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What’s gone wrong with UK productivity?

Speculation suggests that the Chancellor will have limited room for manoeuvre in the Budget despite some encouraging figures for Government borrowing recently. We suspect this will be mainly due to downgrading the forecast sustainable growth rate of the economy from its historic norm of 2.5% to 1% or less. If so, this will have a nasty impact on future finances.

The sustainable growth rate depends on changes in the size of the labour force and productivity improvements. In the UK the overall employment rate (i.e. the proportion of people aged 16-64 actually in work) has reached 75% – the highest on record, suggesting there is now precious little slack in the economy.

Surprisingly, the employment rate is not dramatically higher than in 1977 despite so many more women now working. This is partly due to a doubling of student numbers. Meanwhile, the proportion of working age people is falling as the population ages. However, the total population is still forecast to keep growing (to over 75 million by 2045) which means that the workforce will continue to expand – but only by about 0.2% per annum.

So productivity is the only potential driver of significant growth. Unfortunately most of the developed world have been seeing reduced
growth in recent years.

In all five of these developed economies the rate of growth has slowed. During the 1950s and 1960s France & Germany both enjoyed much faster gains in productivity than the UK. Thereafter until the financial crisis the growth rates were similar. Since then the UK’s performance has been notably worse.

We’ve managed to keep our overall economic growth at a respectable level but that’s because we are working much longer hours than the rest of Europe.

But long hours don’t necessarily result in more efficiency. The average UK worker generates less output than their equivalent in Germany or France despite working up to 24% longer!

The comparison with France is particularly interesting. Although their unemployment rate is high, those in work seem to be very productive
– those long holidays and short hours seem to be good for individual performance!

Contributory factors

No-one is sure of the underlying causes of our poor performance but the following factors are thought to be contributing: 

We are hearing much about the potential impact of automation on the future demand for jobs. If taxi and lorry drivers were all replaced with machines, productivity in those sectors would improve significantly. But as a nation we would only benefit if those displaced managed to gain replacement jobs. That currently seems unlikely which will add to the strain on public finances, as will increasing longevity.

We should expect taxes to rise and spending to remain constrained.

John Spiers, Chief Executive
EQ Investors