The UK economy suffers from low productivity. Productivity measures output per person, or per time worked. If productivity was higher across the economy then people could work less, or be paid more, or both. Productivity drives an economy's output and thus its potential growth rate and, in turn, living standards. So low productivity economies find to hard to keep up with high productive ones.
This is not a new problem. Ahead of the financial crisis the UK was making progress in closing the productivity gap that existed with major competitors such as the US. Since the crisis, though, all western economies have suffered. At various times over the last decade this has been called a problem, a puzzle or a challenge. However it has been described, UK policy makers have not been able to provide solutions.
This may be able to change. A welcome new report from the Centre for Social Justice, 'Productivity: the Great British Breakthrough', chaired by Iain Duncan Smith, has provided a fresh perspective. Much of the CSJ’s other work focuses on those in the lower income deciles. They have combined their on the ground knowledge of how local economies, tax and benefit systems work, with a top-down macro-economic perspective to outline a host of policy measures.
Of course, the media often reports the misleading nonsense that France produces in four days what we do in five. France, like many euro countries, suffers from high unemployment and a lack of jobs for young people. The solution to low productivity is not to have fewer workers!
One of the CSJ’s welcome recommendations is to measure productivity in a different way. 'Productivity measured as output per hour is misleading; it should be changed to output per working age to avoid penalising countries with high employment.'
Data rich research like that of the CSJ’s adds to the debate. We know from previous research that the UK suffers from a productivity gap across regions, within regions and within sectors too, and that diffusion of productivity gains is low. The CSJ’s work confirms that and also highlights the key macro problem: UK business under-invests. 'UK plc is addicted to cheap labour and has chronically underinvested in technology and up skilling it workforce'. This has been going on for years. One consequence of this is an acute regional discrepancy.
The most convenient way to measure productivity at a snapshot in time is Gross Value Added (GVA). It takes out the impact of tax and subsidies on products, allowing a comparison of regional output. The latest available data from 2014 shows the UK’s average GVA per head was £25,000. In London the GVA per head was £44,000. While it is not uncommon for a capital city to have high productivity, the gap with other parts of the country is vast. Of the 20 least productive local authorities in the UK, six are in the North West, three are in the North East, four are in Wales and three are in Scotland.
For some, it can be linked to industrial decline. One of the least productive counties in the UK is Gwent Valleys (GVA per head of £14,000), the home to the now defunct Ebbw Vale Steel Iron and Coal company and Blaenavon Ironworks. For other regions, multiple factors are at play. For instance, gross value added in the North West is half that of London, at £22,000. This mirrors the changing regional structure of the economy too, with an increasing share of output too coming from London and other southern regions. The five most productive areas in the UK are in London.
So what are we to do? The UK needs to position itself to compete in the changing and growing global economy. We can compete on price or quality, but if we just focus on price, someone, somewhere will do it cheaper. Productivity matters as we need to compete on quality. And with a new global industrial revolution already underway this matters more than ever.
Also we have to recognise it is about getting both the demand and supply-side of the economy right. We need effective demand, helped by credible macro-economic policies. And on the supply side, low taxes and effective not but over burdensome regulation will help. The CSJ’s analysis concluded that productivity growth can best be generated through area based policy initiatives.
For this to be successful Government policy must focus on four broad areas. One, build local competitive advantage across regional city based clusters. Two, spend more - and sensibly - on physical and social infrastructure. Three, attract large employers to a cluster. Four, pair a local growth plan with a radical anti-poverty agenda, ensuring inclusive productivity growth.
The encouraging aspect is that the CSJ’s policy recommendations are focused and not just broad based. Boosting local competitive advantage is key to building the clusters of economic power that drive productivity growth in the long term. This means more investment, innovation and infrastructure and also incentivising local government.
For the UK, the message is to compete globally, think nationally and act locally. With all the current debate about the lack of wage growth, this report is a powerful and timely reminder that if we want to improve the income of the lowest two income deciles, then it can only be achieved by improving productivity. That is why UK business now has to step up to this challenge and ensure that, through automation, technology and vital investment in skills training, not only will the UK economy be placed on a sounder economic footing but also a sounder social one too.
Dr Gerard Lyons was a member of the steering committee on the Centre for Social Justice’s new report, 'Productivity: the Great British Breakthrough' by Patrick Spencer.