Britain’s low productivity problem

Table of contents

Why is UK productivity low?

Importance of productivity

Productivity challenges

Digital workplace solution

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The UK has a longstanding productivity problem. In the last decade, rates of productivity growth have slowed significantly, with ‘real wages’ (wages adjusted for inflation) no higher than their counterparts prior to the financial crisis of 2008. This rather dramatic decline in productivity, or ‘Labour Productivity’ (output per worker in a nation), has seen many individual businesses struggle to reach their full potential.

Economists have largely pointed to low overall demand in the economy, caused by the wave of austerity policies, Brexit and the longstanding effects of the 2008 financial crisis, as a major factor in Britain's low productivity. However, despite the slowdown being considered a ‘demand-driven’ problem, top economists advocate productivity growth through investments in ‘supply-side factors’, such as employee education, upskilling and training.

Why is UK productivity low?

Why is UK productivity to low? This is a question with a complex answer. Many developed economies across the world (from the United States to Germany) have seen their nations’ productivity growth lag in recent years. However, the slowdown in the United Kingdom has been far more pronounced than their western counterparts. In an article published by the London School of Economics in 2020, lecturer Ethan Ilzetzki points out that the UK consistently ranked 31st out of 35 OECD countries in growth of output per hour (between 2008 and 2017). In fact, there is a large body of research highlighting how the UK has had a problem for several decades now.

Academics and economists alike have proposed a number of insightful reasons for the severity of the UK’s negative productivity trend, ranging from the mismanagement of small businesses to a comparably low total investment share (by government, businesses and households), or even the £40billion cost to the UK economy each year from insufficient sleep and worker fatigue.

Although the above are certainly parts of a complicated answer, it is possible to place the causes of the slow down into two broad categories. Firstly, ‘supply-side factors’, which include educating workers and tackling the inefficient mismatching of skills and employment. The second is ‘demand-side factors’, which refers to slow demand growth (and cautious investment in R&D) caused by the uncertainty following large economic events like the financial crisis, austerity measures, the EU referendum and the global pandemic.

Why is productivity important?

Productivity is important for a number of macroeconomic and microeconomic reasons. Principally, it is a key factor when considering the potential increases in GDP (growth of the economy) and the resulting social welfare those increases bring. As a result, it plays a crucial role in acquiring long-term gains in living standards for a country’s citizens.

This is particularly important for individual businesses because low productivity in employees, caused by a poorer quality of life or lack of access to education and technology, increases resourcing costs. It may also leave companies unable to compete in international markets because other countries will be more productive and more efficient at making the same product.

Common productivity challenges

Two key productivity challenges that businesses face today are absenteeism (when people simply don’t show up to work) and presenteeism (when employees are not working to their full potential). The former is much harder to solve than the latter. In the case of presenteeism, much economic research has been put into finding solutions for business owners hoping to unlock their employees’ latent potential.

A report commissioned by PwC highlights the need for lifelong upskilling and digital transformation strategies. Businesses need to support workers in their acquisition of new digital skills throughout their careers. Productive gains can be made when firms invest in digital technologies and pathways for their employees, allowing for the seamless adoption of new methods that can bring products to market more efficiently.

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