‘Productivity’ is one of those ‘economicky words’ (as Philip Hammond described them in the budget last week) that economists and politicians get excited about but leaves many people cold. Yet since last week’s downgraded forecasts from the Office of Budget Responsibility, it is a word we keep hearing in the news. And rightly so. As Tom Danker from the Productivity Leadership Group told a Spectator event in the City on Thursday, ‘productivity is about prosperity’.
The wisdom of economists and politicians isn’t always held in high regard these days. And little wonder. Ten years on, we’re still suffering the effects of the financial crisis that most of them didn’t see coming. There’s not much agreement around, but one thing they do agree on is that our productivity is poor, and that something must be done.
Productivity is more than poor actually: it’s pretty terrible. As Andrew Neil observed, it’s currently over 15 percent below where it would have been if our 2 percent a year productivity growth before the crisis had continued. It hasn’t. Instead it has largely stagnated and even fallen in some sectors. This despite our working some of the longest hours in Europe (the effects on workers’ health and morale mean this could be part of the problem). To make matters worse, our output per hour and per worker is also over 15 percent lower than the G7 average for advanced economies.
That might just sound like a load of numbers, but as Sir Roger Carr, Chairman of BAE Systems pointed out, the French and Germans produce more in four days than we do in five. So, as the LSE’s Professor Jon Van Reenan said a couple of years ago; if British workers could be as productive as the Germans, we could take every Friday off and still earn the same. Imagine that.
We are not alone. Most major economies have been struggling to improve their productivity since 2008, but according to Richard Heys from the Office for National Statistics ‘The UK’s productivity puzzle is deeper and more persistent’ than elsewhere. And Britain has been pondering this problem for decades. Only 6 out of 63 UK towns and cities are more productive than the European average, and only London and the South East are ‘world-class’.
Trying to untangle the ‘productivity puzzle’ is complex. The Chancellor’s Private Secretary Kwasi Kwarteng MP mentioned that the way it is measured could be misleading. He also suggested that unprecedented low interest rates have allowed ‘zombie’ companies to stay afloat that would otherwise have gone to the wall. Then there is the notion of ‘labour hoarding’ where businesses hang on to unproductive workers. He also conceded that high immigration has reduced the need for companies to invest in the workforce. The OBR is clear that ‘The fall in business investment…has depressed productivity growth’.
So if we know some of the causes, what are the solutions? Well, knowing what the problem is and fixing it are of course two different things. The government’s Industrial Strategy announced by Greg Clarke on Monday has been broadly welcomed. Sir Roger Carr stressed that a ‘change in culture’ is needed, that the government and business must work in close harmony and that ultimately ‘only business can deliver the goods’. £6 million has been invested by businesses like Rolls Royce, BAE and Cisco, to understand current challenges and share best practice.
Education is critical. Rather than an educational policy fixated on university degrees, we need to recognise the value of apprenticeships. Increasingly, degree level apprenticeships are a desirable and debt free alternative to university. In Germany, similar schemes are the norm, rather than the exception. BAE now trains hundreds of their workers through apprenticeships. The government’s plan to introduce T Levels is a welcome step in this direction.
Also needed is a focus on STEM subjects to give people the skills they need to thrive in the new digital economy. Philip Hammond is excited about the opportunities the ‘fourth industrial revolution’ provides: Kwasi Kwarteng maintains we will be well placed to be at the forefront on scientific and technological innovation. Allie Renison from the Institute of Directors agrees that we can and must compete in advanced manufacturing. Infrastructure must play a part too – surely this is partly why productivity in Wales and Northern Ireland is a third below the European average.
Andrew Neil asked ‘Is this the new normal?’. Few would predict the future given the last few years, and the OBR report was very pessimistic. Tom Danker thought the cost of low productivity was ‘probably bigger than Brexit’.
Economist Paul Krugman once famously said ‘Productivity isn’t everything, but in the long run it is almost everything’. It directly affects the wealth pouring into our economy and ultimately into our public services and our pockets. So cracking the productivity puzzle is vital. Britain needs to up its game to compete globally. But no one said it would be easy. It’s not called ‘a puzzle’ for nothing.
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