Author Mark Richards

UK productivity has fallen to levels not seen since the financial crisis. All the usual excuses have been trotted out – but maybe we need to look at a different solution…

Last week the Office for National Statistics released figures showing that the productivity of UK workers had dropped to levels last seen before the financial crisis – hourly output is now 0.4% below the peak recorded at the end of 2007. ONS head of productivity Philip Wales said,

“UK Labour productivity growth has struggled since the 2008 economic downturn, and the fall in the first quarter of 2017 brings to an end a recent run of positive quarters.”

It has been known for some time that UK productivity lags behind its major competitors such as the US, France and Germany. A quick glance at the world productivity ‘league table’ shows the UK languishing in 13th place. Norway leads the way, from Luxembourg and the United States, but the UK is scarcely ahead of our siesta loving chums in Southern Europe, Spain and Italy.

How is productivity measured?

A good question – and it is a very simple answer. GDP is measured in purchasing power parity, normalised to the 2013 US dollar. It is calculated from 2005 EKS PPP estimates from Penn World Tables, updated with GDP deflator changes. Productivity is then obtained by dividing GDP by total aggregate hours worked for both the employed and self-employed. What could be more straightforward that that? There will be a test on it in first lesson this afternoon.

Whatever the methodology – and however complex it is – the key point is that the same methodology is applied to all countries and the UK does not do very well. So why is that?

Why is the UK’s productivity so poor?

The UK has recovered well since the 2008 crisis – but clearly, that is a product of more people working, and of people working longer hours, rather than a function of increased productivity. Kamal Ahmed, BBC Economics Editor, wrote, “Today’s figures are bad to the point of shocking. [The figures] take the UK’s ability to create wealth back below the level of 2007 – and if an economy cannot create wealth, then tax receipts, the mainstay of government income, will weaken.”

Mike Cherry, President of the Federation of Small Businesses, blamed underinvestment, the uncertainty caused by Brexit and the current political situation, and sluggish wage growth. He warned that the figures acted as a “very sharp reminder” that unless productivity improves, wages and living standards will continue to fall and the UK will struggle to compete in a post-Brexit world.

Other economists though have argued that the UK’s poor productivity is simply a function of there being more people in work.

“We should not forget that the decline in productivity is the flipside of the remarkable success of the UK labour market,”

said Dr Thijs van Rens, Professor of Economics at Warwick University.

There are also significant regional differences in the UK – output per hour worked in London’s financial and insurance sectors was around seven times higher than in the regions with the lowest industrial productivity.

You might also argue that the nature of productivity is changing – and becoming much more difficult to measure. Web designers, app developers, SEO experts – there are plenty of jobs now which did not exist ten years ago. London remains the tech capital of Europe and more people are working across borders: it may be that productivity is simply getting harder to measure accurately.

Or there may be another, rather more unsettling reason…

One in three of us could be depressed

According to a recent survey by PwC, one in three people in the UK workforce may have a mental health or wellbeing issue – in which case, no wonder productivity is down.

The results of the survey suggest strongly that this is proving a drain on productivity, with 39% (two in five) of workers saying they have had to take time off work – or reduce their responsibilities – for health reasons. And nearly a quarter of the 2,000 workers surveyed said that they did not feel their employers took mental health and wellbeing issues sufficiently seriously.

UK Productivity: Unhappy, Unhealthy and Unproductive

Jo Salter, a director in PwC’s People and Organisation Division said,

“It is becoming increasingly important for businesses and organisations to provide employees with support for their physical and emotional health at work. Healthy employees are more productive, they stay in the businesses longer and costs and risks for employers are reduced.”

More than half of those replying to the survey worked for companies that did not offer any health benefits – which typically now include counselling, health screening and subsidised gym membership.

This was backed up by another report from the Smarter Working Initiative, which disclosed that more than half (55%) of the UK workforce do not do any exercise during a typical working week.

Do we need to look at a different solution to productivity?

‘Yes’ could well be the answer. Underinvestment, uncertainty and sluggish wage growth may not be the answer to Britain’s poor performance in the productivity tables: the answer may be a happier, healthier workforce. Maybe the investment that employers need to make is not in new plant and machinery, but in gym memberships, standing desks and flexible working. After all, most millennials – those entering the workforce around the turn of the century – now want to work flexibly, remotely and at a time that suits them.

The Smarter Working Initiatives survey backed this up: 65% of the people they surveyed through more flexible working would help them to exercise more and would, in turn, make them healthier and more productive.

As James Downes, founder of the Smarter Working Initiative said,

“A workforce that knows their employers have their wellbeing in mind will always be more motivated as a result. Maintaining an open dialogue is key and enabling staff to work in an environment that best suits them will ensure that productivity remains high.”

Problem solved. All UK plc needs to do is embrace what it employees want – flexible working and an employer that genuinely cares about staff wellbeing. Diehard traditionalists may sneer, but with the UK’s productivity back at pre-crash levels, it is very clear that what we are doing now is not working.