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FT Series UK productivity crisis

FT Series Global Economy

Britain’s productivity crisis in eight charts
Slowdown in output per hour worked has many facets

Chris Giles in London AUGUST 13 2018

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Britain’s productivity crisis should be keeping the country’s politicians and civil servants awake at
night.

This is because the UK has experienced a slump in productivity growth since the financial crisis
that shows no sign of coming to an end. The slowdown has been more acute than any other western
country.

It matters because achieving higher growth in productivity — or output per hour worked — is the
way nations become richer, living standards rise and governments have the resources to improve
public services or cut taxes.

The following seven charts and a map outline the different facets to the productivity crisis.

1. Productivity is near bottom of G7 league table

Labour productivity is normally measured as the value of goods and services produced for each
hour worked. The average British worker produced 16 per cent less on average than counterparts in
other members of the Group of Seven leading economies in 2016, according to data from the Office
for National Statistics.

The average French worker produces more by the end of Thursday than their UK counterpart can
in a full week. However, British productivity levels are still higher than those in Canada and Japan.
2. UK once had best productivity in Europe
In 1960, Britain had the highest level of productivity in Europe, measured in gross domestic
product per hour worked — better than France, West Germany and Italy. UK productivity grew
continuously during the next 50 years, but often at a slower pace than comparable countries —
meaning that Britain fell behind France, Germany and Italy during the 1960s to become the “sick
man of Europe”.

Between 1980 and 2008, the UK made up a lot of the lost ground with a more efficient economy,
notably after reforms introduced by Margaret Thatcher and other changes stemming from British
membership of the EU.

3. Productivity slump has been worse than elsewhere

Productivity growth has slowed in almost all advanced economies since the financial crisis.

But Britain’s slowdown has been more dramatic than any leading western economy. Annual growth
in productivity has plummeted from average annual rates of about 2.3 per cent before the collapse
of Lehman Brothers to 0.4 per cent in the past decade.

“Had the pre-crisis growth trend continued, then productivity would be more than 25 per cent
higher today,” said the Resolution Foundation, a think-tank.
4. Best industries fizz less than they did
Between 1999 and 2007, Britain’s productivity growth was heavily concentrated in industries such
as computing, finance and professional services.

But the performance of these sectors dropped sharply after 2008. With a few exceptions “labour
productivity growth lost most momentum in those industries that experienced strong growth
before the crisis”, said a paper by the Economic Statistics Centre of Excellence, a consortium
involving several research bodies, that was published in May.

Computer programming, energy, finance, mining, pharmaceuticals and telecoms — which together
account for only one-fifth of the economy — generated three-fifths of the decline in productivity
growth.

5. The most productive companies have lost momentum

Britain has always relied on some highly productive companies across multiple industries to drive
national improvements in output per hour worked.

In the 1980s, the productivity growth charge was led by energy companies because of those
involved in North Sea oil production. In the 1990s and 2000s, it was financial services,
accountancy and law.
But since the financial crisis, the most productive companies have not been raising their game as
fast as they were. Patrick Schneider, a BoE economist, said in a research paper published in March
that “the most productive firms are failing to improve on each other at the same rate as their
predecessors did”.

6. There is a ‘long tail’ of unproductive companies

One core reason for Britain’s stunted productivity growth is a “long tail” of companies with poor
levels of output per hour worked.

Compared with France and Germany, the UK has a larger number of innovative, high productivity
companies.

But Britain also has far fewer companies than France and Germany doing a bit better than average,
and a lot more doing significantly worse. Andy Haldane, the Bank of England chief economist, said
in June: “The UK’s international productivity gap is, to a large degree, a long tail problem.”

7. Many regions don’t have enough productive companies

Every city in the UK has businesses that sell goods and services in their locality, and they tend to be
unproductive, according to the Centre for Cities, a think-tank.
The most productive companies are usually those that “export” beyond their local markets, such as
aerospace manufacturers or software engineers — although they do not necessarily export
overseas.

But researchers at the Centre for Cities said in a report published in May that “export” companies
based outside the south-east of England were often productivity underperformers. It noted Bristol
and Reading had a greater share of higher productivity businesses than Sheffield and Hull.

8. Low skilled workers are too prevalent

One of the productivity problems often cited by employers is that too many UK workers have
inadequate skills.

In what came as a shock to the UK, the OECD found in 2016 that England had one of the largest
proportions of low-skilled young workers among advanced economies.

But even more worrying, the Paris-based organisation established that young English workers were
no more skilled than older employees, suggesting a high likelihood that weak productivity will be
difficult to remedy in the coming years.

As part of this series, we want to hear what you think is the main solution to the UK’s weak
productivity growth since the financial crisis. Share your ideas in the comments below and we
may publish the best in a follow-up piece. You can also share your thoughts directly with us at
ask@ft.com.
The UK productivity crisis
The FT examines why Britain is suffering from weak productivity growth

Part one in the series

The many facets of the UK productivity crisis since the financial crisis, in eight charts

Part two
Is the British economic model driving poor productivity growth?

Part three
A report about the small companies that are accused of endemic inefficiency

Part four
Why the construction industry is a poster child for feeble productivity growth

Letter in response to this article:

Real productivity is an efficiency measure / From Kurt Bayer, Vienna, Austria

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