UK Productivity Crisis: The Invisible Calamity Threatening Economic Growth
The year 2007 marked a turning point for productivity growth in Britain. While the country witnessed significant events like Gordon Brown becoming prime minister, the collapse of Northern Rock, and the introduction of the iPhone, something much more profound was silently happening – productivity growth in the nation came to a halt.
The lack of productivity growth in the UK should be a cause for concern and a topic of conversation across the nation. Without productivity growth, the country cannot achieve economic prosperity or grant substantial pay increases without the risk of inflation eroding their value. As economist Paul Krugman aptly puts it, while productivity isn’t everything, it is nearly everything in the long run.
The UK’s economic history since 1945 can be divided into four periods, each characterized by different levels of productivity growth. Between 1945 and the mid-1970s, productivity growth averaged 3.6 percent per year. From the mid-1970s to 2006, it averaged 2.1 percent. However, from 2007 to 2019, productivity growth plummeted to an average of just 0.2 percent, and since 2020, it has been virtually non-existent or even negative. The most recent data reveals a 0.6 percent decline in output per hour worked and a 0.9 percent decrease in output per worker between the first quarters of 2022 and 2023.
When compared internationally, the UK lags behind in productivity. In 2021, the average UK worker produced £46.92 of value per hour worked. Meanwhile, their counterparts in the US achieved the equivalent of £58.08, Germany £55.83, and France £55.50. Although the UK outperforms Italy (£45.33) and Canada (£42.94), these figures should be approached with caution due to the complexities of exchange rates and data collection. Additionally, productivity disparities in public services exacerbate the problem. The Office for National Statistics reveals that the average worker in the public sector has been producing less since 1997, with any modest gains wiped out by a further decline since the pandemic.
Despite advancements in labor-saving technology and artificial intelligence (AI), the UK struggles to translate them into increased productivity. Over the past 15 years, smartphones, automated checkouts, airline check-in gates, and robotics have become commonplace. While some may argue that technology brings distractions like smartphones, the overall effect should be positive. However, this hasn’t translated into substantial productivity growth.
Determining the underlying causes of the UK’s productivity crisis is no easy task. A government-funded UK Productivity Commission, established by the National Institute for Economic and Social Research two years ago, has yet to reach any firm conclusions regarding the onset of the problem. Economists on the commission remain divided, with some pointing to the financial crisis of 2008/09 as the starting point, while others argue that the crisis was already embedded by then. The commission plans to release a follow-up report after three more years of evidence sessions, which raises concerns about the commission’s effectiveness.
The commission has, however, shed light on the regional disparities in productivity. A submission by the Centre for Cities reveals a significant north-south divide. London ranks among the most productive European cities, followed by Reading. In contrast, Sheffield, Manchester, and Birmingham struggle to keep up. If these cities had matched London’s productivity growth between 1992 and 2015, it could have added £120 billion to the UK economy. Some economists attribute underperformance to poor communication and numerical skills, while others argue that the UK has a long tail of underproductive small companies compared to the US.
The commission’s report identified lagging sectors, including manufacturing, finance, insurance, information, and surprisingly, communications technology (ICT). The underperformance of the communications technology sector is unexpected, while the struggles of adult social care come as no surprise.
In addition to the factors identified by the commission, other issues must be considered. The influx of Eastern European migrants, who provided a cheap labor source, may have reduced the incentive to invest in automation. Furthermore, Labour’s equality legislation, notably the Equality Act of 2010, may have hindered employers’ ability to make optimal hiring decisions, resulting in less-than-ideal diversity hires in senior positions. Additionally, the concept of work-life balance has shifted in recent years, with many Britons prioritizing lifestyle over earning potential and fulfillment in their jobs.
Addressing the UK’s productivity crisis requires a comprehensive and multi-faceted approach. Solving regional disparities, improving education and skills, incentivizing investment in automation, and striking a balance between employment regulations and productivity are all crucial steps. Additionally, embracing technology and AI to enhance productivity while ensuring ethical and responsible implementation also remains a key consideration. Only by tackling these challenges head-on can the UK overcome its productivity crisis and achieve sustained economic growth in the long run.
