Business development · 7 June 2016

Bridging the UK’s productivity gap

steel manufacturing
Productivity in UK manufacturing has fluctuated since 2008
With productivity in Britain low compared with other nations, our resident Natwest expert Marcelino Castrillo takes a look at what can be done to get the economy moving again.

Nobel Prize-winning economist Paul Krugman has said productivity is almost everything? in the long run. So it is concerning that the UK is falling behind other countries in this area, but how can it improve?

The latest official figures suggest the UK’s so-called productivity puzzle? remains a serious concern, as we continue to lag far behind our competitor countries.

Productivity is defined as the amount of economic output produced per unit of labour input, and can be measured by dividing gross domestic product (GDP) per worker or per hour.

If productivity does not increase, it creates a barrier to raising wages without lowering profits. Productivity is therefore crucial for improving living standards, but the UK’s shortfall in comparison with other countries has grown significantly since the financial crisis.

In terms of GDP per worker, the UK trailed the US by 38 per cent, France by 15 per cent, Italy by 14 per cent and Germany by 11 per cent in 2014. If we look at GDP per hour worked, the gap is biggest compared with Germany, where people work shorter hours, but we are also far lower than France and the US.

According to think tank the New Economics Foundation, the UK has not experienced such an extended period without productivity growth since at least the Industrial Revolution, so what is going wrong?

Lessons from other countries

Director of the Centre for Economic Performance at the London School of Economics (LSE), Professor John Van Reenen, said that the problem stems from three main areas: skills, innovation and infrastructure.

He noted that Germany has a strong apprenticeship system for people who do not go to university, whereas the UK does pretty badly for the bottom third of the population.

the US also has some of those problems at the bottom but is even better than us at the top, he added.

Secondly, we fare worse in innovation because we invest fewer resources in research and development. Were very good at elite science and producing Nobel laureates but were not very good at putting it into practice in companies, Van Reenen went on to say.

He added: We don’t invest as much in core infrastructure around energy, transport and housing. The classic example is that weve been talking about a new runway in the South East since the 1960s. By contrast, France and Germany tend to have more strategic planning and greater political consensus when it comes to infrastructure decisions.

The UK’s productivity plan, unveiled in July 2015, talked about getting rail investment back on track? and securing world-class digital infrastructure with superfast broadband for 95 per cent of households and businesses by 2017.

But former business secretary Vince Cable has claimed that the government passed up? the chance to borrow cheap money to build infrastructure at a time of the lowest interest rates since the Babylonians.

Sectors bucking the trend

Before the financial crisis, productivity in both manufacturing and services had risen every year for a decade, but both have been up and down since 2008.

Mooted explanations for this poor performance range from weak investment reducing the quality of equipment used by workers, to staff being moved to less productive roles within companies.

Productivity in administrative and support services, and wholesale and retail trade, recovered quicker than in other areas and has begun to grow strongly again.

However, associate director at the Institute for Fiscal Studies Helen Miller said it is difficult to apply lessons from one sector to others, as they tend to have different requirements. Finance and insurance took a really bad hit, she added. There are more regulations to comply with now and the sector may previously have been running at an unsustainable level.

On the other hand, Miller cited car production as an area doing fairly well, reasoning that this is probably to do with investing in the kind of technology that makes the sector competitive again.


 
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ABOUT THE EXPERT

Marcelino Castrillo is MD of business banking at RBS in September 2015. ? Prior to to that, Castrillo was MD of SME banking at Santander, where he was responsible for leading the challenge of scaling Santander's business bank and managed the business through a period of significant change.

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