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An economist’s brief guide to improving UK productivity

By Nigel Driffield

Nigel Driffield

Nigel Driffield is Professor of International Business and Deputy Pro Vice Chancellor for Regional Engagement at Warwick Business School. He also leads The Productivity Institute’s organisational capital research theme.

At the end of last year, the UK was officially in recession. The economy shrank by 0.3 per cent between October and December 2023, after a previous contraction between July and September.

New figures for January 2024 show a slight improvement with a small economic growth. But there is nothing to indicate that the UK has made meaningful progress when it comes to productivity growth – and how the amount of goods and services produced in the UK need to rise if living standards and wages are to improve.

Productivity growth – that is an increase in output per hour worked – in the UK has been virtually non-existent since the financial crisis of 2008. The productivity growth rate lags significantly behind countries like Germany and France, and even further behind the US.

Producing higher productivity is not easy. Having researched this area of the economy extensively, I’m acutely aware of the challenges facing firms which are trying to be more productive. They include everything from investment levels and access to research and development to regional inequality and a shortage of skills.

But there are some things that could be done to improve the situation. And two of the most important ones are greater investment, and a more localised approach to the national economy.

For example, one major problem in the UK is that its labour market prioritises what economists call “flexibility” – allowing firms to hire and fire employees fairly easily (compared to say with France, where it is more difficult) – and getting people into entry-level jobs. It is much less focused on training and development.

Major investment in training at all levels, from basic skills through to high-level technical and managerial skills, would increase labour productivity. It would allow greater job mobility, which in turn leads to a better match between demand and supply.

The UK also needs to invest in what’s known as ‘capital equipment’ – the stuff that businesses use to produce things. For a building company this might mean buying a JCB digger instead of shovels, or for a dressmaker it could be buying a sewing machine. Put simply, if UK industries had more kit and technological advances, the productivity measure would improve.

A recent change to capital allowances which allows firms to offset investment against tax is welcome. But companies need to know that this will stay, and not be subject to political changes and inconsistent economic policy.

Investment needs to be locally driven for UK average growth boost

So money needs to be spent, and investments need to be made. But another crucial element is that the money needs to be invested locally, in the places where people actually live and work.

To be truly beneficial, this needs close collaboration between local authorities, education providers and the private sector. Local knowledge about where certain sectors are being held back, what skills are required and where they are needed, is fundamental.

Local authorities should be able to address these issues, rather than having to defer to London constantly. This means doing two more things (neither of which have ever had national government support).

The first is simplifying the workings of local government, which is notoriously complex and a constant drag on regional productivity.

And the second is helping those local governments financially, not just in terms of the current funding crisis, but also by allowing them to plan investments in skills and infrastructure over the long term, rather than having to bid piecemeal for short term funding.

It is clear to me from the work I have done in the West Midlands area of England that the UK economy is far too centralised. Everything from access to finance and venture capital, to investment in skills and infrastructure is heavily skewed towards the south east.

Away from that region, the UK has a low level of what economists call “agglomeration economies”, where a particular industry is concentrated within a geographical area, and supported by decent infrastructure and a good supply of skilled workers.

Compared to Germany or France, public transport in the UK is expensive and patchy, meaning people in towns often can’t access employment opportunities in cities that are relatively close by. This means that we see high levels of inequality over short distances, where poverty exists close by to great wealth.

This kind of imbalance could be addressed by combining increased investment (both public sector and private) with a much greater willingness to understand the various British regions that make up a currently disunited kingdom.

These two steps would make the whole economic system more resilient, and in the long run, more productive.

Read the original article at The Conversation.