What is holding back UK productivity? Lessons from decades of measurement

UK labour productivity is significantly lower than that of many other similarly advanced economies and has been so for decades, with negative implications for UK living standards. To make matters worse, during the last ten years labour productivity growth has stalled in most industrialised countries, and particularly in the UK. This has led to a renewed policy focus on productivity growth, as evidenced by successive government productivity plans and efforts to re-invigorate industrial strategy.

In a paper for the 80th Anniversary issue of the National Institute Economic Review, we survey the evidence on UK productivity performance, identifying what we know about the causes of its weakness, what we do not know and what this means for policy. We review the evidence through the lens of developments in economic measurement, drawing in particular on the work of National Institute colleagues past and present.

The measurement of cross-country productivity levels at NIESR started with pioneering work by Laszlo Rostas in the late 1940s in which he compared UK and US manufacturing industries. In later decades this work was built on by several NIESR-based researchers who assembled new datasets and developed new measurement techniques to extend comparisons to service industries and to other competitor nations such as France, Germany and Japan.

Table 1 shows average labour productivity levels between 1950-96 reported in a 1999 study by Mary O’Mahony. Labour productivity levels in the UK showed some catch-up with those in the US but there remained a gap at the end of this period and the gap with both France and Germany increased throughout most of the post-war period. The UK had a labour productivity advantage only relative to Japan, and even there significant narrowing occurred over time.

In the late 1990s and early 2000s the UK’s relative fortunes improved markedly, closing the labour productivity gaps with France and Germany to some extent though not with the US (Figure 1). This was the era when the productivity benefits from large-scale adoption of information and communications technology (ICT) started to emerge in aggregate statistics. Identifying different sources of productivity growth required a massive effort to collect internationally comparable data on diverse investments and knowledge inputs which NIESR participated in, combining with international colleagues on several European Commission-funded projects such as EU KLEMS and INNODRIVE. Analysis based on these datasets showed that the better UK productivity performance between 1995-2007 reflected skill improvements, more efficient use of resources within firms and relatively strong investment in intangible assets such as software and organisational structures.

However, this period of relative improvement in the UK changed after the 2007-08 financial crisis, which saw reductions in productivity growth in most industrial economies, but especially so in the UK. Most of the deterioration in UK labour productivity growth reflected slower growth in total factor productivity (TFP), a measure which (among other things) captures changes in the efficiency with which existing capital and labour resources are utilised.

During the 1980s and 1990s NIESR became well known for research on the role of skills in explaining cross-country differences in labour productivity. This work was led by Professor Sig Prais and summarised in two books: Productivity and Industrial Structure (1982) and Productivity, Education and Training (1995). This programme combined comparative analysis of industry-level data in the UK, Germany and other countries with establishment-level comparisons in selected industries.

Among other things the findings highlighted the channels of influence by which higher skill levels – in particular, intermediate skills – contributed to higher average levels of labour productivity. Examples included the greater ability of apprentice-trained German workers to suggest and implement improvements in machine utilisation and shop floor efficiency in general and the extent to which senior managers and professional staff in British establishments were caught up in dealing with daily problems (‘fire-fighting’) because of the relative absence of intermediate-skilled (craft- and technician-level) workers to deal with those problems, or prevent them happening in the first place.

This emphasis on intermediate skills contrasted distinctively at the time with a more common focus on high-level (university graduate) skills in cross-country skill comparisons. Later work at NIESR has built on this legacy while making greater use of multivariate regression methods to assess the relative strength of skill differences compared to other influences on productivity performance.

In the last twenty years productivity research made much headway due to the increased availability and accessibility of business-level micro data, allowing researchers at NIESR and elsewhere to study and understand the drivers of productivity at the level of the firm. For example, after the financial crisis there was much concern in UK policy circles that the processes of resource reallocation between firms were no longer as productivity-enhancing as they had been in the past, stilted by inefficiencies in the banking system, low interest rates and uncertainty. Examining these issues using business surveys conducted by the UK Office for National Statistics, NIESR researchers and Bank of England colleagues have found evidence that the most striking feature of the collapse in UK market sector productivity growth after 2007 was the widespread collapse in TFP growth within firms, pointing to the effects of a common macro-economic shock. Research also points to poor management practices as a partial explanation. In addition, these studies identified inefficiencies in resource reallocation across firms arising from problems in the banking sector.

Overall, in relation to the UK’s current poor productivity performance, recent and ongoing research at NIESR points to several areas of concern for policy-makers. The main problems that stand out are inadequate investment in different forms of capital (tangible and intangible) and continuing skills issues, especially under-investment in vocational education and training and in management skills. NIESR researchers will continue to investigate the main drivers of UK productivity growth, and any constraints holding it back, in the years to come.