Can higher productivity fix the weak UK economy? Low growth has persisted for 15 years and stubbornly high inflation continues to pressure real wages. Unfortunately, much of the debate on productivity reflects optimism not hard evidence. What seems a simple concept is frustratingly hard to pin down. And, while the UK is lagging its competitors, weak productivity looks like a global problem. Can new technology or hybrid working change this?
Before the financial crisis, UK productivity growth averaged around 2% per year - had that trend continued, productivity would today be around 26% higher. A huge gap has opened up in output per hour worked. Increasing employment or investment can expand the economy, but it is productivity growth that has the potential to boost incomes and deliver higher living standards. There now appears support across the political spectrum to returning the UK economy to growth. Unfortunately, there is less agreement on how to do this. Even with some differences in terminology – such as sustainable and inclusive – this still requires a plan for investment, technology and training.
Currently in the spotlight is the potential to embed hybrid working practice, delivering the assumed productivity benefit as reduced hours. Some companies are experimenting with a four day working week, albeit with caveats about the fifth day. The problem is that no-one really knows what balance of workplace presence and home working is best; it likely differs between organisations. Any attempt to legislate a national standard may hit productivity even more.
Studies on working from home now suggest that productivity is noticeably lower when compared with office attendance. Despite all the technology employed to support teamwork, many suggest they find it harder to collaborate. Scheduling interactions means a lot of information sharing simply does not happen. For those aspiring to leadership, remote working can be a barrier to demonstrate people management; career progress often favours workplace presence. Certainly, many employees have benefited in work/life balance and it has provided cost savings for employers. But while many self-assess as feeling more productive, this is challenged by more objective analysis on customer satisfaction, output levels and quality of work.
For the last three years, much of the debate on remote working has been conducted in a vacuum. Anecdotal evidence abounds, often contradictory – but now some systematic research is being reported. This happens as some companies’ attempt to force 50% attendance meets with strong pushback from staff and unions. The new evidence comes from the private sector, although the Chancellor is now calling for a public sector assessment to be considered prior to any additional funding for training. Even as this happens, the goalposts are moving. The pandemic and lockdowns have changed patterns of demand and public expectations. Reduced demand for rail travel, for example, is forcing debate onto a sector that looks set to shrink. Improving productivity tends to be easier against a background of growth.
This is part of the problem more generally within a stagnant UK economy. Historically much of what looked like productivity growth simply reflected the benefits of demand growth and scale efficiencies. That worked when there was spare capacity, but the economy now seems less flexible.
Hopes for a technology driven productivity boom to be unleashed by generative artificial intelligence (AI) should also be questioned. Estimates suggest that two-thirds of jobs will be impacted by some degree of automation by AI. Initially, the benefits may accrue to companies in the form of labour and cost saving. A US study has suggested AI might increase workforce productivity by an average of 14%, with some companies reporting bigger gains. But this may be competed away between firms and even internationally - with potential to change the nature of work and boost customer service, but probably not converting sustainable competitive advantage to individual countries outside the US. Improving efficiency or making savings within organisations may not translate to better pay and higher living standards. Indeed, the winners may be countries and firms that are already investing heavily in education and training, widening current productivity gaps.
In 2021, the UK Productivity Commission noted the uneven nature of productivity performance across UK regions and even within sectors. Research has not yet yielded any great insights on this variability, which has also been cited as a feature in Scotland. This surely merits further study if national consistency is to be achieved. There is a risk that uneven productivity around the country could exacerbate inequalities.
Already the Commission has identified the UK’s persistent low investment compared with other advanced economies. This is not just in equipment, but includes intellectual capital and job retraining. Weak infrastructure investment also plays a role. Travellers around Europe will have noticed marked differences in the quality of airport and road infrastructure for example. Within Europe, privatisation is not unique to the UK, yet some countries appear to combine this with better levels of capital investment and technological change. There is potential for regulators to drive more focus on investment, rather than primarily on consumer cost.
Productivity has the potential to be a key driver of economic growth and higher living standards. However, more recent research suggests that productivity growth no longer has as direct a linkage to increased wages. The question of sustainability has added to these doubts, but we should not delay on addressing productivity. We need debate over the relation between traditional measures of national output per capita and individual life satisfaction.
Unfortunately discussion on productivity is often in a data vacuum, leading to wishful thinking. It is abstract and difficult to deliver, but nonetheless seems to lie at the root of UK economic problems and a widening gap with competitors. Informed debate is needed – we cannot be sure that hybrid working or AI will fix the problem.
A version of this article was published in The Herald on 6.7.2023