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UK productivity focus Vicky Pryce Chief Economic Adviser, Centre for Economic and Business Research, Visiting Professor, Birmingham City University, Aston Business School Mark Beatson Chief Economist, CIPD, Honorary Visiting Professor, London Metropolitan University The UK’s productivity problems What is productivity and why does it matter? • Productivity = output per unit of input • Output per hour worked = GDP/total hours worked ‘Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.’ Paul Krugman 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Long term productivity trends (2008 = 100) Output per worker Output per hour 120 100 80 60 40 20 0 Source: Office for National Statistics The UK’s productivity standstill (Output per hour worked, 2008 Q1 = 100) 105 104 103 102 101 100 99 98 97 96 2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 Q4 2014 Q1 Q2 Q3 Q4 2015 Q1 Q2 95 GDP is chained volume measure, seasonally adjusted Source: Office for National Statistics International comparisons of labour productivity 1990–2013 (Current price GDP per hour worked, UK = 100) 135 130 125 120 115 110 105 100 USA France Germany G7 exc UK The black columns are the 2008 data. Time series for Germany and G7 exc UK begin in 1991. Source: Office for National Statistics A slowdown in business investment? (£ billion, 2010 prices) Tangibles 140 120 100 80 60 40 20 0 Source: NESTA (2014) Intangibles A lack of dynamism? (Company liquidation rate, % of companies, England and Wales, 12 month moving average) 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2005 2006 2007 2008 Source: BIS Insolvency Service 2009 2010 2011 2012 2013 2014 2015 A lack of dynamism? (Job-to-job flow rate, UK, % of age 16-64 employment) 1.4 0.4 0.3 1.2 0.2 1.0 0.1 0.8 0 0.6 -0.1 -0.2 0.4 -0.3 0.2 -0.4 0.0 -0.5 Moving average of change in employment rate (RHS) (%) Job-to-job flow rate (LHS) (%) Source: Bank of England (2015) plus author’s calculations Future productivity growth (% growth p.a. in output per hour worked) 3 2 1 0 -1 -2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Office for Budget Responsibility How to get UK productivity moving ahead Maintain growth in business investment (£ million, current prices, seasonally adjusted) 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 Adjusted to exclude the 2005 reclassification of British Nuclear Fuels Ltd (BNFL) in 2005. Source: Office for National Statistics Support public sector investment in Spending Review (£ million, current prices, seasonally adjusted) 14 000 12 000 10 000 8 000 6 000 4 000 2 000 Adjusted to exclude the reclassification of British Nuclear Fuels Ltd (BNFL) in 2005. Source: Office for National Statistics 2014 Q3 2013Q4 2013Q1 2012Q2 2011Q3 2010Q4 2010Q1 2009Q2 2008Q3 2007Q4 2007Q1 2006Q2 2005Q3 2004Q4 2004Q1 2003Q2 2002Q3 2001Q4 2001Q1 2000Q2 1999Q3 1998Q4 1998Q1 0 Recognise productivity is a question of mindset and motivation (% of private sector organisations) Survivors - "We were in survival mode for a long 1% time and have not able to invest in major 14% improvements to the business” Cost-cutters - “We are a leaner business now because we took cost out during the recession 3% and the productivity of our workers has improved as a result” Balanced investors - “We have continued to invest in equipment, technology and people and have increased our productivity significantly” 57% 54% 16% All private sector organisations 7% 19% 40% 54% 45% 26% 37% 2% 3% 6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100% Productivity well above average Productivity above average Productvity average Productivity below/well below average Totals do not add up to 100% because “don’t know” responses are not reported. Source: CIPD Labour Market Outlook survey, summer 2015. Support innovation R&D expenditure by performing sector, constant prices (£million, 2013) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Government Higher Education Research Councils Private Non-Profit Source: Office for National Statistics Business Enterprise Take account of regional and local dimension GVA per head by LEP, 2013 Coventry and Warwickshire, 22,443 The Marches, 18,582 Greater Birmingham and Solihull, 20,969 Worcestershire, 18,454 Black Country, 16,958 0 5,000 10,000 Stoke-on-Trent and Staffordshire, 16,914 15,000 20,000 25,000 Source: Office for National Statistics 30,000 35,000 40,000 45,000 Concluding thoughts • The UK’s productivity problem is deep-rooted and long-term – solutions need to be equally holistic and far-reaching • This requires patience and perseverance from policy makers as well as from business • Investment is important but so is making best use of the assets we already have – capital, knowledge, ideas and skills • This depends on what happens within the business – not easy for policy makers or business support agencies to reach