The UK's productivity gap: The latest evidence from economic research

09/28/04

Productivity is the key indicator of economic health over the long haul, real income growth and hence living standards must follow the growth of labour productivity.

But as a new ESRC report confirms, there remains a significant productivity gap between the UK and our main comparators France, Germany and the United States.

The report summarises the latest research findings on the nature and causes of the UK productivity gap and what policies might be effective in helping to close it:

  • In the market sector of the UK economy, output per hour worked the most commonly used measure of labour productivity is almost 40% below that in the United States. The productivity gap with France and Germany is around 20%.

  • Looking at output per worker puts the UK in a better light, with insignificant differences relative to Germany. But while UK workers produce much the same output as German workers, they work much longer hours to do so 16% more.

  • The persistent productivity gap between the UK and the two big continental European economies can mainly be 'explained' by the fact that they have more capital invested per worker and their workers are more skilled.

  • Shortfalls in investment in physical and human capital account for a smaller proportion of the productivity gap with the United States. Half of that gap is due to different ways of working how firms are organised and how they use technology.

  • The productivity gap between the UK and the United States is particularly evident in key services, including wholesale and retailing, hotels and restaurants and financial services. Indeed, just three sectors account for more than half of the gap.

The report details what we know about key drivers of productivity growth:

The role of competition

  • Productivity growth is highest in industries with greater product market competition where less productive firms contract and close while new more productive ones open and grow; and where competitive pressures force existing firms to improve.

  • The historic weakness of competitive intensity in many sectors of the UK economy is being eroded with deregulation and strengthened legislation against anti-competitive practices. Increased competition should improve productivity growth.

The role of capital investment

  • Capital investment plays an important role in productivity growth. But the UK has less physical capital per worker than the United States and considerably less than France and Germany. Many explanations have been offered for these shortfalls, including macroeconomic instability, uncertainty and 'short-termism'.

The role of skills

  • Skills have a big impact on productivity. The UK is behind France and Germany in terms of intermediate skills and behind the United States in graduate skills.

The role of innovation

  • A key driver of slow UK productivity growth is relatively low investment in R&D. Despite the high quality of UK science, there is a difficulty in translating scientific achievement into productivity, reflected in low R&D, patenting and innovation.

  • R&D is important for innovation and productivity, not just for pushing forward the technological frontier but also making it possible for firms to absorb innovations from elsewhere. Foreign direct investment plays a key role in this 'technology transfer'.

Public sector productivity

  • Poor public sector productivity may have a large impact on overall productivity both directly and indirectly given the importance for private sector productivity of an educated and healthy population that can conduct business free of the fear of crime.

The report also outlines key issues that we need to understand and where research efforts at our leading economic research institutions are now being directed:

Services

  • With manufacturing now accounting for only 15% of UK employment, we need to look at productivity in the service sector in far more detail. In retailing, for example, research is looking at the impact of local planning restrictions on productivity.

Management

  • There is indirect and anecdotal evidence that management skills are part of the story behind the UK's productivity gap with the United States. Research is exploring how different management practices influence productivity.

The new economy

  • Will the UK and Europe follow the recent spurt in US productivity growth driven by effective use of information technology? Is it just a lagged effect or are weak competition and over-regulation impeding the necessary organisational changes?

Outsourcing and technology transfer

  • Technology and globalisation seem to be creating a shift towards outsourcing and flexible organisations that are more conducive to innovation. Research is examining which UK firms and industries are outsourcing and how they organise their R&D.

Source: Eurekalert & others

Last reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
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