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Productivity in the UK

Published Thursday, May 26, 2016

The briefing provides latest statistics on UK productivity including breakdowns by sector and region/country of the UK. It also explains why productivity is important to growth, the public finances and living standards, analyses whether the stagnation in productivity is temporary or permanent and outlines the Government's productivity plan. International comparisons are also included.

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Productivity – how much is produced for a given input (such as an hour’s work) – is directly linked to living standards, with a country’s ability to improve its standard of living over time almost entirely dependent on productivity growth.

Productivity is also crucial in determining long-term growth rates of an economy. In other words, stronger productivity growth leads to stronger GDP growth. This, in turn, increases tax revenues and lowers government budget deficits. Of course, lower productivity growth results in the opposite: lower GDP growth and higher budget deficits.

Historically, UK labour productivity has grown by around 2% per year but since the 2008/2009 recession it has stagnated. Despite some indications of a pick-up in growth in 2015, a weak end to the year meant that productivity at the beginning of 2016 was roughly at the same level as it was almost eight years earlier (the pre-recession peak level).

The persistent weakness in productivity has puzzled economists and there are many alternative theories to explain it, including: weakness in investment that has reduced the quality of equipment employees are working with; the banking crisis leading to a lack of lending to more productive firms; employees within firms being moved to less productive roles; and slowing rates of innovation and discovery.

None is sufficient on its own to explain entirely what has happened. This makes it difficult to predict when and if productivity growth will return to pre-crisis rates of growth. The continued weakness in productivity led the Office for Budget Responsibility, the independent fiscal watchdog, to lower its forecasts for productivity growth in March 2016.

OBR forecasts of productivity growth

In July 2015, the Government published its 15-point productivity plan: Fixing the foundations: Creating a more prosperous nation. The plan aims to improve the UK’s transport and digital infrastructure, increase investment in the economy, enhance the skills of the workforce, build more houses, move people off welfare and into work, encourage exports, and rebalance economy away from London.

London has the highest levels of productivity, by some margin, of any region or country in the UK. Northern Ireland has the lowest.

International comparisons of labour productivity show that the UK is ranked sixth among the G7 countries, with Germany top and Japan bottom. In 2014, UK productivity was 18 percentage points below the rest of the G7 average, the widest productivity gap since at least 1991 (when the data series began).

International comparison of productivity

Commons Briefing papers SN06492

Author: Daniel Harari

Topics: Economic situation, Employment

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