Sunday, December 21, 2003
Factories show services how to boost productivity
Posted by David Smith at 09:03 AM
Category: David Smith's other articles

When, in 1997, the newly-elected Labour government declared that it was launching an agenda to close the productivity gap between Britain and competitor economies, nobody expected instant results.

But we might have expected, nearly seven years on, that something was starting to show. It isn’t.

Each American worker is over 30% more productive - they produce that much more each year - than their British counterparts. French and German workers produce about 20% more for every hour they work.

This month’s pre-budget report from the Treasury tried to put a brave face on it but was ultimately unable to do so.

Achieving faster productivity growth than in competitors was, it said, “a long-term goal”. The fact that this had not been achieved since 1997 was, it said, because Britain had been successful in creating new jobs.

“New workers entering employment take time to learn the job-specific skills that are necessary to raise their productivity to the average level,” it said.

The Treasury likes the idea of looking at the figures in the round. Britain has a higher proportion of people in work than France or Germany. Adjusting for this, to measure output for every person of working age (whether working or not) and the gap with France and Germany disappears. That, however, is moving the goalposts, something I’d never want to encourage this government of doing. And even that adjustment does not alter the fact that there is a huge gap vis-a-vis America.

But where does the problem arise? If we take Britain’s two-tier economy as the starting point, many might expect that our fast-growing service industries would be making huge efficiency strides, while slow-growing manufacturing is gently declining under the weight of its low productivity.

In fact, the opposite is true. Official figures last week showed that manufacturing is making remarkable strides but the rest of the economy - private and public services - are lagging well behind. Manufacturing productivity, output per worker, is up an astonishing 7.1% on a year earlier, a blistering, US-style pace of expansion. Even allowing for the fact that monthly figures are subject to distortions, Britain’s manufacturers appear to have achieved something like 5% productivity growth this year.

What of the rest of the economy? Not so good, unfortunately. The latest figures show output per worker for the whole economy up by just 1.8% on a year earlier, a feeble figure that reflects the government’s failure to raise Britain’s productivity game. If the economy was just manufacturing, the chancellor could claim a productivity miracle, Because it’s more than that, he can’t.

Nor are the latest figures just a flash in the pan. Manufacturing productivity appears to grow by at least half as much again as the rest of the economy. Output per head in the sector is up by 10% since 2000, 23% since 1995 and 47% since 1990. The figures for the whole economy are 4%, 13% and 31% respectively. Estimates suggest that manufacturing productivity, overall, is at least a third higher than services.

Plenty of people will have got this far and wondered why I have not mentioned the obvious cause of this difference in productivity performance - the public sector. Its low productivity is of great concern to a government pouring tens of billions into the NHS and other public services and not getting nearly enough out.

The problem is not, however, confined to public services. Private service industries, many of which we sometimes think of as being about as efficient as you can get, are falling behind competitors, while manufacturing is closing the gap.

A new report by the Advanced Institute of Management, by economists Rachel Griffith, Rupert Harrison, Jonathan Haskel and Mari Sako, sets this out.
It compares American and British productivity in terms of value-added per worker. The productivity gap, it notes, narrowed in the mid-1990s but has since widened again and is about where it was in 1990.

A small part of the gap, about 8%, is due to manufacturing, with a rather larger part, around 17%, due to machinery and equipment. This is said to be because of America’s superior performance in the production of IT equipment.

Mostly though, the productivity gap is in services and, worryingly, it is there that it is widening. The manufacturing gap, as the chart shows, has narrowed progressively over the past decade. In wholesaling and retailing, something we think we are rather good at, it has grown significantly larger. One problem is that British shops, particularly supermarkets, are too small to maximise productivity. There are businessmen I know who believe distribution is to blame for Britain’s productivity problem and this research goes some way to supporting them.

Other supposed successful service sectors fare little better. The productivity gap between Britain and America in financial services has doubled over the past decade. It has also widened sharply in the hotels and catering trade, which will surprise nobody.

How gloomy should we be about this? On the face of it quite pessimistic. The only sector that has generated good productivity gains in recent years, manufacturing, has done so by slashing employment. Employment growth in the service sector, by contrast, has been associated with poor productivity performance. If you wanted to be optimistic, you could take the Treasury view that, in time, these new employees will gradually become more productive.

There’s another reason for optimism. Most manufacturers I know say that, faced with the competition from low-cost operations in distant lands, their survival is dependent upon becoming full-service companies - making the product but also providing customers with all the service that surrounds it. Maybe that way manufacturing can also translate some of its productivity success to services.

PS Christmas may be nearly upon us but the economic outlook column never stops. Last Sunday I wrote about the change in the Bank of England’s inflation target to the new consumer price index (CPI). Figures last week showing CPI inflation down to just 1.3% - well below the 2% target - underlined the fact that the chancellor has bowled the Bank a nasty googly on this one. Can the monetary policy committee still raise rates with inflation so far below target? That’s one I’ll ponder over the next few days.

In the meantime, the results are nearly in for the most keenly-awaited event in the economic forecasting calendar (there aren’t that many). The annual Sunday Times forecasting league table will be published next week.

To tide you over until then, and bearing in mind that I can’t stand Christmas quizzes, here’s the commendably short economic outlook Christmas quiz. The three winners will get signed copies of my book, Free Lunch, no doubt to add to the one they got in their stocking. All the answers have appeared in the column over the year and please respond by e-mail by the end of Wednesday December 31, even if it means staying in on new year’s eve.

The questions: 1. When base rates rose in November, it ended the longest period without an increase since when? (a) 1951 (b) 1961 (c) 1971. 2. When was the last time Britain had a quarter of negative growth - falling gross domestic product? (a) 1992 (b) 1994 (c) 1996. 3. Place these three chancellors in order of the length of time in the job, longest first. (a) Nigel Lawson. (b) David Lloyd George (c) Gordon Brown.

And the tie-break. Brown used to be known as the iron chancellor. Now that public borrowing has soared, come up with a more suitable description. Publishable suggestions only please.

From The Sunday Times, December 21 2003

Comments

Hi David

Low productivity per worker isn't necessarily a bad thing. For example, the productivity per worker in the production of luxury goods and services is much lower than in the production of basic goods and services. Trying to increasing the productivity per worker in a luxury hotel, for example, will lead to a consumer boycott.

Regards
Njonjo in Kenya

Posted by: Benson Njonjo Ndehi at March 26, 2008 02:08 PM