Why we must improve productivity

Tony Ward

April 12, 2017

Tony Ward is president and chief executive of Clayton Euro Risk

Good news this week. The Office for National Statistics report that Britain’s workers are at last producing more in an hour than they were at the end of 2007, after almost 10 years of poor productivity.

A surge in productivity growth in the final quarter of 2016 came as the economy accelerated, and we’ve finally surpassed the hourly output levels seen before the financial crisis. Hurrah! Output per hour worked rose by 0.4% during October–December 2016, the fastest improvement since the second quarter of 2015, according to the ONS.

A cause for celebration, then? Perhaps not. Britain’s workers are still substantially less productive than their competitors in Germany, the US and France, producing around 16% less each hour than the average G7 citizen, though that gap reduced a little over the course of 2015.

In the nine years since the mid-2008 low point, productivity has grown by only 4%. By contrast, in the nine years to the peak in late 2007, output per hour jumped by 20.7%. “Although the recent recovery of labour productivity is welcome, there is still no evidence of a return to the pre-downturn rates of growth – either in the UK or among other developed countries,” said Philip Wales, head of productivity at the ONS. “While UK services and manufacturing have both contributed to recent productivity growth, today’s results point to a wide gap between the least and most productive firms in the UK. Professional services firms accounted for almost a third of the UK’s most productive firms in 2015.”

How so? Well, the ONS found that companies in urban areas tend to be more productive than their rural counterparts, with companies in London and in urban areas across the south being particularly productive. That urban premium evaporates in other parts of the country, however. Workers in different areas also work for a varying number of hours per week. Londoners spend the most time at work, at an average of 33 hours per week. Those in Northern Ireland come next at almost 32 hours each. By contrast, those in the South West work the fewest hours, at 29.9 per week on average. It all seems rather disparate.

Andy Haldane, the Bank of England’s chief economist, recently warned that the UK has a small proportion of highly productive firms in each region, which are at the cutting edge of their industries. However, most firms are far less productive and appear to be struggling to learn from their more successful peers. Many such companies do not realise that they are relatively unproductive, Mr Haldane said.

Hmm, what’s to be done, then? Good productivity is the bedrock of strong economic growth and a vital source of improved living standards and wages. Mr Haldane suggests that managers in weaker companies pair up with those from more successful firms to learn how to get the most out of their staff. Well, yes, but it’s so much more than this.

A recent survey by the British Chambers of Commerce found that a shortage of workers with digital skills is hampering UK productivity. The survey of over 1,400 businesses found 84% said that digital and IT skills are more important to their business than two years ago, with 51% saying they are significantly more important. However, the survey also reveals that 52% of businesses are facing a shortage of digital skills in their staff. According to 21%, the shortage is significant; for 3% it’s critical. The most important are basic computer skills, communicating and connecting through digital channels and management of digital information. Many of the businesses surveyed said that the shortages were having adverse effects on their performance and blamed their inability to tackle this skills deficit on a lack of time for staff training, difficulty in identifying appropriate training and the high cost of training.

Back in 2015, I reflected on the importance of productivity. Mark Carney, Governor of the Bank of England, has previously described productivity as ‘the ultimate determinant of people’s incomes and with the capacity of our economy to support health, wealth and happiness’. Agreed.

If we take this research seriously, there are some pretty big considerations in terms of education and training to mull over. But mull we should if we are ever to catch up with our G7 compatriots.

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