The UK’s productivity problem: It’s not lazy workers

Here in the UK, we have an ongoing debate why productivity growth is so much lower than in other industrialised countries. An analysis by economists from the San Francisco Fed doesn’t give definitive answers, but at least gives us an idea where to look for improvements.

When it comes to the lack of productivity growth in the UK, some people blame it on the productivity of our workers compared to those in other countries (summarized in the quip by German stand-up comedian Henning When as “Just like the Brits, we Germans like a laugh… once the work is done.”). Others say it is because of a lack of infrastructure and other investments (see here for a chart that shows how slow people are moving from A to B on British roads compared to other countries).

The people who blame lazy workers tend to focus on labour productivity (i.e. the amount of GDP created per hour worked). The chart below shows how weak labour productivity growth in the UK was in comparison to other countries, lagging not only the US and Germany, but also France, Italy, and Spain.

Labour productivity growth

Source: Fernald et al. (2023)

However, when we look at productivity growth from another perspective the UK isn’t so different from other countries. The chart below shows total factor productivity, i.e. productivity growth not explained by population growth or capital investments and hence the closest approximation we have to what we generally call “innovation” or “technological progress”. Here, the UK shows a material slowdown in productivity growth after the financial crisis 2008, but it isn’t so different from what we have seen in the US or France. The UK seems to be just one of many countries suffering from a general decline in total factor productivity across industrialised countries.

Total factor productivity growth

Source: Fernald et al. (2023)

In terms of innovation and technological progress, the UK’s slowdown is nothing special, but there is one area where the UK is indeed different from other industrialised countries: capital investments. Our final chart below shows the average growth rate in labour contribution to GDP growth, total factor productivity growth and capital intensity over different time periods.

GDP growth composition over the decades

Source: Fernald et al. (2023)

Note how the contribution to GDP growth from labour input remained relatively stable in the UK as well as the other countries in the sample. But in the UK, the growth in capital intensity has dropped significantly, not just since 2007 but already in the early 2000s. Negative growth rates in capital intensity are a unique feature of the UK and they essentially reflect a lack of both government and private investments in this country.

Looking at our productivity problem in the UK this way indicates that the best way to get our productivity growth up again is to invest and invest heavily. Infrastructure investments are a main driver of labour productivity growth, so the government needs to invest more in this area and provide incentives to businesses to do more there as well.

Yet, as I write this, the UK is falling behind in this area. While the US offers investment incentives in the form of the Inflation Reduction Act and the CHIPS and Science Act and the EU has its Next Generation EU spending programme, the UK barely has any incentives in place to foster investments in this country.

UK companies continue to invest abroad, simply because they find a more business-friendly environment there with less red tape, fewer trade barriers, and more government incentives. What the UK needs to do to generate similar labour productivity growth as the US or the EU member countries is to provide a similar environment for investments as they do. If we want the UK to make up lost ground from the past decades, we need to provide more government spending and even bigger incentives than the Americans and European do. Otherwise, the UK will continue to be the sick man of Europe.