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20 February 2014

Solving the Productivity Puzzle

There has been much hype surrounding the recent news that during 2013 the UK economy experienced the fastest growth rate since 2007. However, at the same time that this news was unveiled by the Office for National Statistics (ONS), so too was the fact that UK productivity is still declining. Since the onset of the financial crisis in 2008, falling productivity has been observed within the UK as well as other countries. However, as the UK economy begins to recover, as does the productivity of other countries, UK productivity remains weak and is showing no signs of improvement.

Termed the ‘Productivity Puzzle’, weak UK productivity has resulted from stagnation of the level of output despite rising employment. Growth in UK employment has exceeded expected levels for the last two years and, in 2013, reached a 40 year high. Furthermore, the number of people in employment within the UK reached 30 million during 2013, well ahead of the autumn 2015 prediction from the Office for Budget Responsibility (OBR). Mark Beatson, Chief Economist at the Chartered Institute of Personnel and Development (CIPD) commented:

“last year [2012] we were talking about the UK’s ‘job enigma’. Since then, labour market performance has continued to exceed expectations, turning the UK labour market into a ‘jobs machine’.”

Employment growth is expected to continue, rising by an estimated 300,000 in 2014 and 1 million by 2018. However, with employment growing at such a high rate, Beatson warned that 2014 needs to be the “year of productivity”. Ian Brinkley, Chief Economist at The Work Foundation, commented that the UK economy is currently experiencing a “jobs rich and productivity poor recovery and that may not be sustainable over the medium term”. With productivity being a key indicator of a country’s supply potential, the fact that UK productivity is lagging behind other countries suggests that it is at a competitive disadvantage. Currently, the productivity gap amongst the world’s most developed economies, the G7, is at its widest since 1994.

With the most recent global recession restricting the level of funding available to organisations, particularly small and start-up businesses, investment was significantly reduced. As a result, productivity and growth potential were damaged. In addition to this, UK productivity has been affected by an increase in spare capacity. Although consumer demand fell throughout the recession, many companies were reluctant to let go of employees and some even increased their workforce in response to the fiercer competition. This created an abundance of human resources, reducing output per worker. Nevertheless, as consumer demand begins to rise, this spare capacity of the UK workforce may prove advantageous in satisfying higher levels of demand.

In order to improve productivity, the real challenge starts with the UK workforce. With a recent Survey of Adult Skills conducted by the Organisation for Economic Cooperation and Development (OECD) revealing that the skills proficiency of the UK workforce is comparatively weak to the other 23 countries in the survey, heavy investment in the professional development of employees is required. The training and development of the UK workforce is an issue that must be jointly addressed by businesses and the government in order to actively develop and utilise the skills and talent of the workforce. This, in turn, should result in a long-term rise in productivity.