationally competitive firms across our production sectors. More upstream support for infrastructure, fast broadband, reducing the costs of doing business, ensuring a good pool of well-educated local workers and granting small- and medium-sized businesses access to sufficient bank lending is preferable. But we also need a vision for how long this will take, and clarity on the size of the capital—human, physical or intangible—gaps that we face, as well as how long higher levels of investment will take to plug them. This is a process to be measured in decades rather than heartbeats.
The long relative decline of UK productivity performance has been well signposted by political slogans. These 60 years have seen Wilson’s “white heat,” Brown’s call for “endogenous growth” and now Johnson’s aim of “levelling up.” In this long thread of political narrative, we have repeatedly missed waves of innovation. Perhaps we lack the ability to harness best practice and are dawdling or, worse still, we are not especially bothered. It is, ultimately, a sign that the capability of our state to manage the economy for all has fallen short.