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Improving our productivity

This week’s press has carried suggestions that the UK economy is broken.  The most obvious way in which this is true is our poor productivity. By this economists usually mean the value of goods and services produced per hour of the labour involved in producing them.

UK productivity has been lower than that in the other G8 economies for decades and is now 35% poorer than Germany’s and 30% poorer than in the USA. In other words, it takes British workers five days to produce what their German counterparts take four days.

It was not always so. Twenty years ago our productivity was better than Germany’s and on a par with America’s. If we had maintained that the UK population could be 17% better off than we are today. Philip Hammond recognised this in his first Budget and tackling this is arguably his number one challenge.

The financial crisis of 2008-9 and how firms responded to it is to blame for our poor productivity. In the US firms laid off employees when the crisis hit them but UK firms did not and nor did they invest in new technology to increase productivity. The Bank of England’s interest rate cuts also helped inefficient ‘zombie’ firms to stay in business. Another factor was the change in the economy away from manufacturing goods to more emphasis on services. Falling output from the North Sea oil platforms is also a factor.

 So what can be done to improve our productivity? Individual firms can improve their productivity by investing in new machinery that speeds up production. Artificial intelligence and robotics can be used to replace low skilled workers, to do their jobs faster, more efficiently and cheaper than human labour. Firms can also employ more highly skilled workers and train their employees to be more efficient and produce a higher quality of output. Former Chancellor George Osborne observed that “we are one of only three OECD countries where the skills of our 16-24 year-olds are no better than our 55 to 65 year olds”. Schools can also prepare pupils to handle change and innovation more flexibly. More apprenticeships might also help. Some economists argue that a long term drift in management incentives has not helped and think that the use of bonuses create a short-term mentality. They advocate the payment of better salaries rather than bonuses.

Nationally, the Government can improve road and rail transport, speed up broadband and raise interest rates to drive those inefficient ‘zombie’ firms out of business. In his last budget the Chancellor created a £23billion national productivity investment fund. Better labour relations to prevent major long-lasting strikes like that on Southern Rail would improve productivity. For example, 788,000 working days were lost through large scale public sector strikes in 2014.

Brexit increases the need for action to improve our productivity. The imposition of tariffs on British goods once we leave the single market will make British goods more expensive and less competitive.  Finding new markets and agreeing trade deals with other countries will take time and until that is done our exports will decline as a proportion of Gross Domestic Product and delay any improvement in our productivity. In recent years domestic sales, often paid for with credit cards, have sustained a demand for British goods and services but inflation and pay caps are cutting this back.

There are no quick fixes but better management, more investment in the right machinery, more training and more investment in infrastructure are the way forward. So too are the attitudes we take to work, whatever our roles and responsibilities.  Work undertaken in the right spirit confers dignity on humankind made in God’s image.