How Can The UK Address The Productivity Gap?

What is the ‘productivity gap’?

A productivity gap or sometimes referred to as the “productivity puzzle” is the difference between one county’s productivity levels, as measured by output per workers or output per hour worked, in comparison with the country’s main export competitors.

According to the Office For National Statistics, the UK is falling behind when comparing against other G7 Nations in terms of productivity.

Five key points from their survey:

  1. Output per hour worked in the UK was 15.1% below the average for the rest of the G7;
  2. Output per worker in the UK was 15.4% below the average for the rest of the G7;
  3. The UK had above average productivity growth in both output per hour and output per worker;
  4. Output per hour was overall lower in all G7 Nations;
  5. The UK’s productivity performance was almost double that of its G7 counterparts – at 15.8% – compared to the average of 8.8%;

Why does the gap exist?

Quite simply the UK is, compared to our main economic rivals, not very productive at all. In fact, the UK is a huge 25.6% less productive than our neighbours, Germany.

The largest gap was between the UK and USA, where we saw the UK’s output per worker reach an incredible 26.5% less, with only Italy performing even worse.

If we look at these figures, alarmingly, we can see that Germany and the US are producing the same levels as the UK by a Thursday afternoon! This really is a sobering thought.

Source: 2:

Economists have identified six main areas for why we are lagging behind:

  1. Capital Investment. Low rate of investment by UK firms and many do not operate at the cutting edge of technology;
  2. Banking crisis. Affecting the lending to companies who want to expand and grow;
  3. Slower rates of innovation. The UK has a low level of Research and Development spending (less than 2% of GDP annually);
  4. Skills and Wages. There are huge skills shortages in many key industry sectors with three quarters of UK manufacturers struggling to recruit skilled workers in the last three years. Wages have been falling in the UK in recent years and could be a main factor in the downturn in production with motivation being a leading factor;
  5. There are relatively low levels of market competition, with the existence of a monopoly market, however, many large companies are finding that nearly all key suppliers are based outside of the UK;
  6. Demand. Underutilisation of resources caused by low aggregate demand of final product;

In short, the FT video states that Engineering companies will now have to find 182,000 people every year until 2022 to cover retirement and expected growth, which is already a 55,000+ deficit and Brexit will make it even harder to recruit from European countries.

So, what can be done?

Some of the large blue chip companies can help or are helping;

BAE Systems, the defence company, is opening a £16m training academy, which will train 200 apprentices per year, which is the biggest single investment in the aerospace industry ever seen. This will open up to hundreds of suppliers who simply do not have the funds to run one themselves, with technology such as 3D printing and robotics involved.

Jaguar Land Rover has poured billions in to it since taken over by Tata Motors but still they struggle with skills shortages and bad infrastructure.

The identified areas that need to be addressed to get anywhere near to solving this crisis are: Education, Skills, Investment, Infrastructure and Management. It needs to be across the spectrum to be effective: if you have a highly skilled workforce but no infrastructure and poor management then it will not work and similarly you could have top level investment and infrastructure but without any educated and skilled workforce then it is rather pointless.

No wonder the forecast is looking rather bleak with growth estimated at 1.2% by 2022.

Hobut would love to hear about your views and suggestions on how you think productivity can be improved and close that gap to make the UK proud once more.