Maxine Kennedy, Research Officer in the Economic Development Office
This week’s blog looks at the new data on productivity in the UK.
What is productivity and why is it important?
Productivity, measured as output per worker, per job and per hour, tells us how efficient resources are being used and is a key indicator of how well the economy is performing.
Long term global data has shown that productivity accounts for the majority contribution towards Gross Domestic Product (GDP), and as such is a key determinant of economic performance, and an indicator of a country’s living standards.
What is the long-term trend in UK productivity?
Often termed the ‘productivity puzzle’, UK productivity has been relatively stagnant over the past decade or so. Following the economic downturn in 2007/08 productivity fell, and despite a strong labour market, it has not yet returned to the pre-crisis trend.
UK, seasonally adjusted, quarter 1 (Jan to Mar) 1994 to quarter 4 (Oct to Dec) 2016[1]
Source: ONS. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/octtodec2016
There are several hypotheses for this: first, that the financial crisis led to decreased lending and investment in potentially productive firms; that a lack of investment in equipment and machinery has meant that employees are not working with the most efficient technology available; that there are slowing rates of innovation, or that employees are not making the most of their skills at work. Others have also proposed that how we calculate productivity doesn’t capture the rising importance of the digital economy.[2]
It is also interesting to note that there are sectoral differences affecting productivity. For instance, it has been noted that increased compliance and regulation in the financial services sector following the crisis may have had a negative effect on productivity in that sector, though this may be only be for the short term while the sector adjusts.[3]
However, economists believe that none of these reasons on their own can explain the trend, hence it being coined a ‘puzzle’.
What does the latest UK productivity data show?
The latest data was released by the ONS earlier this month and shows a positive upswing in productivity. Productivity in Q4 2016 was 0.3% higher than Q3 2016, and 1.1% higher than in Q1 2008, immediately prior to the recent economic downturn.[4]
However, the 0.4% quarterly growth remains below the 1994 to 2007 average, and even the ONS warn that the recent positive trend doesn’t indicate an end to the UK’s productivity puzzle.[5]
Regional and sectoral differences in the UK’s productivity?
Andrew Haldane, Chief Economist at the Bank of England, recently analysed UK productivity by looking at firm level data, showing the differences and similarities between firms through a regional, sectoral and export status lens.
We might suspect that productivity varies considerably across the UK’s regions. Looking at data compiled by the ONS and the Bank of England, we can see that overall, London’s productivity is the highest of any region in the UK; it is 75% higher than the region with the lowest productivity, which is the North East.[6]
However, looking at data on productivity at the firm level, we can see that high productivity firms consistently feature in every region in the UK. The distribution does vary from region to region, but the same pattern is seen throughout: a smaller pool of highly productive firms, compared to a majority number of lesser productive firms.
The graph below shows that London has a tighter distribution of highly productive firms (i.e. there are more highly productive firms and fewer low productive firms in London as opposed to the North East, where the pattern is reversed).
Firm level productivity distribution, by region
Source: ONS, ONS Research Database, BvD and Bank of England calculations. See: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf
Looking at the firm level data across different industries, we see a similar trend. There are overall differences between sectors, for instance the information and communication and the professional, scientific and technical activities are the most productive (this might not be so surprising since we would expect to see innovation particularly in these sectors), and manufacturing tends to be more productive than construction. It’s important to remember that each sector also faces unique circumstances that affect productivity.[7]
Yet, again, we see a similar pattern: within each sector there is a similar distribution, will all sectors having a smaller number of highly productive firms, who are innovating and leading the way, and a larger number of less productive firms.
Firm level productivity distribution, by sector
Another key finding is the difference between firms who export as compared to those who don’t. The graph below shows that those firms which do export, and so are faced with global competition, tend to be highly productive. This suggests that openness to global trade is a key contributor to long term economic growth.
Firm level productivity distribution, by export status
Source: ONS, ONS Research Database, BvD and Bank of England calculations. See: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf
Quite clearly, productivity is crucially important to the future of the economy, and consequently we’re seeing more focus on the topic by the Government and other stakeholders. In 2015, the Government launched its Productivity Plan – the latest update to its implementation is here: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/931/931.pdf
[1] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016
[2] See: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbis/87/87.pdf
[3] http://pwc.blogs.com/press_room/2015/06/financial-services-firms-want-government-to-reduce-cost-of-regulatory-compliance-cbipwc.html
[4] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016
[5] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016
[6] Latest data available for the regional level. See: http://www.lse.ac.uk/Events/2017/03/20170320t1830vOT/The-Productivity-Puzzle
[7] http://www.cbi.org.uk/better-off-britain/Productivity.html