Fixing the puzzle of the UK’s long-term stalled productivity growth

Bart van Ark, Professor of Productivity at The University of Manchester and the managing director of The Productivity Institute explains how world-leading research and inform businesses and government policy.

Why focus a £32m research grant on the UK productivity puzzle?

The issue is not new, and despite the ink that has been spilled and words that have been spoken, productivity growth has stubbornly stalled in recent years. Productivity is important from a purely monetary perspective: if production per hour worked since 2007 had increased at the same rate as in the 15 years before, today’s economy would have been some £300bn larger, equalling an average of £11,500 per household.

But that’s not the whole story. Nobel price-winning economist, Paul Krugman, once quipped: “Productivity isn’t everything, but in the long run it is almost everything.” That statement is no overstretch.

Productivity helps businesses to use their resources efficiently, freeing up money for investment in new business activity and jobs. Productivity supports workers’ incomes. And productivity helps society as the proceeds from technology and innovation spill over to other parts of life, including healthcare, education and smarter ways to clean up the environment.

Better understanding

Yet in recent decades many of those mechanisms have broken down. Why? There are many reasons. We may be mis-measuring the real productivity gains in a predominant services economy with a larger share of output being delivered in digital format.

For example, how much do free apps and streaming add to productivity? And how do we compare the productivity of a gig worker with that of a traditional factory worker? Perhaps the productivity debate has been too much dominated by economists.

Modern day economists have gone well beyond traditional neoclassical models by incorporating technological change, innovation and market imperfections in their thinking. Other disciplines can help though to get to a better understanding of what motivates people to invest in education and training.

Why companies flourish in one place and not in another. And why productivity gains seem to have helped profits more than labour income, and why the latter has become increasingly unequally distributed.

Reducing productivity gaps

We also need to tackle the unusually large productivity gaps between regions and nations in the UK. Businesses are often facing too small markets. There is a lack of coordination to scale up, raising important political economy questions about the benefits and challenges of devolution.

Finally, businesses (and perhaps even policy makers) have become captured by short-term thinking and are driven more by quarterly earnings than by long-term growth objectives. This hampers reaping the long-term benefits from innovation, and goes against the grain of building a net-zero carbon economy.

No single bullet

There is no single bullet to resolve the productivity puzzle. We need multiple disciplines to help understand the causes of the puzzle. We need a comprehensive and coordinated approach to strengthen productivity with research, business and policy in the room. And we need to focus on the long-term economic and social benefits of productivity, and better manage the short-term trade-offs.

If the £32m investment in The Productivity Institute makes us smarter about the key drivers for productivity growth and contributes to policies and strategies that help reverse the slowing trend, it would be money well spent.

This article was first published in the Alliance Manchester Business School Magazine, Issue 07