The UK faces a highly uncertain economic future – with its recent withdrawal from the EU and the ongoing COVID-19 outbreak casting much into disarray. But one thing is clear: as part of its recovery, the UK economy will need to address some serious long-term issues around productivity.
Productivity is the output produced given the inputs employed, such as hired labour, capital and materials. It describes how efficiently a producer or service provider combines these inputs to deliver products or services. Crucially, productivity can turbo-charge economic growth – and ensure the survival and expansion of firms.
But while a productivity slowdown has put the brakes on many developed economies since the 2008 financial crisis, the UK has been particularly hard hit. This will almost certainly be exacerbated by the COVID-19 pandemic.
UK productivity growth has lagged behind that of other comparable economies since the 1970s and the country has suffered virtually zero growth in labour productivity since 2008, the latter known as the UK “productivity puzzle”. By 2016, the output per hour worked in the UK was 16.3% below the average of the rest of the G7 countries – although this has improved following adjustments to how labour input is measured.
But why? And what can be done about it in these uncertain times? Aston Business School explored this in a recent white paper.
In the short term, tumbling global and local demand and a slow economic recovery following the financial crisis arguably have played a part, as have other factors such as falling real wages and low business dynamism. Low real wages and low productivity usually go hand in hand – there’s less incentive to be productive when you’re undervalued – while low business dynamism reduces the likelihood of innovative ideas boosting productivity.
As part of the UK government’s austerity programme, around half a million jobs were slashed from the UK public sector, while the private sector added 1.7 million jobs between 2012 and 2015. But evidence suggests that many of these new private sector, self-employed roles were low-productivity, part-time and based on zero hours contracts. On average, these mean low pay, low skills utilitisation and few opportunities for skills development.
Meanwhile, the acute decline in demand has also made firms less willing to invest in innovation and new ideas that might improve productivity. Again, COVID-19 could present even greater challenges, as firms are likely to invest less in research and development (R&D) than usual due to uncertainties and financial pressure.
So where does that leave us? We argue that technology, innovation and skills are central to the conundrum.
There is some hope for the UK economy. In recent years, skills have improved at every skill level and are expected to continue to do so. High skills are already relatively abundant – 46% of adults aged 25-64 have some form of tertiary education, compared to an Organisation for Economic Cooperation and Development (OECD) average of 37%. Meanwhile, in 2015, 13% of UK university students were enrolled in science, technology, engineering and maths (STEM) subjects, compared to an OECD average of 6%.
But the situation is gloomier when it comes to low and medium skills. In fact, while the UK is predicted to be ranked seventh among OECD countries in 2020 for high (tertiary level education) skills, it is projected to be 22nd for low (below upper secondary) skills and an even lowlier 28th for intermediate (upper secondary) skills.
The UK also lags behind its competitors in vocational education and training – and many adults remain hampered by poor literacy and, particularly, numeracy. Ranked 13th out of 18 countries by the benchmark Surveys of Adult Skills, a staggering quarter of UK adults scored at Level 1 or below (out of five) for numeracy skills (the OECD average is 19%). Worryingly for the future, the UK is the only country where older people (aged 55-64) outperformed younger people (16-24) in both literary and numeracy.
Productivity is driven by technology, but it demands the right level of skills, deployed when and where needed to be effective. And in the UK, growth in this new environment continues to be held back by workplace skills shortages, gaps and mismatches.
New technologies and their adoption require varied skills. Nowadays, innovation in manufacturing means that customer service and embedding algorithms in customers’ software systems are as important as bashing metals. These changes must be adapted to if firms are to become more productive.
As technology advances, it’s no surprise that there are skills shortages and mismatches. But they must be addressed by policy, corporate practices and innovative thinking – especially in the current climate. Skills gaps may lead to reduced short-term R&D expenditure and long-term fixed capital investment, slowing productivity further. At a regional level, skills gaps sharpen competition for skills and talents between companies, favouring fast-growth firms while impairing others.
There is a long way to go before a healthy balance is maintained. The UK Commission for Employment and Skills’ (UKCES) 2015 Employee Skills Survey (ESS) found that one in seven employers identified workers who were not sufficiently proficient in their positions, amounting to an estimated 1.4 million employees.
Meanwhile, three in ten employers are estimated to experience “over-skilling”, whereby employees are over-qualified and under-utilised. This is a clear waste of resources and a missed opportunity for productivity growth.
But while skills gaps are a central part of the productivity problem, current efforts to assess their scale tend to fall short. This is because skill levels are often measured via formal educational attainment. While most people finish their education by their early twenties, they can, and should in fact, continue to acquire skills throughout life – particularly if their workplace offers training. Indeed, existing statistics suggest the UK should encourage lifelong learning and better use of skills if it wants to boost growth, productivity and earnings.
Future research should reflect this – by focusing on levels of training and skills rather than education among the workforce.
But the UK is also letting itself down on R&D, which helps drive firms’ innovations and productivity. The good news is that the UK has a world-leading fundamental science base and is ranked fourth among economies producing the largest volume of top-cited scientific publications. Despite this, however, it spends less on R&D, relative to GDP, especially by its corporate sector, than many other major world economies. In 2016, the UK ranked just 11th in the EU.
In this new economic environment, information and communication technologies (ICTs) will play a key role, accounting for 70% of global patents. The UK, however, doesn’t feature among the top countries patenting emerging ICT technologies. And while it is on a par with France and Germany when it comes to artificial intelligence (AI) related patents, it is a long way behind Japan, Korea, the US, China and Taiwan. It also lags behind many other countries in robotics. These are issues the UK should consider as it seeks to thrive in this technological new world.
Productivity slowdown is not unique to the UK – it is a global issue that now faces a whole array of added challenges. Skills and technology are key components of the solution, but the two must be correctly balanced. Skills must meet the demands of evolving technologies, for they not only lead to new technological innovations, but also drive and facilitate their adoption and diffusion.
There is no easy fix. But forward-looking, bold policies, inspired and informed by solid research and a global perspective, are key to lifting the UK out of the productivity doldrums and providing a lasting recovery post-COVID-19.