Britain Short Read

Productivity Problems

Historically, economists have used increasing productivity as a proxy for improving living standards. The argument stands that if productivity is improving, firms have more room to increase wages. This in turn increases living standards (assuming no increase in inflation). However, since the financial crisis, the productivity growth of G7 nations, especially in the UK, has not increased in line with its historic trend. Has this lower productivity growth impacted living standards in the UK over the last 10 years?

Productivity is defined as economic output per unit input. I will use the Gross Domestic Product (GDP), total value of products produced in the country, as the measure of output as it gives a picture of the whole economy. This output is divided by the input, measured either as hours worked or number of people employed. However, these two measurements have little variation when plotted against each other.

Using this calculation of productivity, we can see a clear statistical gap. This is best conveyed by showing the UK’s growth (in productivity as well as living standards) relative to other G7 countries. I will use France as the representative of a G7 country as it almost mirrored the UK’s productivity growth up until 2007 and is the closest country to the current G7 average. From 2007 – 2018, the UK’s productivity has increased by 1.03% to $58,420 per hour. In contrast, France’s productivity has increased by 8.41% to $68,020 per hour over the same period. This marks a significant gap which has formed since the financial crisis of 2007, especially considering that from 1990 – 2007, the UK’s productivity grew 48%, compared to France’s 35%. A reason for this disparity is the severe drop in growth of the previously thriving services sector after the financial crisis. The UK’s consistent productivity growth lost its drive (with one fifth of the economy producing three fifths of the decline). However, Britain’s average annual wage has increased 21% since 2007, 1% higher than that of France. On the surface, this looks positive for the UK. However, the UK has had significantly higher inflation since 2009 (by over 2% at some points). Considering this, the UK’s real wage growth lags behind France’s, suggesting a lower increase in UK living standards in the last decade.

High productivity brings with it many positive implications. Increased output as workers become more productive results in increased GDP. Some of this extra income can be distributed to workers, causing wages to rise. This results in higher living standards as people can purchase products which were previously unaffordable. Furthermore, higher productivity results in the ability to produce more at the same cost. This limits inflationary pressures on prices. Hence, productivity growth has a strong correlation with economic growth.

Despite this evidence, there is an argument to be made that the UK productivity gap has not had the expected negative effects. As mentioned, the UK productivity growth does appear to have fallen behind France since 2007. I have defined the outcome of improved productivity as improvement in living standards. However, the UK is experiencing the lowest level of unemployment, at 3.8%, since records began in 1971. Compare this to France where the figure was 8.5% in 2019, having been as low as 7.4% in 2008. This seems incongruous with the suggestion that living standards in France have improved more than those of the UK over the last decade.

Another underlying statistic is that government debt to GDP, in 2019, was measured at 99.3% in France, compared to 85.6 % in the UK. This suggests that France is potentially in a weaker position than the UK to protect its standard of living in the face of another global financial shock. It is also important to consider profit levels as an indicator of living standards. For example: a company that doubles turnover, yet where profits remain flat is in no better position to facilitate wage rises. However, a company that doubles its profitability with no increase in turnover is in a much stronger position than the former to enable pay rises without having to put prices up. It is also in a much stronger position to weather macro shocks. I would propose measuring the profitability levels in a country via its corporate tax revenues, as an annual increase in tax revenues is an indicator of economic expansion. Although UK corporate tax rates have been considerably lower than those of France since 2007, the UK had a corporate tax revenue of £59,429 million in 2018. This is over £15 billion more than France’s £43,335 million and growth in UK tax revenue is second only to Germany out of all of the G7 nations.

One may ask how it is possible to double profit whilst producing similar revenue. In the case of the UK, this has been achieved by entering more profitable markets. The UK is the world leader in online spending, per capita spending in the UK was £3,041 in 2018, compared to £1,472 in France, which results in considerable supply chain benefits. Moreover, the UK has more tech and biotech start-ups than any other EU country and, in 2019, attracted $13.2bn of venture capital funding for tech compared to $5.3 billion in France. The high levels of profitability in these industries would suggest that living standards have not fallen behind as much as is implied by the data.

This will remain a well-debated topic until the true impact of the internet and advances in technology on productivity are understood. Despite this, there is a clear, statistical productivity gap between the UK and the rest of the G7. However, low unemployment rates coupled with very high corporate tax revenues would suggest that the UK isn’t suffering from many of the expected implications of this gap.

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