Definition of productivity and its importance
Productivity is a key economic instrument, which is defined by the ratio between the outputs per unit of input. According to the Olivier Blanchard, productivity is the measurement of efficiency of production inputs like capital and labour (Blanchard 2013). It aids to determine how efficiently the inputs of production are utilised in an economy in order to produce desired amount of outputs (Peri 2016). Increase in productivity showcase that economy has moved towards better efficiency level compared to the previous situation; whereas, reducing productivity highlights worsening economic situation of a country. With rise in productivity, the economy can produce higher amount of output with same amount of input leading to better standard of living. This rise in standard of living germinates from the rise in real income leading to higher purchasing power for the individuals through enhancement in their productivity. Sloman, Wride and Garratt (2015) argue that, productivity is one of the primary sources of economic growth and it is being utilised to assess the country’s performance as well as for the international comparison of performance of different economies. For instance, it can be seen that various international organisations use the productivity data for investigating the effect of labour and product market regulations of economic performance to gauge the situation (Mayer, Melitz and Ottaviano 2014). Findings of the Dasgupta (2007) entails that productivity verifies the capacity utilisation potential of an economy and in long run it aids the policy maker to bring in laws to determine the business cycle of the economy through assessing the inflationary pressure and demand pull of the economy.
UK economy is one of the developed and strong economies in the world; however, the country’s decade long struggle to cope with the productivity is still persistent (Nelson 2018). According to the latest report from the Office for National Statistics, productivity issue of the UK economy is all set to get worse because output per hour of UK worker again fell by 0.1% in the second quarter of 2017 (Elliott 2018). However, economists have high hope with the UK productivity due to the fact that during the first quarter of 2017, per hour productivity drop of the UK workers was as high as 0.5% (Smith 2018). From the figure 1, it can be seen that there is high productivity shortfall between the UK and the other G7 economies.
Gap between the UK per hour per hour productivity has been widened by 16.6% during the year 2015 as compared to the 16.3% gap between the UK economy and other G7 economies (Wearden, Smith and Treanor 2018). From the figure 1, it can be seen that per hour productivity of the UK workers has improved in case of Canada and there was no change relative to Italy. On the other hand, other G7 countries like US, Germany and France there is huge gap in terms of UK productivity, whereas Japan seems to have caught-up slightly.
Comparison of UK productivity with other G7 countries
From figure 2, it has also been observed that there is certain difference from the GDP per worker with the per hour productivity of the workers in UK due to difference in the working hour of the respective nations (Ward and Parkinson, 2017). Comparing the GDP per worker with the G7 countries and UK, it can be seen that UK and US GDP per worker productivity gap is highest (Oliveira 2018). On the other hand due to lowered rate of employment and lack of job creation during pre and post financial crisis, UK productivity is not up to the mark with the other nations of its league.
Latest statistics of the UK productivity highlights that the country lags by 15.9% in terms of productivity from the other G7 nations (Nelson 2018). It has shown reducing productivity since last one and half decade that has effectively hampered the growth rate of the country. Reasons that explain the weak relative productivity performance of the UK are as follows:
Reducing level of investment: Credit crunch in the UK has reduced the foreign investment in the UK economy (Buera and Moll 2015). It has effectively caused a fall in capital growth and owing to recession labour force was also reduced. Combining these two, productivity of the UK has fallen over the time (Buera et al. 2015). Considering the figure 3, GDP per hour worked has also fallen compared to the other nation. It has also leaded to fall in productivity.
Labour hoarding: Analysing the business structure of the UK firms it has been observed that the organisations prefer to hold onto workers though there is less demand. Owing to prevent the cost of rehire and managerial cost over the year trend of holding workers remains persistent in the organisation (Nellis 2004). According to the statistics, number in employment has fallen over the time due to recession in larger magnitude compared to the holding rate. Since 2008, holding rate has fallen by 2% only as compared to the new employment that has caused reduction in productivity for the UK economy (Wolf 2018).
Reducing real wages: Reduction in real wage rate is another factor that has contributed to a substantial amount to reduce the productivity of the UK (Ison 2006). According to the figure 4, it can be seen that real wage has been reducing since 2010 leading to labour cost fall. With lower labour cost, firms started to employ higher amount of labours who are generally unskilled, while compromising the productivity (Olivier, Giavazzi and Blanchard 2016). Post 2014 there was a rise in wage rate compared to the inflation that has helped the UK economy to employ skilled labour and enhance he productivity (Smith, 2018)
Reasons behind the UK’s productivity struggles
Brexit uncertainty: Uncertainty since 2016 regarding the Britain’s exit from European Union has caused reduction in investment and the capital market of the economy has faced certain fall during the last three years (Oliveira 2018). This reduction in the investment has caused widening in the gap of the per hour labour productivity leading to overall productivity of the UK’s economy.
Reasons like reduced skilled labour, high unemployment rate as well as the reduced investment flow has caused the UK to face lesser productivity in recent days compared to other G7 countries. In order to control this situation, various recommendations are mentioned below:
Enhance the government spending in public sector: Traditionally it has been observed that government spending can act as stimuli for the economic growth of the country (Rutherford 2007). Considering this, it can be recommended that government need to enhance government spending for better growth of the economy. Considering the graph of figure 5, it can be seen that government spending as the percentage of the GDP is falling since 2010, which is causing lesser productivity for the UK. With low cost of borrowing, if government increase its investment in public sector, then it would significantly boost the productive capacity of the economy.
With series of investment program in public sector, UK can achieve faith on the investors, which will provide repercussion effect to enhance the productivity of the economy.
Evaluation in the fiscal consolidation: During the recession period UK government took plans to cut the government spending that in turn reduced the aggregate demand (Blanchard 2013). With reduction in government spending, job creation reduced as well as the real wage rate also reduced leading to fall in productivity of the UK economy. Thus, as the step to gauge this situation, it would be better for the UK government to take expansionary fiscal policy. Without cutting the spending, government need to come with credible plans for gauging the structural deficit and enhance the aggregate demand. It will cause higher employment and enforce the firms to employ skilled labour that will enhance the productivity of the economy (Rutherford 2002).
Reduction in interest rate: since the recession of 2008, saving rate of UK has increased from 0% to 7% by the end of 2012 (Wolf 2018). This has caused higher savings and lowered spending by the UK population. Now if Bank of England can take initiative to reduce the interest rate, then it would aid the economy to have necessary liquidity, which will enhance the aggregate demand leading to better productivity of the economy,
Recommendations for addressing the productivity issue
Introduction of public investment bank: Since credit crunch has taken place during the financial crisis in 2008, bank lending of the UK has been low. Banks are struggling hard to improve their balance sheets, however, recent reforms has failed to provide anything fruitful to them. Other than UK, all the countries in G7 group have Public Investment Bank that has aided their economy to have sustainable growth through facilitating the small and medium sized firms with loans rationally (Elliott 2018). Thus, as the recommendation, it can be said that UK need to introduce Public Investment Bank, which will provide lending facilities to the small and medium scale firms to have productive growth.
Reference:
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