Britain's productivity malaise

The dead trees say that today's figures (pdf), showing a fall in wage inflation, increase the chances of a cut in interest rates. But there's something more interesting going on.
Just ask: why should wage growth be so low when unemployment is low? It's not merely because of lower City bonuses. If we ignore bonuses, wages in the private sector have grown a mere 3.7% in the last 12 months (3.8% in the public sector.) That's a real increase of just 1.3%, based on RPI.
There's a simple reason for low wage growth - productivity is growing slowly. I reckon output per worker has risen just 0.7% in the last year.
This is not merely because employment has expanded in the low-productivity public sector. Productivity is also stagnating in the private sector. Here are the figures for the last year, with five-year annualized growth in brackets*:
Construction: -1.4% (1%)
Distribution, hotels & catering: 0% (2.1%)
Transport & communication: 1.4% (1.9%)
Business services: 1.4% (1.3%)
Manufacturing: 3.9% (3.8%)
With productivity growth so low, you'd expect wage growth to be low.
In all cases, except manufacturing, productivity growth was higher in the mid-90s. This is, of course, in contrast to the US, where productivity growth boomed in the late 90s, and is still doing so.
So, what's going on here? It's not that UK investment has been lower than the US's. Between 1995 and 2004, UK business investment rose at much the same rate as the US's; US investment has since risen faster than the UK's but the increase is too recent to explain the productivity difference .
Possible reasons include, among other things: less competitive pressures to force efficiency higher; poorer management; building regulations that stop retailers exploiting "big-box" efficiencies as US retailers have done; greater employment protection; or less skilled workers.
For more on the international comparisons of productivity, try this paper by Mary O'Mahoney and colleagues, or this pdf by Robert Gordon.
* All these figures are based on comparing table 5 of the labour market figures with table B1 here (pdf).

Comments

[Marcin Tustin]

Maybe we work less.

[Andrew Duffin]

One possibility you haven't mentioned, is that workers are spending more and more of their time on useless "compliance" activities, rather than running their businesses (or their employers' businesses) so that their harder work - if any - and their increased investment - which you have noted - is to some extent going to waste.

I have a theory that the increased productivity brought about by ever-cheaper PC's is almost entirely swallowed up by the fact that we now do pointless and wasteful things on the documentation and compliance fronts that would have been physically impossible in the age of the typewriter.

Hence we all have to work just as hard or harder, simply to produce the same amount of useful wealth.

[the-man-in-black]

As I have posted before - the Centre for Economic Performance at LSE have a stack of great papers on this. They really examine UK productivity gap well, and its good quality stuff. http://cep.lse.ac.uk/

Some of the productivity gap is down to the sector mix of the UK economy, and variable productivity performance therein. And then there's the long tail....

Another factor evidenced by about 5 years worth of employer skill surveys is that UK has a dual labour market. The best and most highly skilled are as good as the best in other countries, but the lower skilled occupations are poorly skilled - poor productivity, poor basic and core skills. And they are poorly paid. They are caught in a low productity, low wage and low training trap.

Of course the US can achieve economies of scale and scope much better than the UK too...

Generally within the UK foreign owned firms are stronger performers in terms of productivity than the UK too.

[Paul Scargill]

Approximately 1 in 4 workers in the country is employed in the public sector.

What the hell happened to economies of scale?

No wonder productivity is so woeful.