Here is What Has Happened to UK Productivity, Says ONS Economist

Ever since the start of the great depression productivity in the UK has been slowing in an unprecedented decline not seen since late Victorian times, says a recent report from the ONS specifically on the subject.

Productivity growth in the UK has slowed dramatically since the financial crisis but the problem appears to differ markedly from region to region according to a study by the Office of National Statistics (ONS).

Increasingly people are questioning what has happened to UK productivity growth, which has slowed dramatically ever since the great depression and is now the lowest in the G7.

After all, it was not long ago when the Japanese would cite the work ethic of the average UK worker as one of the main reasons for them situating their factories in Britain.

But apart from the fact that productivity isn't simply about work ethic but also encompasses technology and skill, the slowdown still remains a mystery. 

Some recent statistics from the ONS don't necessarily give us any concrete answers as to exactly why, but they do provide some interesting additional insights on the subject.

What is Productivity?

But what exactly is productivity and how is it measured?

Productivity is the amount of wealth a worker generates in a given period of time, usually an hour or sometimes a day.

The best example to illustrate productivity is the farmer bringing in the harvest.

The old method was to use a scythe and the help of 49 farm labourers to harvest a field in a day.

A more modern way would be to use a combine harvester which allows the farmer to harvest the same field on his own in a day.

The help of the combine harvester, therefore, helps increase the farmer's productivity 50-fold.

In the Year 2008..

One feature of the ONS data is how productivity suddenly slowed dramatically after 2008, which corresponds to the start of the financial crisis:

"In manufacturing, output per hour growth has slowed from 4.3 per cent per year in the decade prior to 2008 to just 0.8 per cent in the years since, while the productivity growth of services has fallen annually from 1.6 per cent to just 0.3 per cent over the same period," says ONS Deputy Chief Economist Richard Hays.

Secondly, the data shows a heavy regional bias in the UK:

"Only London and the south-east are more productive than the UK average; all other regions have below-average productivity (in Wales and Northern Ireland it was close to 20 per cent below this rate in 2015)," says Hays.

Apart from outside the southeast of England there were also marked regional differences.

For example, in the North and Midlands of England, only Derby, Solihull and parts of Cheshire and Merseyside have above-average productivity."

These regional differences also seem to be a recent phenomenon says Hays having started after 2004.

The data also shows some trends in the type of businesses which tend to be more or less productive, with a bias for larger and older firms to be less productive:

"Businesses at the bottom of the productivity league exhibit a worrying trend towards containing a larger share of increasingly older and larger firms, who employ more people," says Hays.

Explanations

One possible explanation for the decline in productivity after 2008is that it has something to do with companies 'hoarding' workers in the hope of an upturn following the crisis.

Another possibility is that it is due to 'zombie companies' which have kept employees on after the recession due to government bail-outs and super-cheap borrowing, facilitated by ultra-loose monetary policy.

However, Hays is sceptical about these factors still being relevant almost a decade after the start of the financial crisis.

Another common explanation given for the lack of productivity growth is that the large pool of cheap labour available in the UK which has made it more cost effective to recruit more cheap workers to do a job rather than invest in technology or innovation.

One reason productivity slowed even more after the financial crisis may have been that unemployment rose in the whole of Europe, leading to a greater influx of migrants to the UK, especially from the periphery of Europe, which further increased the pool of cheap labour available to companies, and disincentivized investment in labour saving technology or training which would have led to a rise in productivity.