UK productivity falling for second quarter in a row

(pic: Eric Hossinger / Flickr)

Today, I learned that that UK productivity has continued to fall at a time when growth in our economy is badly needed as we career towards an uncertain Brexit. Since I focus on innovation in retail,  I needed some expertise on why productivity was down, so I turned to Nigel Driffield of Warwick Business School. Nigel is a Professor of International Business who has researched productivity in UK industry.

Expert Comment From Professor Nigel Driffield:

There is an inherent trade-off in policy terms between productivity and employment, and the UK mostly makes different choices from much of the rest of the more affluent countries in Europe, partly driven by skill shortages.

The UK has a particular labour market, and labour market rules which make hiring and firing much easier, and also encourages things like zero-hours contracts or the gig economy.

This, particularly compared with France and Germany, has proved successful at getting people to work in what may be thought of as low productivity activities, or where flexible markets particularly advantage the employer. As a result, the UK has lower productivity, but also, for example, lower youth unemployment than France.

It seems likely there are four other reasons for the UK’s low productivity. Firstly, uncertainty over Brexit is choking investment, which in turn shows up in lower output per hour, as machinery is not updated.

Secondly, output per hour is just one measure, albeit a useful one for comparing economies. But how, for example, does one compare, using this standard between a barista and a barrister?

We see much more variation within sectors regarding productivity than we used to. Thirty years ago one could compare industries regarding say value added per head, and be confident that these sectoral level differences were representative of typical firms, but heterogeneity within sectors is now much more significant.

Thirdly, many of the so-called ‘squeezed middle’ firms are caught in a downward spiral. They need investment capital to improve productivity but need to generate productivity growth to access new investment. The speed with which specific technologies are advancing is exacerbating this for some firms.

And finally, supply chains are now much more fragmented than they used to be, at either end of the value chains being the most productive (design at one end, with marketing at the other).

The UK has a higher proportion of less productive activities. Those businesses will be typically more productive than many comparable ones around them but are not necessarily the most fertile parts of the supply chain.