UK still lags on productivity

2004

Workers in the UK produce much the same output as their counterparts in Germany, but take 16 per cent longer to do so, according to new figures.

A report from by the Economic and Social Research Council (ESRC) says that there is still a significant productivity gap between the UK and its main comparators – France, Germany and the United States.

Output per hour worked – the most commonly used measure of labour productivity – is almost 40 per cent below that in the US and around 20 per cent below that of France and Germany.

The persistent productivity gap between the UK and the two big continental European economies can mainly be explained by the fact that they have more capital invested per worker and their workers are more skilled, the ESRC says.

Shortfalls in investment in physical and human capital account for a smaller proportion of the productivity gap with the United States. Half of that gap is due to different ways of working – how firms are organised and how they use technology.

The productivity gap between the UK and the United States is particularly evident in key services, including wholesale and retailing, hotels and restaurants and financial services. Indeed, just three sectors account for more than half of the gap.

According to the report, productivity growth is highest in industries with greater product market competition – where less productive firms contract and close while new more productive ones open and grow; and where competitive pressures force existing firms to improve.

The historic weakness of competitive intensity in many sectors of the UK economy is being eroded with deregulation and strengthened legislation against anti-competitive practices. Increased competition should improve productivity growth, it adds.

But a key driver of slow UK productivity growth is relatively low investment in R&D. Despite the high quality of UK science, there is a difficulty in translating scientific achievement into productivity, reflected in low R&D, patenting and innovation.

However technology and globalisation seem to be creating a shift towards outsourcing and flexible organisations that are more conducive to innovation, the report argues.

Poor public sector productivity may also have a large impact on overall productivity – both directly and indirectly given the importance for private sector productivity of an educated and healthy population that can conduct business free of the fear of crime.

But another factor at work, the ESCR suggests, may be poor management. "Perhaps it is the poor skills of managers rather than the skills of the labour force as a whole that are holding back productivity," the report suggests.

"There is a wealth of anecdotal evidence in support of the view that management skills are a problem in the UK."