How can we solve the productivity problem?

Saturday 13 October, 10:0011:30, Frobisher Auditorium 2Battle for the Economy

Economists agree that the fundamental basis for increasing economic growth and improving living standards is rising productivity, the amount of goods and services produced for a given amount of labour. Longstanding worries about the stagnation of productivity have increased since the economic crisis of 2008. In April, the Bank of England reported that the rate of growth of UK productivity over the past 10 years is slower than at any time since the eighteenth century. To find a period of slower productivity growth, researchers had to go back to the period from 1761 to 1781. If productivity had continued in keeping with past trends, it would be 20 per cent higher than today. While the problem has affected every developed country, the UK seems to have a particular problem: a German worker produces, on average, as much in four days’ work as a worker in the UK produces in five.

Yet while there is unanimity that there is a problem, there seems little prospect of a solution. Some economists argue that, to some degree, there is a problem of measurement. While measuring productivity is never straightforward, it seems harder in services – particularly new online services that are free to users – than in the production of goods. For example, using Google Maps to navigate should improve productivity, but because the service isn’t paid for, it doesn’t count as ‘output’.

But even if this were true, it couldn’t be the whole story. One of the drivers of productivity is investment in new equipment, particularly where that represents a new form of higher-productivity technology. Yet investment levels have been falling for decades, across the developed world. Moreover, even in services, UK productivity seems to be lower than in comparable countries like Germany, France and even economically moribund Italy.

Economist Tyler Cowen, among others, has argued that we may be approaching the limits of productivity improvement, with all the ‘low-hanging fruit’ of major technological change – from motorised transportation to network electricity – has already been harvested. Yet others regard this as unduly pessimistic. New technologies that could improve productivity include ‘Industry 4.0’ smart factories, robots harvesting crops or operating warehouses, automated drones making deliveries of goods or applying pesticides, and rapid developments in genomics allowing faster development of everything from seeds to vaccines.

Others argue that while the best companies are seeing healthy levels of productivity growth, there are too many others barely surviving that drag the figures down. Thanks to a variety of measures, including low interest rates and weak bankruptcy rules, companies that would have folded in the past are clinging on. Not only do these ‘zombie’ firms reduce the overall productivity figures, but by continuing to capture part of the market in their goods and services, they make investment by better companies less profitable and less attractive. Other commentators have noted different barriers to investment, from an inflated housing market to high energy prices and skill shortages.

To what extent do we really have a productivity problem? Is declining productivity the ‘new normal’ that we simply need to tolerate? Why does the UK seem to have a particular problem? Is there really anything that government can do to change things?