Reversing the UK’s Productivity Growth Problem

Julian Birkinshaw, Vice-Dean; Professor of Strategy and Entrepreneurship; Academic Director, Institute of Entrepreneurship and Private Capital recently contributed an article on the challenges of boosting UK productivity which has appeared in The Times CEO Summit 2023. The following is the article that appeared in The Times on June 23, 2023.

The UK has a productivity problem. Over the decade leading up to the pandemic (2010-2019), UK GDP growth was 1.8% per year. But if you break down the source of that growth, 1.2% of it was achieved by working longer hours. Capital investment was 0.5%, and the remainder (less than 0.1%) came from the intangible benefits of innovation and better ways of working – what economists call total factor productivity (TFP).

The net result is we are working harder not smarter. The UK has a similar GDP per capita to France, but the difference is UK employees worked for 1670 hours a year in 2019 whereas the French worked just 1510 hours.

To put this into historical context, UK productivity growth averaged 2-3% per year from the beginning of the Thatcher era up to the financial crisis in 2007, and roughly half of that growth was attributable to TFP. But from 2010 to 2019, this component had dwindled to almost zero.

What can we do to improve our output per worker?

We could put the brakes on immigration. We have become addicted to the “easy lever” of employing overseas workers when faced with staffing shortages. From 1998, net migration into the UK from EU countries averaged 100,000–300,000 per year. Since Brexit, immigration from the EU has been replaced with legal immigration from the rest of world and we are now at even higher numbers than before.

Slamming on the brakes would be shock therapy, with understaffing and supply failures in the most affected sectors. Business would need to look for other ways to meet sales and profit objectives, for example training their workers better and investing in new equipment. But the time lag before such investments to bore fruit would be significant – five years at least.

We could increase investment in business infrastructure. The government has no shortage of plans here, for example, its industrial policy in fast-growing sectors like Artificial Intelligence and its £375m Future Fund. All necessary and well-intentioned, but again with little short-term benefit.

Investing in human capital – better knowledge and skills – would also develop the well-educated workers needed for a high-productivity economy. The UK has a phenomenally successful higher education sector – hence all the foreign students flocking to our shores – and there are various government initiatives underway to better harness its potential, such as the greater focus on apprenticeships.

Investing in workplace innovation is a solution that gets remarkably little attention despite its importance. Workplace innovation doesn’t mean spending on IT and automation, but improving the efficiency of factories, call centres and offices, so people can achieve more with less effort. If you take a historical perspective, the exponential growth in productivity through the 20th century came largely from innovations in the workplace, such as Henry Ford’s oft-cited pioneering of mass production. There are plenty of similarly good ideas out there today – from agile to open-source development – but they need concerted effort, with researchers and businesses working together, to be implemented properly.

The Government’s stated goal is to create a “high wage, high skill, high productivity” economy. Unhelpful diversions, like the recent policy announcement preventing international students bringing dependents with them, have the potential to discourage the skilled workers actually needed to drive these productivity measures. A new report, ‘The costs and benefits of international higher education students to the UK’, reveals that international students boost UK economy by £41.9 billion. Universities also play a vital role in shaping workplace innovation through their business schools, technology institutes and applied engineering schools – all of which depend to a large degree on advanced-level masters students from around the world. If we want productivity growth – and in the long-term that’s the only thing that really matters – there needs to be a serious reconsideration of these policies.

There are always short-term political problems facing the government of the day. But a blanket policy approach to issues such as immigration may actually worsen UK’s productivity problem. In the end, any workable solution will inevitably involve a considered suite of measures working in concert.