The UK productivity puzzle

I like to celebrate the achievements and innovations of our British Manufacturing industry. We have some amazing companies doing brilliant things, and great technology hubs researching and prototyping cutting-edge solutions. But there is one question that keeps nagging me: why are we still lagging behind our international peers in productivity?

In this post I compare the UK’s productivity performance with that of other countries. I also look at differences within the UK. I use this broad data to determine if any significant variances exist. In later articles I will drill down into specific criteria and look at how the UK compares and what actions may be taken.

Before we dive into this question, let me clarify what I mean by productivity. Productivity is the amount of output per unit of input, such as labour or capital. It is a key indicator of the efficiency and competitiveness of an economy or a sector. And because we are engineers and we like data, we need some evidence to support our hypothesis. So let’s look at some international comparisons as well as some differences within the UK.

International Comparison

Comparing data across countries is always a challenge as different countries may use different measurements. So approximations are used, such as dividing the Gross Domestic Product (GDP) by the number of hours worked. GDP is a measure that is consistently agreed between the G7 and other countries, however hours worked are subject to different interpretations, but can be approximated. If we look at The Office for National Statistics paper,  “International comparisons of UK productivity (ICP), final estimates: 2020” published in 2022 the comparisons are quite concerning.

• The G7 countries’ average (excluding the UK) output per worker was 13% above the UK in 2019.
• The UK’s output per hour growth between 1997 and 2007 was the second fastest of the G7 countries, but between 2009 and 2019, it was the second slowest.
• Compared with other G7 countries, the contribution of capital deepening to labour productivity growth in the UK has been weak.

At the mid-points of the estimates Germany is 10% more productive, France 18% and the US 23% more productive.  

The UK has gone from a productivity growth leader to a laggard, whilst capital investment has slowed. These are not small differences. They also do not include more recent data post BREXIT. 

There are lots of other possible comparisons and evaluations. But let’s work on the basis that the UK is significantly falling behind our main international competitors.

UK Productivity comparison.

 Unfortunately the bad news does not end there. Looking at the Office for National Statistics report “Trends in UK business dynamism and productivity: 2023”.

• In 2021, 70.6% of workers in the UK worked in firms with labour productivity below the mean.
• The dispersion of firm-level productivity across firms has increased; in 2021, workers in firms at the 90th percentile produced around 3.7 times as much output compared with workers in firms at the median of the distribution.
• Business dynamism has slowed compared with the period before the 2008 economic downturn; the total reallocation rate has fallen from 30.7% in 2001 to 20.6% in 2022.
• The responsiveness of firm-level employment growth to productivity has fallen since the 2008 downturn, leading to overall lower productivity growth as relatively more productive businesses expand more slowly.
• Measures of market power have increased; the average markup on intermediate consumption increased from 111% in 1997 to 127% in 2021.

In other words; Most workers (7 out of 10) are employed by companies whose productivity is below the mean. In fact it is so skewed that the top 10% of companies are 3.7 times more productive than the median ones. And this has increased since 2008.

The fall in the reallocation rate indicates that the whole economy is changing at a much slower rate. The economy may be more stable, but also less dynamic and less innovative. The responsiveness drop reflects that as more productive companies hired fewer people and grew more slowly, whilst less productive companies hired more people and grew faster. This reduced the overall productivity growth of the economy, as less output was produced by less efficient workers.

And finally, and interestingly, the market power, measured by average profit margin, has increased. This means companies can charge higher prices with less competition.

Comparison Conclusion

So all of the above makes a real puzzle. I use the term “puzzle” because the causes are not immediately obvious. It certainly suggests that capital investment is lower in comparison to our international competitors. But there are probably multiple factors that contribute to the UK’s productivity gap, such as the structure and composition of the UK manufacturing sector, the lack of a coherent and long-term industrial strategy and policy framework, the uncertainty and volatility caused by external events, and the social and cultural preferences and norms of UK manufacturing companies and investors.

These factors may interact and reinforce each other in complex and unpredictable ways, making it hard to identify and address the root causes of the problem. Moreover, the UK’s productivity gap may have significant implications for the competitiveness, resilience, and sustainability of the UK manufacturing sector, as well as the living standards, wages, and well-being of the UK workers and consumers.

Therefore, it is crucial to find effective and feasible solutions to close the UK’s productivity gap and unleash the full potential of the UK manufacturing sector. This may require a collaborative and coordinated effort from various stakeholders, such as the government, the industry, academia, the unions, and the civil society. It may also require a holistic and long-term vision that considers the economic, social, and environmental aspects of productivity.

In this post, I have tried to shed some light on the UK’s productivity puzzle and its causes and consequences. But only at a high level. Next time I will drill down into some of the key indicators and see what possible solutions exist.

In the meantime, I hope you have found it informative and interesting. I would love to hear your thoughts and opinions on this topic, as well as your suggestions and recommendations for improving the UK’s productivity. Please feel free to leave a comment below or contact me directly. Thank you for reading.