Why increasing productivity must remain our focus

Tony Ward

July 11, 2017

Tony Ward is chief executive of Clayton Euro Risk

Dear, oh dear.

This week, we learned that the productivity of UK workers has dropped to pre-financial crisis levels. The Office for National Statistics reported that hourly output fell 0.5% in the first three months of the year. At the end of 2016, productivity climbed to the level achieved before the downturn, overturning years of decline which had weighed on wages. But now it has slipped back again and is 0.4% below its peak recorded at the end of 2007.

Back in April, I wrote about the importance of productivity and how it is the foundation of strong economic growth. Now it’s at the forefront of journalists’ minds again with articles appearing about the UK’s worryingly low productivity rate.  “[The] figures should act as a very sharp reminder to government that Brexit is not the only challenge facing the UK,” said the Chartered Institute of Personnel and Development’s Ian Brinkley. “Unless more is done to tackle the nation’s low productivity, people’s wages and living standards will continue to fall and the UK will be ill equipped to compete once we do leave the European Union.”

Economists have warned that the UK’s productivity continues to lag behind major trading partners such as the US, France and Germany. ONS head of productivity Philip Wales said: “UK labour productivity growth has struggled since the 2008 economic downturn, and the fall in the first quarter of 2017 brings to an end a recent run of quarters of positive growth.” To make matters worse, there are no signs of real improvement on the horizon.

Why the UK fares so badly in comparison is a puzzle. Many economists are left scratching their heads. Some blame the way in which productivity is measured: the figure is arrived at by dividing the output of the whole economy by the number of hours worked, which is fine when counting cars coming off a production line but much trickier in the services sector, which comprises 80% of Britain’s economy. Paul Ormerod of consultancy Volterra Partners thinks that official figures are underestimating real growth in productivity. “The productivity slowdown is not as dramatic as it seems,” he countered.

There may be some truth in this but what we can’t ignore is lack of investment. Spending on research and development is just 1.7% of GDP in the UK, well behind the near 3% in Germany.  Britain falls behind its G7 compatriots in the use of robots for manufacturing, which would certainly enable each worker to produce more.

It is hardly surprising, then, that most economists concur that ending Britain’s huge under-investment would be one of the best moves – although how to do this is another matter entirely. Theresa May’s £23bn national productivity investment fund, with cash designated for housing, research and development, infrastructure and training, doesn’t seem to deliver anything near enough. A more substantial infrastructure pledge is urgently required. Mike Cherry, president of the Federation for Small Businesses, said: “Productivity is being stifled by chronic underinvestment, exacerbated by current unprecedented uncertainty and reflected in sluggish wage growth.”

More than that, we need to build links between managers of weaker companies with those from more successful firms. This will allow poorer performers to learn how to get the most of out of their staff. It’s an idea first suggested by the Bank of England’s chief economist Andy Haldane, who found that the UK has a small proportion of highly productive firms in each region.

Others lobby on behalf of more radical solutions. Lord (Jim) O’Neill, former chief economist at Goldman Sachs and one-time Treasury minister, has argued that the UK should raise the minimum wage. He thinks higher labour costs would force employers to invest in machinery and automation. This may appear a step too far, but in my mind investment, education and training all remain key to improving productivity.

Lord O’Neill sums it up neatly: “Productivity is everything. If we can’t grow our productivity, we can’t improve standards of living and we can’t generate the money that pays for our public services.”

It’s a point worth making time and time again.

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