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.
Openness to foreign investment has also been critical in reviving the UK car industry, according Van Reenen, who highlighted biotechnology and pharmaceuticals as another sector bucking the trend, due to good links between a strong medical research base in universities and the NHS.
Apprenticeship reforms and foreign labour
From April 2017, large firms will have to pay 0.5 per cent of wage bills beyond a 3m threshold in an apprenticeship levy. The government wants the scheme to fund three million apprenticeships by 2020, ensuring big business helps pay to raise the skills of the nation.
Research suggests this could be an effective way of increasing productivity. According to the Chartered Institute of Personnel and Development CIPD 72 per cent of businesses report improved productivity as a result of employing an apprentice.
attempting to get a decent apprenticeship programme back would be a good thing and a levy on firms to pay for it is not unreasonable, said Van Reenen. My concern is that it is too target driven and we will sacrifice quality for quantity, when in Europe you have a long-term approach.
One important question is how foreign labour influences productivity. A 2013 study by the National Institute of Economic and Social Research (NIESR) found that a 1 per cent increase of the immigrant share in the workforce resulted in productivity increasing by between 0.06 per cent and 0.07 per cent.
Research released last year by the Department for Business, Innovation and Skills (BIS) that looked at the impact of migrant workers on 80 UK firms may help explain why. Employers appreciate having a diverse, global outlook, benefit from migrants? language skills and believe it would be harder to break into new markets without them, the study found.
openness to immigration has been very positive and has meant we can fill gaps in the labour market, Van Reenen added. Immigrants tend to be better educated and work more than British-born people, and they pay more in taxes than they take out in benefits. they’re not part of the problem, they’re part of the solution.
Thinking about exporting? Read more from Marcelino about obtaining export finance for your small business.