Sunday, January 15, 2023
A league table which tells us we need to raise our game
Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

It is never too early in the year, dry January or not, to tackle the big issues, and regular readers will know that there are few bigger issues than the UK’s poor productivity performance. It explains the prolonged weakness in real wages, the biggest driver of living standards. As things stand, real wages are still marginally below where they were in early 2008, which adds up to roughly a “lost” decade and a half.

Fortunately, the Office for National Statistics has given me a reason to return to the issue by publishing a few days ago, its annual international comparisons of productivity, comparing the UK with other G7 nations.

Mostly, the exercise compares the UK with five of the other six, because data problems prevent a full assessment of where Japan was on productivity in 2021, the relevant year. That is not a huge problem, because for at least 40 years Japan has been the productivity laggard in the G7, which some people still find surprising. Japan has an efficient manufacturing sector but a combination of lifetime employment (which results in over-employment) and a weak services sector gives it low overall productivity.

Of the rest, the UK’s output per hour worked is a little better than Italy and Canada, but quite a lot worse than France, Germany and America. On the output per hour measure highlighted by the ONS, French labour productivity is 18 per cent higher than the UK, Germany 19 per cent and America 25 per cent.

This is all quite concerning. You may recall that, before the pandemic, there was a suggestion that the UK might not be such a productivity laggard because hours of work in this country were being overestimated. The gap, however, remains.

It is also there when productivity is measured by output per worker. This time, the UK is behind every other G7 country except Japan, so including Canada and Italy. US productivity, on an output per worker basis, is almost 50 per cent higher than the UK.

“These figures confirm that the UK remains behind other leading nations in the productivity race. But, while we’ve trailed for over a decade, it’s not an intractable challenge,” said Anthony Impey, chief executive of Be the Business, an organisation which champions small business productivity, “We often refer to the UK’s lagging productivity figures as a ‘puzzle’ - but we can crack the code and close the gap by inspiring businesses to work more efficiently.”

What do these figures tell us about the effect of the pandemic on productivity, and the changes it brought about, including furlough schemes, working from home, and so on? Taking the annual figures for 2020 and 2021 together, something unusual happened as economies swung into recession and back out of it again. Hours worked dropped sharply, particularly in 2020, and output per hour showed a sharp rise in the UK, rising by an average of 5.1 per cent a year in 2020 and 2021, with even stronger rises in Canada, 6.1 per cent, and Italy, 5.9 per cent.

These figures, however, tell us very little about underlying productivity growth, which on an output per worker basis fell by an average of 1.2 per cent a year in the UK in 2020 and 2021. Other figures from the ONS, covering the UK only and taking us into 2022, published late last year, showed that productivity on an output per hour basis was in line with its weak pre-pandemic trend, while growth in output per worker was quite a bit below that trend.

The debate about the impact on productivity of working from home will continue. These are early days, and we are yet to see where it settles. So far, however, there is no evidence that it has moved the dial on productivity in either direction.

What can we do about the productivity problem? Quite a lot. Skills are a particular problem for the UK, with the Edge Foundation’s latest Skills’ Shortages Bulletin highlighting Open University research which shows that 78 per cent of organisations have suffered a decline in output, growth or profitability as a result of an inability to recruit suitably qualified people.

Nearly 12 million people in the UK lack the digital skills necessary to cope with everyday life, let alone complex tasks at work. The now disbanded Industrial Strategy Council estimated that, on top of the skills’ gap now, an additional seven million people will be insufficiently skilled for the roles the economy will need in 2030.

Rishi Sunak wants every pupil to study Maths until the age of 18, but figures from the Learning and work Institute show that adult participation on Maths courses, 258,000 in 2021-22, was down by 29 per cent on pre-pandemic levels and less than a third of what it was 10 years earlier.

The Department for Education has established a Unit for Future Skills, chaired by Sir Ian Diamond, the national statistician, but there is a lot for it to do.

A second priority is investment by businesses. I do not need to remind you that the picture on this is bleak, with business investment in the third quarter of last year 8.1 per cent below pre-pandemic levels and 6.2 per cent lower than on the eve of the EU referendum.

The Office for Budget Responsibility (OBR) thinks it will be a few years before business investment gets back to those earlier levels, during a period in which it should have grown, not stagnated and then fallen.

When Sunak was chancellor, he promised to bring forward new ideas to boost investment, instead of which repairing the public finances and returning to some kind of normality after the Liz Truss-Kwasi Kwarteng madness has taken priority. Maybe Brexit has put the kybosh on business investment to such an extent that nothing can engineer a meaningful revival, so it has been put in the “too difficult” box, but without it, it is hard to see productivity breaking out of its weak trend.

Finally, at a time when one part of the infrastructure, the rail network, has been failing badly, both because of strikes and shortcomings on the part of the operators, there remains a need for a proper infrastructure strategy.

Jagjit Chadha, director of the National Institute of Economic and Social Research, in a piece headlined ‘Fixing the Mix’ notes that the UK’s relative decline has accelerated in recent years, not least because of the “well-documented poor performance of UK productivity”.

He suggests, politely, that infrastructure is too important to be left to the politicians, whose political horizons may not be long enough and that a commitment to genuine long-term plans “may ultimately mean handing over public investment schemes to some amalgam of the National Infrastructure Commission, the UK Investment Bank and an Industrial Strategy Council with an assessment of its implications for the supply side by the OBR”.

Doing nothing should not be an option.