Sunday, October 11, 2020
There's no quick fix for Britain's deep productivity problem
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

One of the topics I get asked a lot is about productivity. People don’t necessarily put it this way, but is this crisis unleashing the “creative destruction” that will propel us out of more than a decade of productivity stagnation? Is the working-from-home revolution and other changes that businesses have adopted, which in other circumstances could have taken years, good or bad for productivity?

What about the nature of the shakeout in jobs that we are seeing? Is the very bad news for the UK’s hard-hit hospitality sector, and the people who work in it, good news for economy’s overall productivity?

These are big questions and I cannot promise definitive answers on all of them. Before I try, let me give you another in the series of extraordinary statistics this crisis is throwing up. The Office for National Statistics (ONS) has just published figures for productivity in Britain’s public services. The measure used is slightly different from the way we typically measure productivity for the economy as a whole, which is on an output per hour or output per worker basis. Public services productivity is measured by the amount of inputs going in – public spending – versus the outputs emerging in return.

On this basis, productivity in public services plunged by 35.7% in the second quarter, compared with a year earlier. This was comfortably the largest fall since it was first measured on this basis, the previous record being the 3.8% annual drop in the first quarter.

It happened because inputs into public services, mainly health and social protection (benefits, free school meals, etc), increased sharply, while outputs fell. School closures hit the output of education, while non-Covid work in the NHS also dropped. No public sector workers were furloughed even when they were unable to work. The drop in the output of public services was a contributor to the 19.8% second quarter fall in gross domestic product.

These huge falls in productivity should not be taken as evidence that the public sector can never deliver productivity gains. Between 2010 and last year productivity in public services rose by more than 5%, with the biggest gains occurring during the period of maximum austerity. Old Treasury hands used to say that putting the squeeze on spending was the only sure ay of delivering such gains.

The official statisticians are still working on final productivity data for the whole economy in the second quarter, which will be published shortly. We will have to wait even longer to see how much productivity bounced back in the third quarter, if it did, as the economy recovered from its second quarter slump. Friday’s monthly GDP figures were a touch disappointing, showing only a 2.1% rise in August, but they left the economy on course for a 16% third quarter rise.

In the meantime, we have the ONS’s “flash” estimate for second quarter productivity, which showed a 19.9% quarterly fall in output per worker and a more modest 2.5% drop in output her hour. The output per worker fall was so large because furloughed employees were counted as still being in jobs, even when they were not working. The drop in output per hour was smaller, though it was still the biggest on record.

These figures will be revised, not least because the revised second quarter drop in GDP was marginally smaller than first estimated, but they will confirm that any productivity recovery will start from a low base. What are the prospects for such a recovery?

As far as the public sector is concerned, and productivity in public services, one feature of this crisis is that a lot of money has been poured in, the “inputs”, often without due diligence. Contracts have been hastily signed and the services not delivered. That is not unusual – there was a lot of such wastage in the second World War – but it does not bode well for public services’ productivity.

For the private sector, there are two big questions. One is whether productivity gains will result from changes in working practices. We should not exaggerate such changes. The latest ONS coronavirus business impacts survey, showed that in the period from September 7 to September 20, 9% of employees were furloughed, 28% were working remotely but 59% were at their normal place of work.

Looking to the future, only 19% expected to use increased homeworking as a permanent business model in the future. Of these, improved productivity was only the third most popular reason, cited by 34%, behind improved staff wellbeing (60%) and reduced overheads (55%).

This will be the test of changes in working practices – whether firms can point to productivity gains – and so far the evidence is thin. I am aware of many surveys showing that employees believe they are more productive when working from home, as well as an improved lifestyle when you cut out commuting. But for salaried workers, getting a set amount done in a shorter time so that you can take the dog for a walk does not increase measured productivity. Only when more is done in each working day does productivity improve. I note that some firms are keeping a remote eye on their employees, to make sure they are working.

Any productivity gains from changes in working practices, meanwhile, have to be set against other losses. Sir James Dyson may have been speaking for many when he said that businesses need the interaction of people working closely together. “I’m 73 and when I come into work I’m learning all the time, we’re learning from each other,” he said. “You can’t train people and learn when you’re sitting at home”.

The jury is out on this. What about the changes in the economy resulting from Covid-19, which the chancellor, Rishi Sunak, has described as a “permanent adjustment”? All sectors have their productivity leaders and laggards but a labour-intensive industry like hospitality has much more of a challenge in delivering productivity improvements than, say, manufacturing. Many hundreds of thousands of hospitality jobs are at risk.

Economists sometimes talk about the “batting average” approach to productivity, which is that if you eliminate low-productivity firms, indeed large parts of low-productivity sectors, the economy’s average productivity will be higher.

That may happen but it is probably not a good thing. Hospitality and other domestically focused services may drag down the productivity average but they have generated huge numbers of jobs and they have a minimal impact on the UK’s ability to compete in global markets. At this time in particular, we need those hospitality jobs.

The keys to raising our productivity game are the same as before; more investment, more innovation and better infrastructure, together with skills. This crisis is very unlikely to come to the rescue.