Don’t blame us – we’re British
It is a long-term UK problem and is not shared by the other major economies, such as the US, France & Germany whose economies all outstrip ours in productivity. Richard Heys of the Office for National Statistics calls poor productivity “the key economic issue of our age”.
Disappointingly, there is also little consensus on the root cause(s) of such an appalling legacy. Some are cyclical, and others are more persistent underlying reasons, but the following are the main contenders:
- Labour hoarding – this is a regular complaint. Unemployment is at a 42-year low, which looks good on paper and is heartening for those in employment. However, firms are maintaining labour levels in anticipation of a hoped-for upturn and there is considerable slack and low utilisation.
- Strength of the labour market – due to a long period of low wage growth (now easing a little), it is comparatively cheap to hire and retain more staff than firms need now. This, it is claimed, has led to higher employment than is desirable or even realistic.
- Under-investment – this is also a legacy or hangover from the credit crunch. Because of the crisis, labour costs reduced but the cost of capital increased, which led to a prolonged period of low or no investment whilst firms merely kept pace through stockpiling workers, often on a temporary or short-term basis.
- Zombie businesses being kept afloat – the long-term low cost of borrowing and tightened regulations has perhaps led to low-productivity businesses being nursed along when they might otherwise have gone under through so-called “creative destruction”. This policy position may have led to greater continuing employment but at very low productivity levels when the resources involved could have been invested elsewhere in more dynamic areas.
- Slow/low innovation – It is believed that the more recent emphasis on innovation being focused on technology will be shorter lived than earlier bursts of innovation and that the potential for this type will not have the same impact as over the last two centuries. This would help to explain why other developed nations have also seen slowing productivity, despite it being less acute than the UK.