The UK's productivity is dismally low – but can advances in technology explain why?

Hamish McRae
Screen and done: the iPhone was the single greatest change to the world economy since 2006: Reuters

It is just possible that we are moving to solve the great productivity puzzle. If we are that would give us a quite different – and much more positive – perspective on how wealth will increase across the developed world in the future.

The puzzle is well-known and much debated. In the decade to 2006 in most developed countries labour productivity per hour increased each year by around 2 per cent. It was a bit faster in some, with the US growing at more than 2.5 per cent, and a bit slower in others, for in Germany it was only 1.6 per cent. In the UK it was a bit over 2 per cent.

Since 2006 however, the rate of growth of productivity has fallen everywhere. In the decade to 2016, it was 1 per cent in the US, 0.5 per cent in Germany, and right down to 0.2 per cent here. Everyone is doing worse than before, but we are doing worst of all.

This is odd. You could understand the dislocation that resulted from the financial crash of 2008-9 would cause a one-off hit. But we are eight years on from that and you would expect productivity growth to have recovered. It hasn’t, with the result that living standards throughout the developed world seem pretty much stuck.

There are two broad explanations. One is that the great productivity boom is somehow over and that unless and until we rediscover how to crank things up, living standards will stagnate. There is a version of this explanation that applies to the UK, argued by Andy Haldane, chief economist at the Bank of England. It is that the UK is unusually uneven. Our best companies are indeed still very productive and getting better but there is a long tail of mediocre performance, or worse.

There will be something in that, of course, but it does not feel like a complete explanation and in any case would only apply to the UK. The Office for National Statistics has done a huge amount of work on this, and this has thrown up some oddities in the measurement of output. For example, one of the areas where productivity has fallen fast is energy, and that is because huge numbers of people are now employed on renewable energy. More people plus less energy output equals a fall in labour productivity.

The problem is particularly difficult in the service industries. Take finance, another area where productivity has fallen. Here many more people have been hired to cope with tougher regulatory and reporting requirements. Now you can have your own view as to whether this is a sensible use of resources, and some of us think the growth of clunking, box-ticking regulation has been counterproductive. But whether it is necessary or not, it has certainly hit the industry’s productivity.

Again, though, this is a particular UK issue. Since 2006 there has been a technological revolution in communications and that surely must have improved productivity worldwide. That is the second broad explanation: that there isn’t a productivity problem, there is a measurement problem.

The most noted advocate of this in the US is the chief economist at Google, Professor Hal Varian, and since Google is at the very heart of the communications revolution, you might expect that to be the house view there. But come back to the UK, for there is some fascinating work going on with the ONS and the Institute for Engineering and Technology. They are trying to improve the measurement of the communications industries, and since the greatest single change to the world economy since 2006 has been the invention of the iPhone and all that has flowed from it, it may well be that much of the explanation lies here.

As it happens, Ireland has been doing pioneering work on this, trying to improve the measurement of its high-tech industries. This is particularly important for Ireland as it is home to the European headquarters of Google, Apple and Facebook. Its Central Statistics Office has come up with a different calculation for the real gross value added by its high-tech sector that it believes more accurately reflects its contribution to the economy. If you apply the Irish method of calculation to the UK, our national output has been rising just as fast after the recovery got going in 2010 as it did before 2007. The real value added in the UK economy is about £100bn higher than estimated. That would be about 5 per cent more.

If this is right – and a word of caution because this is preliminary stuff – everything falls into place. There may indeed be a problem of the weak tail of underperforming British companies. There are certainly problems of rising inequality everywhere, associated with soaring house and other asset prices. There are skill shortages just about everywhere too, pointing to weaknesses in education and training. But the huge and scary proposition that the great productivity machine is broken is wrong. Phew!

By using Yahoo you agree that Yahoo and partners may use Cookies for personalisation and other purposes