At its simplest productivity is the value of output produced per hour or per year by the average worker. The Bank of England is said to be worried because UK productivity is lower than the USA and some countries in the EU, and has not been going up as quickly as before the crash in recent years.
The Bank has struggled to explain why. Let me have a go to help them. It is not all bad news.
The first reason is the sharp decline of North Sea output – which is bad news. Oil production is one of the most productive types of activity as conventionally measured, as oil output has a high sales value, and uses relatively little labour to achieve it, once the wells and platforms are in place. The North Sea is now a province in sharp decline, so we have just lost a lot of highly productive output.
Pre the banking crash, the UK also had a lot of very expensive banking and financial output. This too appeared to be achieved at very high levels of productivity, as each individual investment banker or trader could undertake very large turnover with modest supporting labour input. The fact that some of this output turned out after the event to be loss making does not require the past productivity figures pre crisis to be rewritten, which are flattered by the apparent high turnover and profit announced at the time. Since the crash there has been a deliberate run down of bank balance sheets and activity levels, and the loss of some high end business to centres like Switzerland and Hong Kong where taxes are lower. This has also depressed UK productivity.
The third more positive reason UK productivity has fallen is the success of the UK economy in adding a lot of more labour intensive lower priced service sector activities to its high end manufacturing, commodity extraction and expensive service activities. The French barrister may go to the office and get a coffee from the workplace drinks dispenser. His UK equivalent may stop off for a coffee from a coffee shop produced in a labour intensive way by a barrista. The French may be more productive at getting their coffee, but the UK employs more people and produces a better served product in this example. UK shoppers now expect a much higher proportion of cafe, pub and coffee shop space in their preferred retail centres, with a higher staff ratio for delivering the service.
To the extent that UK productivity has stagnated because we have added a lot of extra lower productivity labour intensive services, that is good news. It means we have much lower unemployment than Spain or France. On OECD figures for 2012 (last I could find) the UK generates $48.5 worth of output per hour worked, compared to $50 in Spain, $59.5 in France, $58.3 in Germany and $40.1 in Japan. The UK is just a little above the OECD average.
However, if you adjust these figures for the levels of unemployment, the Spanish figure drops to $38.5, the French figure to $53 and the UK to $46, as by definition the unemployed are making no contribution to output but do not get included in average productivity.
The Euro area as a whole has similar productivity to the UK. US productivity remains considerably higher than Europe’s. Norway has the highest of the Europeans, thanks to a large oil and gas sector. Switzerland is also high, with a large financial sector.
Raising output per hour is a good thing in most cases. The UK’s very average productivity figures tells us more about the new balance of our economy. It does not mean our best industrial companies are uncompetitive or themselves have poor productivity.