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Yeah, about that British productivity thing ...
Britain’s productivity problem is long-standing and getting worse
Many culprits and few easy answers
In the classic short documentary “Powers of Ten”, made in 1977, the point of view steadily pulls back from a picnicking couple in a lakeside park to show first the Earth, then the solar system, and eventually the entire universe. An expanding field of view brings home the scale of things. So it is with the challenges facing Britain.
In the week that Boris Johnson scraped through a vote of confidence in his leadership, the narrowest field of view focuses on the prime minister: how wounded he is, and how long he will survive. Zoom out a bit and you can see the immediate issues facing an enfeebled government, from a creaking health service to the rising cost of living.
Zoom out farther still, though, and one problem fills the screen: the country’s anaemic growth rate. A healthier economy would raise people’s living standards; faster growth is the way to square the circle between lower taxes and better public services. Yet the oecd, a club of rich countries, reckons that only heavily sanctioned Russia will fare worse in the g20 in 2023. And whereas average annual gdp growth over the decade preceding the 2007-09 financial crisis was 2.7%, the Office for Budget Responsibility (obr), a fiscal watchdog, predicts the new normal is closer to 1.7%.
The political debate is moving rapidly onto this terrain. Mr Johnson says growth is his top priority. Cabinet ministers are urging tax cuts. The Labour Party is working up a growth strategy. But talking is a lot easier than delivering. Zoom out again, and it is clear that Britain’s growth problem is long-standing and getting worse.
In the coming months we will publish a series of articles on how to get Britain growing again. But first it is vital to understand how bad things are. That means focusing on one issue—productivity.
Over the long run productivity growth, or the ability to produce more with less, is all that really matters for rising living standards. Although in theory economies can grow when people work longer hours, at some point that strategy is limited by employees’ health and the number of hours in a day. Raising labour productivity, or the amount workers can produce in an hour, can happen with investment. Or it can happen with greater total factor productivity (tfp), a measure of the overall efficiency with which capital and workers are used. tfp can be traced to factors like better management practices or stiffer competition.
Britain once set the pace in productivity. At the start of the 19th century it overtook the Netherlands as the world’s “productivity frontier”. A century later, America was in the lead. A study by Stephen Broadberry of Oxford University and Doug Irwin of Dartmouth College has documented how in around 1850, American workers produced roughly 10% less than their British peers. By 1910 they produced 25% more.
Britain never regained its lead. Two world wars hit hard; at home, meanwhile, domestic competition waned. European peers industrialised behind protective trade barriers. By the end of the 20th century Britain’s labour productivity was below that of America, France and Germany (see chart 1). Although it matched France’s gdp per hour at the beginning of the 1970s, by 2000 it trailed by over 10%.
This century started promisingly. Between 1997 and 2007 British productivity growth was second only to America’s within the g7 group of countries (see chart 1); output per hour grew at an annual average rate of 1.9%. Over the course of that decade Britain’s gdp per hour grew from 88% of Germany’s to 93%.
But then, disastrously, the global financial crisis struck. The productivity slowdown that followed was global, but Britain’s was particularly dramatic. Between 2009 and 2019 its productivity growth rate was the second slowest in the g7 . A study by Nick Crafts at the University of Warwick and Terence Mills of Loughborough University calculated that Britain’s shortfall during this period, compared with the pre-2008 trend, was the worst in 250 years.
There is no doubt that the cost of this lost decade was huge. Had Britain’s productivity growth rate not fallen after the global financial crisis, gdp per person in 2019 would have been £6,700 ($8,380) higher than it turned out to be. But there is fierce debate over what exactly went wrong. Diane Coyle, a director of the Productivity Institute, a research consortium, likens the search for a source of Britain’s weak productivity growth to the conclusion of an Agatha Christie mystery. “Everybody turns out to have done it.”
Several enormous shocks hit the British economy over the course of that decade, even before the pandemic delivered another. The financial crisis curbed the flow of credit. One study published in 2020 found that companies with weaker pre-crisis balance-sheets that faced a particularly severe reduction in credit saw sharper reductions in tfp growth, partly because they cut back on innovation. Drooping demand crimped incentives to invest and innovate: around half of European economists surveyed in February 2020 attributed Britain’s slowdown to weak demand associated with the financial crisis or austerity policies.
And then there was Brexit. On one estimate, uncertainty caused by Britain’s departure from the eu depressed business investment by as much as 11% in 2019, relative to what it would have otherwise been. Erecting trade barriers with Britain’s biggest trading partner has eaten up managers’ time, made supply chains less efficient and added costs. None of that has helped.
Industry-level data yield further clues as to what went wrong. The slowdown in tfp growth within financial services and insurance contributed as much as a third of the economy-wide drop between 2007 and 2019, according to Jonathan Haskel of Imperial College London and Peter Goodridge of Manchester University. Information-technology services, transport-equipment manufacturing and pharmaceuticals also contributed—all industries typically thought to be among Britain’s strengths. Overall, they find that intangibles-heavy and technology-intensive industries were harder hit during the 2010s.
Britain’s productivity problem is long-standing and getting worse
Many culprits and few easy answers
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