Dismal trade, growth of low-level service jobs with low-level pay, and a chronic lack of investment only partly explain the gap

Why is UK's productivity still behind that of other major economies?

Extra funds for new roads, research and development and skills training will drive up UK productivity and put the economy in a better position to withstand the looming Brexit shock.

That was the central message in Philip Hammond’s autumn statement and went to the heart of a debate about the UK’s low productivity growth, which according to official figures, has fallen well behind Germany, the US, France and Italy.

“The productivity gap is well known, but shocking nonetheless,” Hammond said on Wednesday. “It takes a German worker four days to produce what we make in five, which means, in turn, that too many British workers work longer hours for lower pay than their counterparts.”

The Office for Budget Responsibility (OBR) warned that productivity growth would be lower than it had previously forecast for the rest of this parliament and only return to its long-term trend of 2% in 2020.

There have been times when the UK’s productivity growth has reached 5% and closed the gap with other major economies. The 1990s and early noughties were periods of intermittently strong growth. The early 1980s was another.



But the 2008 banking crash knocked the stuffing out of the economy and productivity growth has barely moved ever since, allowing the gap to open up again.

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The commonly used measure of productivity is the rate of output per unit of input. The Office for National Statistics (ONS) says improving productivity results in improved living standards “because an increase in productivity translates into an increase in output (amount and quality) without any increase in input (labour and materials)”.

There are generally two ways to improve productivity. One is the purchase of better machinery. The second involves a new process, which allows a worker to increase the speed or quality of what they are doing. Quality matters as much as quantity when firms can charge more for higher-grade goods.

There is no shortage of academic musing on the productivity puzzle. Senior policymakers have also written extensively about the possible reasons, among them the former chief financial regulator Adair Turner and Martin Weale at the Bank of England.



It was Turner who dubbed much of the derivatives and other products sold by City investment banks to their clients before the financial crash as “socially useless”.

It was a comment that illustrated how good the Square Mile had been in the previous 20 years selling its services at high margins and taking the cash to reward not just its shareholders but also its workers.

According to the ONS, east London is the UK’s most productive area, but it is not only because the Ford engine factory in Dagenham is highly efficient in its use of labour t is also a measure of the high productivity rates still seen among banks in the City.

Next on the list of productive cities is Aberdeen, which is home to another of Britain’s high-margin industries: oil. It would therefore be easy to conclude that what Britain needs is more high-margin businesses, where the workforce is a relatively small element of the costs.

Rebecca Riley, a research fellow at the National Institute of Economic and Social Research, said declines in banking and the oil industry partly explained the UK’s low productivity rate, but there were also a host of other factors.

She also pointed out that most countries had failed to increase productivity since 2008, with many economists blaming it for the stagnation in wages across the north-east of the US that helped to propel Donald Trump into the White House.

She said comparing one country with another – as Hammond did – was difficult because the value of goods and services fluctuated with currency values. There can also be variations in the way different national statistics authorities measure the contribution of labour and capital in making a unit of production.

“But it is still the case that the UK sticks out against other countries that have at least had some growth,” she said.

Studies have looked at whether the near collapse of the banks restricted the supply of credit to companies and prevented them making productivity-enhancing investments. Riley said this would have had some impact.



The rapid expansion of mainly low-level service jobs that carry low levels of pay is another reason. In France and Germany, the coffee shop and online delivery culture is still in its infancy by comparison with the UK. These are businesses that provide a valued but unsophisticated service with limited room for productivity improvements.

It means the UK has lower unemployment and a bigger workforce, with fewer people economically inactive than France – but lower productivity and lower pay.



In France, and to a lesser extent Germany, restrictions on working hours are other factors at play. For instance, widespread industrial pay bargaining and limits on redundancies make hiring workers a more costly proposition than in the UK. This encourages French and German firms to invest in the latest machinery and limit employment.

Bill Martin, a former City economist who is now at Cambridge University’s Judge business school, has argued that the UK’s poor productivity is “more plausibly interpreted as a symptom of a largely demand-constrained, cheaper-labour economy”.

He is not alone in saying that companies would invest in new equipment and be more productive if only there was higher demand for British goods and services from its domestic businesses, consumers and the international community.

The UK has seen a much bigger fall in trade as a proportion of GDP than France or Germany in the past eight years, forcing it to rely increasingly on its own economy to drive demand – a challenge that consumers have met, but businesses have refused to join.

The OBR said a planned Brexit in 2019 would further damage Britain’s export sector and push down trade as a proportion of GDP. The fear must be that this will further discourage investment and delay again the moment productivity stages a recovery.