Unit 2 Macro: UK Productivity Gap Grows

New figures that make international comparisons of productivity suggest that the UK is once more fallig behind efficiency improvements made in some of our major trade rivals. The productivity gap is regarded by many as one of the key supply-side weaknesses in the British economy.

According to the Office for National Statistics, output per hour worked (a measure of labour productivity) in the UK was 15 percentage points below the average for the rest of the G7 industrialised nations in 2011, the widest productivity gap since 1995. On an output per worker employed basis, UK productivity was 20 percentage points lower than the rest of the G7 in 2011

International Comparisons of Productivity, 2011

GDP per hour worked, UK = 100

The deep recession of 2008-09 and the sluggish recovery since then also seems to be having an effect on productivity. The ONS reports that, since the start of the recession in 2007, UK output per worker has fallen by a cumulative three percentage points. This is the weakest of all G7 economies apart from Italy.

Reading:

Jobs figures and the productivity puzzle (Guardian)

The productivity problem (Chris Dillow, Investors Chronicle)

Background on productivity

Productivity measures the relationship between inputs into the production process and the resultant outputs.

Productivity can be measured in several ways: e.g.

1. Output per worker or hour of labour
2. Output per hour / day / week
3. Output per machine
4. Unit costs (total costs divided by total output)

Higher labour and capital productivity can provide the economy with a number of advantages over time.

Lower average costs:

Improvements in labour and capital productivity allow businesses to produce output at a lower average cost (i,e exploit economies of scale) These cost savings might be passed onto consumers in the form of lower prices, encouraging an expansion of demand, higher output and possibly an increase in employment.

Improved competitiveness in international markets:

Productivity growth and lower unit costs are key determinants of the international competitiveness of British firms in domestic and overseas markets. From improved productivity, businesses can develop (or protect) a competitive advantage in markets where there is intense price and non-price competition from overseas suppliers.

Higher profits:

Efficiency gains resulting in rising productivity are a source of larger profits for companies. These profits might be re-invested through higher capital investment or research and development.

Higher real wages:

In the long run there is a positive relationship between improvements in labour productivity and the real wages paid to labour as a factor of production. Millions of employees in the modern labour market have some element of performance-related pay in their overall earnings package.

Long Run Economic Growth:

It is clear that the capacity of the economy to produce goods and services depends on the stock of factor resources available (i.e. the active labour supply, the stock of capital inputs and natural resources) plus the productivity of those factors.