The days of the three-day week that brought British productivity to a grinding halt are far behind us. Yet productivity has once again stagnated, not growing at all since its pre-crisis peak. On the other hand, the output per hour of our neighbouring Frenchmen has risen 2% over the same period and in the US a figure of 9% seems astronomical. So why is our so-called “Productivity Puzzle” such a problem and how has it come about?
With worries about the economy ripe in the hearts of the government, policymakers are rightly anxious about productivity growth. Economic growth will slow and real incomes, along with living standards, will not rise unless productivity growth delivers its key contribution. At a time when Mark Carney, the Governor of the Bank of England (BOE), is trying to make precarious decisions about interest rates, boosts to productivity should help kick-start inflation. This would act to signal the end of the recent unequivocally low interest rates that have fuelled a British housing price bubble.
Additionally, productivity determines the competitiveness of the UK in an increasingly globalised market. When high productivity in Germany means workers can make manufactured products cheaper and faster, the UK is at a serious competitive disadvantage. Pre-2008 net UK foreign direct investment hovered at just below 10%. With it now stumbling closer to 1.5%, efficiency improvements would attract more foreign funds and could fuel an economic boom.
But what does this mean for UK economic growth? Well, without productivity increases to bolster our GDP figures, the UK will have to rely on continuous population growth. Since fears of the excessive strain on our public services, due to uncontrolled immigration, are at the forefront of the public mind, the balance between growth and public appeasement does not appear an easy one to strike.
One cause of our stagnating productivity was the way in which British employers reacted to the 2008 crisis compared to other nations. Whilst the French and Americans cut back employment in order to keep wages stable and the workforce efficient, British employers retained employees and lowered, or constrained, wages. This had the effect of de-motivating the workforce and lowering overall output per worker, as employers were not able to obtain the full value of their labour.
Arguably more important to Britain’s problems has been the lack of capital investment. Due to revenues being spent on wages and not productivity-raising machinery, workers have suffered from a severe capital shortage that has left little room for productivity improvements. With relatively poor infrastructure and a lack of investment in new technologies, it comes as no surprise that British productivity has fallen behind the likes of that in Germany and the US.
However, aggregated statistics do not tell the whole story. Much of our productivity stagnation has resulted from a slowdown of a key component of our economy: the Finance sector. Productivity in Finance and Insurance has fallen by roughly 10%, but this has been due to the disappearance of largely overvalued financial instruments, and consistently inflated asset prices, from bank’s balance sheets; thus removing huge amounts of value that never truly existed. A resulting evaporation of the exuberant confidence, which led to high volume trading before the financial crisis, has made it difficult for market makers to complete the vast quantity of trades that accelerated productivity. The disappearance of this false productiveness skews our sense of how the economy is actually faring.
In fact, in 2014 the transport industry produced 56% more cars, planes and trains than 2009. Productivity also rose substantially in administrative services as well as construction and consumables. The summative statistics do give a generalised picture, but not the whole one. There are many sectors, such as pharmaceuticals and public services, however, where productivity has fallen – these contribute heavily to economic growth, especially since 20% of the population works for the public sector. Hence productivity must start to rise among these latter contributors, to ensure economic growth in the long run.
There is some hope then for a catch-up. The Finance sector is supposedly better equipped to avert the next crisis under new regulation, which should relieve other businesses of the strains imposed by financial collapse. The Bank of England suggests that some of the productivity shortfall could simply be the result of a temporary cycle and Osborne’s productivity plan, released in July, proposed incentives for business to increase long-term investment and saving, key for innovation and technological expansion. Whether these statements are realised to be true, or not, is another matter.
Between April and June of this year productivity rose by 0.9%, the fastest in four years. Despite a protracted period of stagnation and falling behind the productivity of our international competitors, the Great British catch-up may finally be on.
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