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.

In a nuitshell, lack of automation. Employing cheap labour instead of machines means it takes more UK workers to produce a given item/complete a given task that workers in more automated counties. Hence our productivity per head is dire.

because the technology thats replaced humans is shit. Constantly breaks, doesn't work as intended and needs a million workarounds.

Dh works in a factory. They had someone try to sell the company a piece of equipment to do dh job, except, it could only do half the job and was much slower. They kept dh.

Just what I was going to say

Short contracts mean always looking for a new job rather than concentrating on the current one. Private equity takes money out of business rather than investing. Complex life admin hours on the phone to several people to get anything done. Tendering means contracts go to the cheapest rather than the most competent

The £100k is only one cliff edge. There's also the one at £50k which affects a lot more. There's also the benefits cliff edges at much lower income levels which affects huge numbers. Add up all the people at each cliff edge and you'll come up with a pretty significant number of workers/potential workers.

That's because UK managers go for the cheapest option or the option that has the best sales people.

One of the problems with tendered contracts is that the company needs to be big enough to have individuals whose sole job is co-coordinating and writing up paper work for tendered contracts. (I work with firms who have to do this.)

My local area use to have small firms do the local council gardening. The council decided to combine with another council to "save" money and find one firm to do it all. This meant any company who completed the bid now had to complete more paper work with examples of when they handed contracts that big. So unsurprisingly the small firm didn't bother tendering. The winner was a big firm and the first month they took over it was interesting watching their "gardeners" mow. Some of them clearly had never used any lawn mower before. The council then got loads of complaints from the public about the state of the grass, verges, hedges, etc.

All so very true. Smaller firms simply don't have the experience/resources/time to prepare "professional" bids for public sector and other big contracts. It's all about dotting the i's, crossing the t's, ensuring the right "words" are in the right places, the right policies in place, etc.

I had the job of doing grant claims for the firm I worked for in the 90s. They were an absolute nightmare, and it was all about matching exactly your application against the published criteria and ensuring your bid matched exactly what the awarding body was expecting to see. That only comes with experience. Once I got a grant claim knocked back by a quango because our application had included the purchase of a particular piece of equipment, let's say the Acme 101x - in reality, the bid took so long for them to approve, the 101x had been superseded by the 101y and we couldn't buy a 101x, so bought the 101y instead which was basically identical, similar price, did the same job, but just a few "tweaks" from the manufacturer. Grant was denied because we didn't "meet the conditions" which was to buy exactly what we had applied for! No amount of persuading, letters from supplier, marketing literature from manufacturer would persuade the awarding body!

Same today with a local theatre trust I work with. The trust spent best part of 20 years trying to get grants to renovate it. Always knocked back. They had a change of management and one of the new trustees was experienced in grant applications, they got awarded the first grant they applied for, for millions! But then, they had trouble finding "acceptable" contractors to do the work, as the bids had to be approved by the awarding body, and all the bids from local contractors, which the trust members knew and trusted, and which were acceptable by them, were rejected by the governing body, for reasons such as not having an adequate anti-bullying policy in one case, another contractor rejected for not declaring the number of disabled employees and gender analysis.

It's nothing to do with whether they can do the work at a suitable price - it's all political and woke these days, and small firms simply don't know how to do all the nit-picking, box-ticking, etc - they are too busy doing the work than to spend all their time doing all the nonsense. The end result is that the "professional" firms get the work and usually do a crap job of it, and probably 2 or 3 times the price, because they've got to employ a small army of people just to write "professional" contract bids containing all the nonsense required.

Yes, this

Well yeah it is - the chancellor himself commissioned research into poor productivity and our tax cliff edges were a very clear problem.

I think you've just described most public sector procurement there.

Larger firms that write good tenders and then pull in cheap untrained labour to do skilled jobs badly and charge public sector bodies extra when they complain about the quality and want it sorting out. Bane of my life.

From a purely mathematical perspective, the increase in the labour market participation rate caused it (productivity is output divided by number of hours worked). The share of people in the labour market has risen (until psot-Covid) faster than output rose. Women working more and the post EU expansion arrival of lots of young working age eastern Europeans added to the potential workforce size.

So the question is then why doesn't more hours worked equal matching growth in output?

1. the government effectively subsides low wages so the cost of adding more low-paid workers is not that high for companies. The employees will get topped up by benefit system and we tolerate low standards of loving.

Which leads on to

2. companies don't invest in measures in improve productivity because they've found it cheaper to hire more workers instead.

The amount of investment made by businesses is low compared to other countries. That's not just about buying big machinery in factories but in the service sector as well - billing, admin, data, customer management, logistics etc.
Construction sector is very inefficient - dominated by small or even one man band companies and so doesn't scale up or incentivised much investment in improved equipment or processes

Businesses also aren't training their employees - again, the government doesn't make them do it (via mandatory apprenticeships or training budgets) and the economic benefits are not clear cut enough for them to do it.

"the chancellor himself commissioned research into poor productivity and our tax cliff edges were a very clear problem."

Which chancellor? The current multi-millionaire one? The one before him, who has no qualifications or experience in economics or industry (he's an academic) and who nearly crashed the economy? Or the one married to a gazillionaire, who doesn't know anyone who is working class and who is now PM?

The cliff edges are only a problem for those few affected - not for the millions of people for whom the challenge is finding a job that pays enough to keep a roof over their heads, and keep warm and fed.

@Lostinalibrary , regarding this :
"Well yeah it is - the chancellor himself commissioned research into poor productivity and our tax cliff edges were a very clear problem."

Could you please share a link to the report or its name? (I couldn't find)

While they can certainly impact labour market participation decision at individual level, I would have imagined at worst the effect will be marginal, if at all detectable at national economy level.

But if these are identified as one of the major causes of U.K.'s stagnating productivity, I am curious to learn about the transmission channels through which tax cliff edge affect productivity and how that estimate was made.

How are we defining cliff edges? Because if it's just about tax, that would be missing out a significant number of situations where people choose to work less because it isn't worth their while. And those happen all across the income spectrum.

It might be a person on UC working part time for NMW who isn't going to be any better off practically from doing the extra day once you factor in reduced top up benefits and free school meals. It might be someone who doesn't want to take the extra contract on because once they go over 50k, it's not worth their while when they lose child benefit as well as hit 40% tax. It might be someone who's going to lose 15 of the 30 free nursery hours when they go over 100k and be worse off for doing it. I haven't seen the report and nor do I claim to know exactly what the impact is, but I'd hope any government research has a wide scope.

I'm also not sure that only small numbers are affected, because even using the tightest definition of cliff edges there's a ripple effect. I'm pretty much certain never to earn 100k, but if I have to wait longer for medical treatment because the NHS doctor I need won't do the extra shift if it takes her over 100k, that's impacting me. These decisions don't only affect the people taking them.

@BashirWithTheGoodBeard

How are we defining cliff edges? Because if it's just about tax, that would be missing out a significant number of situations where people choose to work less because it isn't worth their while. And those happen all across the income spectrum.

Fully agree, it can't be just about tax, it has to be about NIC and benefits too, as there are "cliff edges" throughout the income range.

One of the best things recently done has been raising the employee NIC threshold as that was definitely a threshold that disincentivised part timers from working more hours. All they need to do now is raise the employer NIC threshold too, and that will incentivise employers to give their part time staff more hours!

But yes, the thresholds and reductions in tax credits and universcal credit need to be looked at and the "tapers" need broadening so that claimants don't lose as much benefits for straying slightly over the thresholds. Likewise with free prescriptions, council tax relief, housing benefits, etc.

There are so many people at all income levels who are disincentivised from working more hours, from taking promotions, from climbing the career ladder, etc., due to it simply not being worth their while as they lose so much of the increased pay in tax, nic and benefit reductions, or even being worse off due to a combination of the deductions added to loss of benefits.

@BashirWithTheGoodBeard

I'm also not sure that only small numbers are affected, because even using the tightest definition of cliff edges there's a ripple effect. I'm pretty much certain never to earn 100k, but if I have to wait longer for medical treatment because the NHS doctor I need won't do the extra shift if it takes her over 100k, that's impacting me. These decisions don't only affect the people taking them.

Yes, this is what people don't understand. The £100k issue was a popularist policy with people thinking "the rich can afford to pay more tax etc", but in reality, when you earn a lot, you don't "need" to work more hours to earn a tiny amount after deductions, etc., or be worse off when taking into account travelling costs, etc. The reality is that "rich" people like doctors and dentists have simply reduced their hours, stopped taking on extra shifts, etc., so the very people who wanted "the rich" to pay more tax are the ones who are now suffering due to shortage of doctors & dentists, longer waiting lists, etc.

And the ripple effect goes much further than that if we look beyond tax alone, which we should. Honestly, my parents were making these same calculations about work hours and tax credits a couple of decades back. It's not just the highest earners and its a long term thing!

It has to be worth people's while working, and that means carrot not just stick.

The cliff edge disincentives should be fixed. because they distort 'whether to work or not' decision

But bringing this back to OP's original question, do they explain even partially UK's abysmal productivity growth since 2008?

Just like some posters know people who withdrew from the job market because of marginal rate of tax, I know people who carry on working despite high marginal rate of tax. They work no less productively because their marginal tax rate is much higher than normal.

But plural of anecdote is not data

Unless there is some study, some sort of estimate of its impact, it's just people's opinion. It's especially hard to believe when there are number of advanced European economies with much higher productivity and marginal rate of tax than U.K.

Well, it's going to have some impact, and potentially become more of a factor given that a combination of inflation and fiscal drag will increase the numbers of people hitting each bottleneck. But I agree, it's a very complex picture and we're only talking about one factor here. There are bound to be multiple reasons, and it doesn't tell us anything about the impact of eg investment, education etc. I'm not familiar with the studies mentioned a few posts upthread either.

Btw can you tell us more about the marginal tax rates? I had heard that the UK was worse than the average for cliff edges, particularly given the top up benefits system, but I don't know anything much about any other tax system other than ROI a bit.

I agree with many of these examples but also the internet drives the mindset that working is for fools. If you believe all the people that claim to earn hundreds of thousands working part time or basically hustling, why on earth would you break your back working in a meant packing factory for minimum wage?

Everyone agrees the cliff edges need to be fixed, but fixing the tax ones (the 100-125k one) would mean reducing taxes on those people. I don’t see that being well received on mumsnet.

totally agree there are benefit ones too. They are probably of more importance to fix.

More doctor and dentist appointments will be a massive benefit to everyone. To get there, if it means reducing the stupidly high marginal tax rate on those earning over £100k then it's a price worth paying. After all, those doctors and dentists currently aren't working the extra hours, so they aren't paying tax on the amount they're not earning, so hardly a tax break! By working more hours, they're paying MORE tax, because they're earning more, and the taxpayer benefits not just from more tax revenue, but shorter waiting times too! Win Win!