The UK government has unveiled its industrial strategy, which is seeking, among other things, to help boost the productivity of the country. Productivity is a much-talked about aspect of the economy – but what is it and why is it stagnating?
At its simplest, the UK economy is a system that converts hours of work into goods and services. Labour productivity measures this rate of conversion: when productivity grows, the economy is producing more goods and services (or output) for each hour worked. Conversely, falls in productivity indicate that the economy is producing less output for each hour worked.
Productivity matters because it is closely related to average earnings and living standards: productivity growth allows living standards and earnings to rise through time. In essence if people make more, they can take home more.
How has productivity changed since the economic slowdown?
Historically, UK productivity has trended upwards over time, as the economy has produced more goods and services for each hour of work. However, since the economic downturn in 2008 to 2009, UK productivity growth has stagnated. Between 1994 and 2007, UK output per hour grew by around 2.1% per year and was accompanied by rising average incomes and living standards).
By contrast, productivity was little higher in the middle of 2017 than it was almost a decade earlier, in a phenomenon known as the “productivity puzzle”. If the pre-2007 trend had continued, productivity would now be 21% higher than the current level.
UK Output per hour, January to March 1994 to April to June 2017, Q4 2007=100
Downturns are a recurring feature of modern economies – booms and busts – and it is not unusual for productivity to fall during downturns. However, the recent slowdown in productivity growth is unprecedented in the post-war era. Whereas productivity recovered strongly after the downturns in the 1970s, 1980s and 1990s, the recovery since 2008 has been unusually weak.
In fact, the best available estimates suggest that we have to go back to the 1890s or the early 19th Century to find a period of comparably weak productivity growth in the UK.
Average annual UK productivity growth, 10-year moving average, 1770 to 2016
The similar growth rates in output, employment and total hours worked since the onset of the economic downturn are driving this slowdown in productivity growth. Output – measured by gross value added (GVA) – fell more sharply than both hours and employment during the economic downturn, indicating that both hours worked and each work delivered less output than previously. However, since 2012 the growth rates of output, employment and total hours have been closely aligned.
Together, these developments have held down productivity growth: while UK output and employment are around 8.8% and 9.0% above their pre-downturn levels, the level of productivity has barely changed since 2008.
UK GVA, employment, hours worked and output per hour, Q1 2008=100
How does UK productivity compare with other countries?
The UK’s level of productivity also lags that in other, comparable economies. While most of the world’s other leading economies have also experienced a slowdown in productivity growth in recent years, the UK’s slowdown is deeper than elsewhere.
The UK is thought to have suffered a “productivity gap” with France, Germany and the US for much of the last 30 years. The most recent estimates suggest that UK output per hour was around 15% lower than in the rest of the G7 advanced economies in 2016.
Difference from UK productivity level, output per hour, G7 countries, 2016
Why has productivity growth slowed down?
The causes of this productivity slowdown are debated and there is little consensus about the main drivers of this trend. During the economic downturn, some argued that businesses were choosing to hold onto workers in anticipation of a rapid recovery, which would limit productivity growth in the short-run.
Others argued that the financial crisis reduced the willingness of banks to lend to businesses to finance investment, which has also been weak. Still others have argued that mis-measurement – in particular of the digital economy or the services industries might play a role. However, no single factor seems to account for the scale of the change in recent years.
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