Boosting Britain’s woeful productivity is the Chancellor’s greatest challenge
Joe Wright, 8 July 2015
British productivity has flat-lined since 2010 in a manner unprecedented in the post-war era. A worker in France will complete in four days what it takes a British worker to complete in five. We are 40% less productive than US workers and 20% less than the G7 average. British output per man hour improved under New Labour but collapsed again following the recession. Since then, employment has risen and Britons have worked longer hours only to produce the same amount.
More disconcerting, this happened during a period of huge technological change. The global shift toward automation should have helped productivity. The boom in Britain’s Tech City (East London), which eased the damage of the banking sector’s near collapse, created a raft of intricate jobs and attracted high-skilled immigration. Yet there has been no improvement. The result is stagnant wages and living standards, plus a big question mark over the strength of Britain’s recovery.
There are multiple explanations for this:
- Flexible labour laws, low-skilled immigration (though the governor of the Bank of England was careful not to over-state its impact) and greater participation of the elderly in the workforce for longer periods mean Britain has a greater supply of cheap labour than most industrialised countries. Also, ‘labour hoarding’ – firms retaining more people during the recession in anticipation of a swift economic rebound – means companies have done less with more for a protracted period. The trade-off for high employment (the ‘jobs miracle’ to Tory HQ) is low productivity. The inverse is true in France, the Telegraph explains: ‘One of the reasons for relatively high rates of French productivity is that the labour market is so hedged around by protections that there is a positive incentive for French companies to employ as few people as possible.’
- Dysfunctional banking is another explanation according to the FT: ‘Monetary conditions (debt forbearance and low interest rates) have enabled low-productivity companies, which disappear in normal recessions, to survive.’
- The dramatic increases in self-employment may be another. Small businesses are less likely to engage productivity-increasing activity, such as exporting.
Recent obstacles aside, productivity has been a thorn in Britain’s side for decades, meaning there are more fundamental problems. Skills are a good example. Businesses constantly complain, with good reason, that they struggle to find the talent they need. Successive governments tried to improve connections between education and business; the coalition made apprenticeships a core policy (though these have been challenged as poor quality and poorly paid). Part of the solution is for companies to train people themselves, which they have been reluctant to do. This reluctance relates to a wider problem: the investment culture of British businesses.
Too few seek to export and conquer new markets, happy to rely on domestic consumption. Too many business leaders look to mergers and acquisitions to boost company performance (see Civitas’ recent report on M&As in the aerospace industry) rather than build the company organically. Changing this culture is the Chancellor’s biggest obstacle.
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