Sunday, July 03, 2022
One crisis killed off productivity - will this one resurrect it??
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. Not to be reproduced without permission

Anybody who has travelled by plane recently, as I have, or waited on the phone for a customer services department, or seen the many notices around cafes, bars and restaurants screaming out for staff, will know that the country is beset with labour shortages, of the kind we have not seen for a very long time. The question for today is whether this will bring about something that is essential for our long-term prosperity, a productivity revival.

Before trying to answer that question, some background, courtesy of the Productivity Commission, established by the National Institute for Economic and Social Research (Niesr), as part of the Productivity Institute. It published its evidence review recently, and the results are striking.

For three decades after the Second World War, during the so-called golden age for the world economy, productivity measured by output per hour worked grew by an average of 3.6 per cent a year. In the next three decades, it was 2.1 per cent a year, on average, a figure we have come to associate with long-term productivity growth for the UK.

But then, around the time of the financial crisis, the lights went out. Productivity growth over the 2008-2020 period average just 0.5 per cent a year, or 0.2 per cent from 2007 to the pre-pandemic year of 2019.

For those who are interested in economic history, this is quite something. Productivity growth in the period since the financial crisis has been weaker than at any time since the dawn of the industrial revolution well over 200 years ago.

The Productivity Commission deliberated on whether to date the start of the slowdown to the crisis. One theory was that US productivity began to slow about two years before 2007-8, so on the catch-up theory the UK may have experienced a slowdown anyway. But it settled on the financial crisis as the point where reasonable growth in productivity was replaced by near-stagnation.

All countries experienced a productivity slowdown after the crisis, but the UK’s slowed more than others. Some of that may be because of the fact that the post-crisis recovery in business investment, necessary for lifting productivity, was snuffed out by the referendum, and stagnated for more than three years, long before it took a further hit as a result of the pandemic. Business investment in the first quarter of this year was at its lowest for eight years.

This matters. Niesr calculates that, has productivity growth since the crisis grown in line with that 2 per cent average since the crisis, workers in the UK would be an average of Ł5,000 a year better off. As it is there has been a prolonged squeeze on real wages. Official figures show that regular and total pay in real terms is barely above, at best, the early 2008 level.

The Productivity Commission would admit, I think, that there was no lightbulb moment in the evidence it gathered. The UK’s weak productivity is due to low business investment, inadequate infrastructure, insufficient innovation, low skills and one of the most centralised economies in the world.

There are provisional recommendations of what needs to be done. It calls on the government to support more collaboration and business networks “to help firms develop new products, processes, and organisational methods that result in productivity growth”. This is sometimes called open innovation.

Meaningful regional devolution and a decentralisation of decision-making away from London and the southeast could address “weak institutional capacity to improve productivity in other regions and cities”. The same is true of the private sector, where financial institutions which could promote investment and innovation are also heavily concentrated in the capital. Government short=termism, evident in this government’s decision to abolish its industrial strategy council, is a problem.

Much more needs to be done on skills, where UK spending, public and private, lags well behind competitor countries and women, in particular, are not encouraged or incentivised to acquire the skills they and the economy needs. We also need a coherent long-term plan for infrastructure investment and, as the chancellor would agree, lift business investment to similar levels as in other countries.

That brings me on to the question I asked at the start. Will labour shortages prompt the investment, including automation, that could raise productivity? It needs to happen. Latest official figures show that output per hour fell by 0.7 per cent in the first quarter and, while it was 1.9 per cent above pre-pandemic levels, the statisticians said, “no fundamental change in productivity behaviour resulting from the coronavirus pandemic is yet visible in these data”.

Something may be stirring. A timely survey of 670 firms to be published by HSBC UK tomorrow will show that a third of them have investing in automation as a priority, because of staff shortages. Not all the businesses in the survey are experiencing such shortages, though some 40 per cent are.

The survey is reasonably positive about investment, with 45 per cent expecting to increase capital spending this year, up from 36 per cent who did so last year.
That becomes the key question. Do businesses invest in response to staff shortages or do they hang on in the expectation that such shortages will ease? Will they invest in general at a time when business confidence is very weak and cost pressures are biting hard? Forecasts for the growth of business investment have been revised down sharply this year because of the uncertainty, cost pressures, and those labour shortages. It should be remembered that recruitment and investment are not usually alternatives but go hand in hand.

That said, there is still considerable scope for automation and new technology to substitute for scarce workers. This has long been the case in industry and should spread across the service sector.

Before long, manned checkouts at supermarkets will become a rarity. Famously, ATMs, cash machines, did not result in a drop in the number of bank staff, but banking automation may now be doing that. The solution to a chronic shortage of HGV drivers will eventually be driverless lorries and, strikes permitting, a shift in freight back to trains. More robots will be used on warehouses, and even to care for the elderly.

All these things are likely. The question is whether they will happen quickly enough to lift us out of the productivity doldrums.