Is the UK’s productivity recovery real, and where will future growth come from?
The UK’s latest productivity figures appear to offer some positive news. After years of weak growth, recent data suggests that UK productivity may be improving.
But do the figures mark a genuine turning point, or are they largely the result of changes in how productivity is measured?
In a new episode of Productivity Puzzles, Bart van Ark speaks to Jun Du, the new Managing Director of The Productivity Institute, about what the latest statistics tell us and what they don’t. Their conversation explores the potential of artificial intelligence, the challenges facing firms as they adopt new technologies, the UK’s position in a changing global economy and the lessons other regions can draw from Manchester’s growth.
Together, these issues point to a wider question: how can the UK turn new investment, knowledge and technology into sustained productivity growth that reaches beyond a small number of leading firms and places?
Is the UK’s productivity recovery a statistical blip?
The recent improvement in UK productivity, due to the new ONS approach to measuring labour productivity, should be treated with caution.
According to Jun Du, the recovery shown in the latest figures is modest and varies according to the measure used. Output per hour increased on the payroll-based measure, while the survey-based measure showed a small fall. This means the short-term signal remains weak.
More significantly, changes to the measurement of labour inputs have revised the UK’s historical productivity performance. By drawing more heavily on payroll and business register data, rather than the Labour Force Survey, the revised figures suggest that productivity growth since the financial crisis may have been stronger than previously thought.
This is important, but it does not mean the economy has suddenly become more productive. The revision alters our understanding of past labour input rather than revealing an equivalent rise in economic output.
In other words, part of the UK’s productivity puzzle may have been a measurement problem. However, the underlying slowdown in productivity growth remains and is also visible across several other advanced economies.
Why is productivity growth becoming harder?
As economies move closer to the technological frontier, many of the more straightforward routes to higher productivity become less readily available. Growth increasingly depends on intangible assets such as software, data, skills and organisational capital.
These assets can generate substantial returns, but they are often concentrated within a relatively small number of highly productive firms. They can also be difficult to finance because, unlike buildings or machinery, they may not provide the physical collateral traditionally required by banks.
This helps to explain some of the differences between the United States and Europe. The US combines deep equity and venture capital markets with a large domestic market and a sizeable technology sector. The UK and Europe have more fragmented capital markets and thinner sources of risk finance, limiting firms’ ability to turn promising technologies and ideas into productivity gains at scale.
The problem is not a shortage of invention. The UK has strong universities, innovative firms and highly skilled knowledge workers. The greater challenge is diffusion: ensuring that knowledge, technology and effective business practices spread from leading organisations and institutes into the wider economy.
Weak management capability, limited investment, low ambition and poor absorptive capacity can leave less productive firms unable to benefit from technological change. As leading firms move further ahead, those already behind risk falling further back.
Why has AI not yet transformed productivity?
Artificial intelligence illustrates the difference between adopting a technology and turning it into measurable economic growth.
Studies of individual tasks have found potentially substantial benefits from AI. Workers can complete some writing, administrative and coding tasks more quickly, with some evidence suggesting that less experienced or initially less productive workers may gain the most. Yet these task-level improvements have not translated into comparable gains across the economy.
This illustrates the gap between using an AI tool for a particular task and taking full advantage of AI’s capabilities.
Jun identifies several stages in this process:
- Adoption: adding an AI tool to an existing task or process.
- Integration: redesigning workflows so that the technology is used effectively.
- Business-model change: reorganising how the firm creates and delivers value.
- Organisation-wide transformation: connecting changes across a wider set of tasks, teams and processes.
Most firms remain close to the first stage. The technology may be present, but workflows and business models are largely unchanged. Without investment in complementary capabilities such as workforce skills, data, management and organisational design, improvements at the task level are unlikely to accumulate into large productivity gains.
Therefore, the question is not simply whether firms are using AI, but whether they have the capacity to use it to its full potential.
How does growth spread through the economy?
Productivity policy often focuses on which firms, industries or places are growing. But an equally important question is how that growth travels.
If investment and innovation are concentrated in a small number of firms or sectors, do they strengthen surrounding supply chains and local economies? Or do they become highly productive enclaves with stronger connections to global markets than to the businesses and communities around them?
Understanding these transmission mechanisms is central to Jun’s emerging research agenda for The Productivity Institute. This means looking:
- Inside firms, institutions and places to understand how they adjust to economic and technological change.
- Around them to examine relationships between customers, suppliers, lead firms and supporting organisations.
- Beyond them to consider how domestic productivity is shaped by the UK’s position in the global economy.
Average economic effects can disguise very different routes of adjustment. One firm may respond to a new technology by purchasing equipment, while another trains its workforce, reorganises production or enters a different market. Others may make no changes at all.
For policymakers and businesses, understanding these different pathways is crucial. It can reveal why the same economic shock or policy intervention produces very different outcomes across organisations and places.
Why the UK’s international position matters
For an open, service-intensive economy such as the UK, productivity cannot be understood solely as a domestic issue. British firms depend on international markets, investment, knowledge and technology, while many apparently local businesses are connected indirectly to global value chains through their customers and suppliers.
Recent debates have rightly placed greater emphasis on resilience, economic security and strategic dependencies. But these are largely defensive concerns. A productivity strategy also needs an outward-looking dimension: identifying where the UK can create, maintain and capture value as trade, industrial policy, technology and geopolitics change simultaneously.
This requires choices about which capabilities the UK should develop domestically, where it should collaborate internationally and how businesses can remain connected to the markets and supply chains that support competitive scale.
The UK’s relationship with the European Union forms an important part of this discussion. However, future options cannot be assessed solely using the conditions that existed at the time of the 2016 referendum. Supply chains, trading relationships, industrial policies and technological priorities have all changed a lot.
What can other regions learn from Manchester?
Manchester offers a useful example of how local institutions, density and international connections can combine to support growth.
The city region has attracted significant greenfield foreign investment, including investment in information and communications and professional services. Unlike mergers and acquisitions, greenfield investment can create new capacity and capabilities rather than simply transferring existing ownership.
Manchester has also invested in institutions and concentrated economic activity around assets such as the Oxford Road Corridor and the University Science Park. This density can help businesses, researchers, workers and investors connect more effectively, while international links give firms access to markets and capital beyond the region.
However, the Manchester model cannot simply be copied wholesale in every place. The appropriate policy depends on the objective.
Attracting internationally mobile investment may require a concentrated and highly competitive proposition capable of competing with leading cities around the world. Achieving wider goals such as equality, wellbeing or access to opportunity may require resources and activity to be distributed more broadly.
The central lesson is not that every place should try to become Manchester. It is that policymakers must be clear about what they want different interventions to achieve and select the right instruments accordingly.
A new agenda for productivity research
The UK now understands more about the inputs associated with productivity and the outcomes they produce. The next challenge is to understand the mechanisms connecting them, particularly during a period of rapid technological, geopolitical, demographic and environmental change.
Jun identifies five closely connected priorities for future research:
- investment and productive capacity;
- human capital and skills;
- technology adoption and absorptive capacity;
- the transmission of growth between firms, sectors and places; and
- trade, supply chains and the UK’s global position.
Across each area, listening to businesses, policymakers and communities will be essential. Rigorous research matters, but so does asking the right questions, responding to real-world concerns and communicating findings in ways that can inform decisions.
The UK’s productivity challenge is no longer only about identifying what is holding growth back. It is about understanding how firms and places adjust, how successful change spreads and how domestic strengths can be connected to opportunities in an increasingly complex global economy.
This blog is based on a conversation between Bart van Ark and Jun Du for The Productivity Institute’s Productivity Puzzles podcast. Listen to the full episode to hear the full discussion about productivity measurement, AI, growth transmission, international trade and the Manchester model.
