Why does the UK have such low productivity compared other advanced economies?

[Fifi1010]

Our economic productivity has grown 0.8 percent per year on average since 2008 compared with 2 percent before. Why is that? High productivity increases the tax receipts , money for schools and healthcare. If we don't improve productivity living standards will further decline. Where have we gone wrong? I know Brexit is a problem but this started 8 years before.

There have been a lot of poor decisions over the last few decades that have contributed. They all come down to successive governments creating an environment where there is poor investment in technology and skills and a low wage economy that means productivity has fallen off a cliff across both the public and private sectors. In the UK private wealth seems to largely be generated by either cost cutting (i.e. keeping workers on low wages and not investing in businesses) or through public to private wealth transfer (which occurs with increasing frequency instead of genuine investment in public services. It is essentially the result of the UK's application of trickle down economics.

This. My opinion as to why Thatcher moved us from being a manufacturing economy to a service one is 2 fold. One to crush the unions who had crippled the UK under both Labour and Tory government.
Secondly the lack of investment in equipment and technology. Read Tony Benn 's diary from when he was a minister in the 1960s inspecting equipment made in the 1860s. The US financed both Japan and German rebuilding in part to remove us from our ddominant position.
Thatcher couldn't come clean on this because it would be seen as an attack on her own support

I think what Thatcher did at the time was probably the correct move. It was the way she did it that was bad. Ultimately, if you are going to take peoples jobs away, you need to offer them alternatives, which she didn't.

At that point in time the UK needed to transition from an economy where people bang stuff with hammers to a more advanced service based one, software, fintech etc. That is the only way to add value, because labour costs for manufacturing in foreign countries undercut ours considerably. We did pretty well at this transition.

Then with Blair and the EU we went the opposite. Lack of investment in robots, manufacturing infrastructure and just imported cheap labour to compensate. This subsidises manufacturing costs, but ultimately the labour has a lot of hidden costs associated with it, houses, schools, medical care etc. And those hidden costs are in no way compensated for by taxes generated by those people that are imported as they are mostly on minimum wage.

So we are now at a stage where we lack robots, technology and investment in manufacturing infrastructure which is why our productivity is so low.

People talk about stuff like the UK can't grow its own food, its too expensive here and now we have left the EU we cannot get fruit pickers. But the Dutch seem to manage it without the cheap labour force. So how ? Well probably because their farming in very high tech, with glass houses and controlled environments and they invest in the technology. Whereas we just get a lot of low paid workers in to pick fruit by hand and our farmers buy Range Rovers instead of investing in technology, then complain when they aren't subsidised enough to compete with the rest of the world.

We are or have been a very unbalanced country in many respects. These things go in cycles, and the rebalancing is just beginning. We'll probably have another 5 years or so of adjustments, and then start to move forward again in a much more balanced way than before. Hopefully with lower living costs (housing in particular) and greater investment in technology.

Nobody's getting paid enough compared to the cost of living. Whats the point in working hard for fuck all?

Tax. No point working more to be worse off. The UK has lots of cliff edges where this actually happens. The chancellor was told this is a significant reason for poor productivity by research he commissioned.

However, the glimmer of light on the horizon is that the UK has just joined an even larger free trade bloc than the EU: the CPTPP which represents over 16% of global GDP.

The GDP of the EU is around $17 trillion. The GDP of CPTPP is $13.5 trillion. It is not "an even larger free trade bloc than the EU".

The GDP of Japan, Canada and Australia makes up most of the GDP of CPTPP, and the UK already has FTAs with Japan and Australia. The GDP per head of the other countries is far lower and average wages are far lower than in the UK, so UK factories will be competing with factories paying in Mexico, Vietnam and elsewhere paying workers £50 a week. Joining this trade bloc will bankrupt UK businesses and put thousands of UK workers out of work, and just how many bottles of Scottish whisky or "British" cars does Badenoch think these people will be able to afford on £50 a week?

And to compound the idiocy, trade disputes will be settled in secret Trade Courts, in which corporations will be able to sue the UK government if legislation is brought in that affects profits. Leaving the EU was a bad move, but to join the CPTPP and place UK trade policy in the hands of another, secretive group of "unelected bureaucrats" will be even worse.

I remember, many years ago, reading a comparison between two manufacturing companies - one in Germany and one in the UK. They produced the same products to equal quality standards, and sold at roughly the same price as the market was international. They both used the same production machines and shop-floor productivity was almost identical. The main difference between the companies was that the UK company had over twice as many non shop-floor employees, with more sales, HR, accounts, managers and directors. The German company's overall productivity was thus much higher and they could pay higher wages and still make greater profits.

Your opinion, but many of these economies are growing faster than ours. The EU wants to control the industry standards, work T&C and legal frameworks in a manner that hamstrings outsiders. And the value of the EU economy, as a proportion of global trade, is waning slightly relative to other groups, as world trade ebbs and rises. I am not cheerleading but I do see advantages in having free trade deals across the world.

And @Havanananana , the UK is not going to be selling mass-manufactured widgets into these markets. We shall be marketing computer games and intellectual property.

But Vietnam and Mexico will be selling mass-manufactured widgets, food products and confectionary into the UK market, bankrupting the UK companies in these industries and putting thousands out of work.

The Japanese are experts at computer games - and local language versions will still be produced in the Far East, not in the UK. As for IP - how many people in the UK are employed in developing new products and processes? A few thousand at most, leaving manufacturing and agriculture to go the same way as UK shipbuilding, steel-making, aerospace, motor manufacturing etc. If only high-skilled jobs remain, how will those in the UK with lower skills earn a living and how will they afford to buy all the wonderful cheap imported products if they have no money?

But these economies are growing from a far lower baseline, so if the wage of someone in Mexico increases from £50 a week to £55, while it is true that his wage and spending power have increased by 10%, it is still far below that of workers in the 27 EU countries.

The EU wants to control the industry standards, work T&C and legal frameworks in a manner that hamstrings outsiders.

But that is exactly what the CPTPP does as well - with far lower standards than those currently acceptable in the UK and the EU - with the added problem that trade disputes will not be handled in public, but will be settled in secret trade courts to which even Parliament will not have access.

If a company from Canada believes that UK minimum-wage legislation is stopping it from making a profit in the UK, it can sue the UK government for millions, effectively taking control away from Parliament and giving it to unelected secret courts and the corporations. At least within the EU, the UK had a voice and had judges on the various European Courts, the decisions of which were open to public and Parliamentary scrutiny. Giving this power away will be an economic and political disaster for the UK.

Yes, I accept your reservations on the legal framework, but the Canadian company still has to persuade its Uk workforce to work for below market wages, and why would they?

The UK is a world leader in computer games. Among the world leaders in designing, developing and marketing them too. If we are clever enough to do that then we should be shit hot at making sure we profit from them as well? Or am I delusional?

There are IMO so many jobs that could be part time but are full time. I used to have one, I could have quite easily done it in three days….but most people need five days wages. I reckon this is true for loads of jobs…but it’s known that most need an f/t income to survive. I wasn’t productive on the other two days as the job didn’t lend itself to that.

So we have people in jobs that are unnecessarily f/t because you can’t live on a p/t wage.

This thread confuses me. I barely understand what "productivity" means and I have half a degree in economics, I definitely couldn't answer the question. Yet so many people here are confident.

20th in 2017?
or maybe 7th in 2017.
13th in world in 2020?
FT article that says "mediocre" not terrible.

better question, what do others have that UK lacks?
I don't think comparison to tiny states like Singapore or Luxembourg helps, they have too unique situations.

Ireland has high productivity because of low corporation tax (apparently).
Norway has high skill, well educated workforce, but also very supported/good workers rights.
Switzerland adds high value & is highly integrated into global economy (banking).

Switzerland & Ireland are services economies, aren't they? I don't think UK being a service economy is the problem. USA, France & Italy have plenty of lazy people, USA is especially young. Japan is old. Don't think it's a generational problem.

Brexit has definitely made us far less productive.

Lack of investment in equipment, staff training, technology, innovation, etc. What should be spent on investment goes to shareholders, bonus etc. I think the "prioritise the shareholders over everything including the company's viability" trend has been going on for decades worldwide but it seems worse in the UK.

Apart from that the UK did worse than most comparable economies since the 2008 recession. And then, Brexit.

No it doesn't. CPCPP is designed to allow the Canadian/Australian/Mexican etc. business to set wages in the UK. In this case the Canadian company can sue the UK government for imposing a minimum wage that makes the business less profitable (and if it wins, the UK taxpayer ends up paying) - and if the corporation wins, it can say to the employees that the job now pays £x an hour, and if you don't accept this, we'll close the factory. Either way, both the employees affected and the UK taxpayer lose out - and the taxpayer and Treasury also lose out as the sacked employees will cease to be taxpayers themselves and will instead be receiving support and benefits from the Treasury.

Meanwhile the Canadian company transfers production to Vietnam, pays the employees there £50 a week and now has tariff-free access to the UK market.

There are two aspects to this -

Productivity expressed in output per hour worked ($ / hour of work) in UK is relatively low compared to many of its advanced economy peers, say, the likes of US, Germany, Netherlands, France, Belgium, Denmark and so on.

See here for a chart comapriing UK with some other OECD member countries https://ourworldindata.org/grapher/labor-productivity-per-hour-pennworldtable?tab=chart&country=GBR~USA~FRA~DEU~NLD~SWE~DNK~AUT~BEL~GRC~PRT~POL~FIN~HUN~CZE~RUS&region=World

This fact translates to comparatively lower standard of living in UK, lower wages, lower government revenue and so on.

But as the chart shows, this had been so for many decades. By 1970s several of our European neighbours had pulled ahead of UK, triggering the famous despatch from Sir Nicholas Henderson, UK's ambassador to France, in 1979 about British decline and its causes. Leaked almost immediately, but declassified only in 2006, this is still an interesting read -
https://www.margaretthatcher.org/document/110961

The second aspect is that productivity growth since the global financial crisis in 2008 had been much lower than previous trend. (this is also true for most other advanced economies, but UK situation is more acute)

This is a much bigger problem because it contributes to stagnant wages, rising pressure on government budget etc. In the absence of productivity growth, the pressure on NHS, school budgets, elderly care etc will continue to worsen, especially now when percentage of retired people in UK population is going to rise for next few decades.

The near stagnant productivity growth since 2010 is a puzzle. Number of studies have investigated various causes behind it and none have been able to fully explain the gap between trend UK productivity growth before the 2008 crisis and the actual now.

There is one constant though whenever UK low productivity is disussed - low investment (both private and public sector). Among OECD economies, UK's investment as a share of GDP is much lower than OECD average or most of its peers.

Here is quick comparison of UK investment as a percentage of GDP compared to few other countries and other high income economies - https://data.worldbank.org/indicator/NE.GDI.FTOT.ZS?locations=GB-FR-DE-XD

The chart shows that lower investment in UK had been theme for at least 30 years. So that alone cannot fully explain stalled productivity in the last 12 years. But higher investment, either from government or private sector will certainly help.

Few other explanation I have come across are -

Very low interest rate environment since 2008 allowed many firms that would have otherwise gone bust to survive, locking in labour and capital in relatively less productive activities.

Simiarly too, labour market churn since 2008 had been much lower than before.

But as said before, none of these fully explain the gap between current productivity growth and previous trend.

I am really enjoying this conversation. It's very depressing of course but it's so heartening to hear so many women with such intelligent points of view.

Thank you @justanotherdaduser for the link to the Nicholas Henderson memo. I haven't ever seen that, because (I assume) that when it was being circulated, I was living overseas. It really brings home the limited intellectual quality among our politicians (of all parties) and the enduring obduracy of the Treasury and the unions. I have only skimmed it, but will read it properly.

It's a fascinating read, if only for the history. Hope you enjoy it

Henderson was retiring and this was meant to be his valedictory despatch, probably why it was so unusually forthright. Economist leaked it the same year causing some embarassment for the Callaghan government at the time.

Margaret Thatcher invited him back from retirement to serve as ambassadtor to Washington where he played a key role during the Falkland war.

The low paid jobs were there BEFORE the tax credits. The abolition of the wages councils led to that as predicted. So if tax credits were abolished do you really think employers would step up and pay more. Because they didnt after the wages councils were abolished in 1993

15th December 1992.

" ONE in four workers who approached the Scottish Low Pay Unit in the

past year was being paid below the legal minimum rate set by the wages

council.

This fact was highlighted in a ''Food for Thought'' survey carried out

for the pay unit by Roy Wood, senior lecturer at the Scottish Hotel

School in Strathclyde University.

The report comes at a time when the Government is intent on pushing

through Parliament legislation which will abolish the 26 wages councils

still in existence.

Wages councils were established in 1909 with the support of Sir

Winston Churchill who told the Commons it was required to protect

low-paid workers from unscrupulous employers.

But the present Government denies the lower paid require this

protection. Michael Forsyth, Minister of State at the Department of

Employment, who is responsible for the Trade Union Reform and Employment

Rights Bill which covers the abolition of the councils, wrote in a

letter date December 10: ''There is no good reason to believe that the

abolition of wages councils will lead to widespread reductions in pay .

. . It is of little help to workers to saddle employers with

bureaucratic requirements which do nothing to encourage enterprise and

initiative.

The letter went on: ''Most of the workers covered by wages councils

are not poor; many work part-time and live in households with two or

more earners.'' Mr David Stark, the recipient of the letter, and an

official of the Transport and General Workers Union, however does not

agree with the Minister.

He said: ''Unfortunately there are a number of unscrupulous employers

who will take advantage of the absence of wages councils to cut wages.''

The author of the survey, Mr Roy Hood, said: ''I believe wages will

decline. Some employers will cut the hourly rate and there will also be

a general decline in the real value of wages over a period of years.''

The Scottish Low Pay Unit believes that existing evidence does not
back up Michael Forsyth's assertion. It points to numerous workers who

are not covered by wages council rates and who earn even lower than the

average of just over #3 an hour set by the councils.

It has examples of security guards who earn #1.70 an hour and have to

work 100 hours a week to earn a wage. It points to young receptionists

who are paid as little as #1.50 an hour, and the worst example of low

wages which the unit has on its file is that of a third-year apprentice

car mechanic who is paid #1 an hour.

Morag Gillespie, of the Scottish Low Pay Unit, said: ''There is

considerable evidence which suggests that once wages councils are

abolished wages will indeed be cut. The latest checks show that one in

10 workers covered by wages councils are underpaid. Take away the

protection of the councils and the wage levels could plummet even more.''

More than 200,000 Scottish workers are covered by wages councils

including those in hairdressing, retail trades, hotels, and restaurants.

Wage rates set by councils vary between #100.81 for a 39-hour-week in

the button manufacturing industry to #120.90 in tailoring.

David Stark, who is a member of the aerated waters wages council,

explained how the councils operate. He said: ''The councils are made up

of equal numbers of employers' and workers' representatives plus three

independent members who are appointed by the Secretary of State for Employment. Both sides put their case for a new wage rate to the

independent members then retire to separate rooms. ''Independent council

members can call either side back in and ask for further information.

The independent chair then puts their proposals to the full council and

it is voted on by both sides. This means that the new rate is set by the

independent members.''

At the recent aerated wages council of which David Stark is a member,

the council agreed an 11p hourly increase giving new hourly wage rates

of #3.08 -- #123.20 for a 40-hour week. He said: ''We are fortunate that

in this industry most of the large companies have trade union agreements

and the council rate is only a benchmark. But in many other industries

where there are no union agreements employers will exploit the absence

of the council.'

Michael Forsyth does not agree. In his letter he writes: ''Without the

councils, wage rates will adjust to suit local economic circumstances .

. . businesses themselves are best able to judge what they can afford

and what levels of pay are necessary to recruit and retail suitable

employees.'' The Government expects to guide the legislation through

Parliament within the next nine months and be in a position to abolish

the councils a few weeks later.

The Low Pay Network, which is campaigning to save the wages councils,

believes it is a contradiction for Mrs Gillian Shepherd, Employment Minister, to have overall responsibility for this legislation when she

also has responsibility within the Cabinet for women's issues.

It points out that the industries covered by the councils ''tends to

employ significant proportions of women especially on a part-time

basis.''

Winston Churchill, in his capacity as President of the Board of Trade,

was responsible for introducing wages councils and had this to say on

the subject. ''. . . where you have what we call sweated trades, you

have no organisation, no parity of bargaining, the good employer is

undercut by the bad, and the bad undercut by the worst . . . where these

conditions prevail, you have not a condition of progress, but a

condition of progressive degeneration.

But then Sir Winston always was a renegade!"

Not sure this is the issue. If those retail jobs exist it doesn’t matter whose little darlings work them the productivity level is the same.

So are people arguing for reducing hospitality, retail and call centres as sectors?

And increasing manufacturing etc?

I’m not sure why the latter is looked up to, I recall a piece on China saying what they want to do is less of being world’s factory and more of world’s ideas and services.

In some ways what the U.K. offers.

Maybe it’s easier to think of which sectors people want to grow and which they want to shrink.

Some have higher productivity than others - I think finance, creative sectors and engineering do quite well?

While at Uni, I got a summer job in a factory drilling holes in bits of metal used to make bus conductors' ticket machines. The machines I was using had been made before WW1!