Productivity is the key to prosperity

Productivity is important from a purely monetary perspective but that’s not the whole story – productivity matters for business, workers, and society and ultimately improves livelihoods everywhere.

• Higher productivity strengthens business performance, makes companies more profitable and supports the balance sheet.

• Productive firms can pay workers better, reward investors more, or innovate and invest faster in new productivity-enhancing activities.

• Higher incomes and revenues leads to greater investment in public services, such as health care, education and infrastructure.

• Ultimately productivity can create inclusive growth – economic prosperity which is created by providing broad access to all resources, transforming them into efficient outcomes, and distributing the gains widely across societies.

For quite some time now, the UK has experienced poor productivity performance relative to its own history and its peers, which has become known as the productivity puzzle.

Despite strong performance around the turn of the century, UK productivity growth has grown more slowly since. While other advanced economies also experienced a growth slowdown, the effect is more accentuated in the UK. And there is no single solution to solve it.

This poor productivity affects everyone. The shortfall caused by the productivity slowdown amounts to some £5,000 per working in the UK – around 20% of average annual earnings.

The Productivity Institute has developed a synopsis of what has caused the UK’s productivity stagnation:

• A chronic and broad-based degree of underinvestment in the UK economy – including physical, human, and intangible capital – both publicly and privately.

• Inadequate diffusion of productivity-enhancing practices between firms and between places, affecting innovation, FDI and supply chain integration.

• High centralisation of policy-making in Whitehall, combined with institutional fragmentation and lack of joined-up policies at the level of regions and devolved nations.

The UK’s economy is more regionally unbalanced than other comparable countries, with many places trapped in a low wage-low productivity-low living standards mode. This makes it difficult for regions outside London to invest in their places.

Evidence from across the OECD shows that second-tier cities can be engines for growth. But when we compare cities like Birmingham, Cardiff, Glasgow, Leeds or Manchester to similar places abroad, they’re all performing much worse.

The UK is firing on only one cylinder and that’s not good for the UK or for London and the South East. Everyone will benefit if we improve productivity across the UK

The Productivity Agenda is a blueprint for boosting the UK’s productivity . It features 10 chapters highlighting key policy areas of focus so the public, private and civic sectors can be better equipped to translate productivity gains into improved living standards and well-being across the UK. The chapters have been written by experts from The Productivity Institute.

The Productivity Agenda will be launched at a panel event on 29 November in London with a panel featuring Dame Diane Coyle, Kate Bell, Sir John Kingman and Will Hutton.

The chapters:

• The UK’s productivity challenge: people, firms, and places
• The changing landscape of firm-level productivity – anatomy and policy implications
• Productivity, Innovation and R&D
• Why digitalisation isn’t improving productivity growth
• Skills for productivity growth
• The green transition: Net Zero as an opportunity to improve productivity
• Public Sector Productivity – managing the Baumol cost disease
• Regional productivity, potential causes, and institutional challenges
• A new UK policy institution for growth and productivity – a blueprint

It’s not just efficiency

• Productivity for business is about how an organisation effectively uses its resources (people, machines, knowledge and technology) to improve its performance (profit change).  Profit change is driven by what a business does, how it does it, and for what cost.

• The Productivity Institute has determined five drivers of business productivity – innovation and digital, worker skills and well-being, leadership and management, marketing and communication and access to finance.

• These drivers work best when strategically aligned with boardroom functions – Finance; Human Resources; Operations, Technology and Digital; and Marketing and Communications

The public sector is a key driver of productivity growth. Public sector organisations can facilitate firms and people to make investments in skills, innovation, and create the hard and soft infrastructure at a national, regional and local level. Their services assist private businesses to grow, and contribute to the creation of jobs, higher wages, and a better quality of life.

The public sector itself also stands to gain from improving its productivity levels by generating more value for money. Productivity in the public sector creates higher quality services for customers, enhances employee engagement and motivates people to embrace change.

The key drivers of public sector productivity are:

• Organisation – Adaptive business design
• Technology – Digital transformation
• People – An agile workforce

To put productivity into practice:

• Identify and solve constraints
• Measure and manage performance
• Collaborate and communicate

The Productivity Institute has assessed the UK’s subregional productivity performance through a range of indicators and drivers and produced them in a scorecard format.

There are two levels of scorecard, covering:

• 12 regional ITL1 levels
• 179 subregional ITL3 levels

ITL1 scorecards

Disparities between regional productivity performance are significant both across and within UK ITL1 regions and devolved nations. London remains the most productive part of the country in absolute terms, while Northern Ireland appears as the lowest productivity performer.

The ITL1 scorecards cover five main regional productivity drivers – business performance; skills and training; policy and institutions; health and well-being; investments; and infrastructures. These drivers are evaluated using 17 indicators.

ITL3 scorecards

However, the picture at the aggregate ITL1 is not clear cut, with most regions having areas that are doing well and some that could be performing better. The ITL3 scorecards offer greater  geographical granularity and can be used as a tool to assess productivity performance relative to other places in the same region or devolved nations as well as the UK as a whole.

The ITL3 scorecards cover five regional productivity drivers – business performance; skills, health and well-being; investment; infrastructure and connectivity. These drivers are evaluated using 15 indicators.

The UK has some of the highest regional inequalities of any advanced country and is one of the most centralised countries in the industrialised world. The latest strategy to tackle regional inequality began in 2019, with a pledge to “level up” the UK.

A subsequent White Paper in 2022 focused on reducing regional inequalities to drive productivity and growth across the whole UK, proposing a “revolution in local democracy” as a solution. However, the scale of the challenge to revolutionise the constitutional and economic models away from the centralised Westminster system of government is considerable.

Some of the structural factors contributing to UK regional inequality include over-centralisation; weak, ineffective institutions and policy churn; institution and policy silos; short-termism and poor-quality policy co-ordination.

A stable institutional landscape; a clear devolution and decentralisation strategy; and coordination between institutions at all levels can help as well as learning lessons from past initiatives.

The productivity growth slowdown in advanced economies during the early decades of the 21st century has led to renewed interest in economic measurement. While measured productivity growth has largely evaporated, yet in many ways the average person is better off than at any time in history and technological advance is ever evident. Are we simply, or at least in part, mis-measuring productivity change?

The modern economy is more global, more digital and more complex than in the past. Productivity can be measured for economies, regions, industries, and firms, each of which bring their own challenges and insights. Current productivity measures also don’t always capture intangible and human capital, the environment and welfare.