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Productivity Puzzle

Britain's productivity has stalled compared to other wealthy nations, with varying performance across industries; the transport-manufacturing sector has seen significant improvements, while finance and pharmaceuticals have underperformed. Factors such as investment cuts and regulatory burdens have contributed to these disparities, with low-tech sectors like administration showing surprising productivity gains despite lower output per hour. Proposed remedies include easing planning regulations, improving industrial clusters, and reforming bankruptcy laws to enhance productivity and growth.

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4 views3 pages

Productivity Puzzle

Britain's productivity has stalled compared to other wealthy nations, with varying performance across industries; the transport-manufacturing sector has seen significant improvements, while finance and pharmaceuticals have underperformed. Factors such as investment cuts and regulatory burdens have contributed to these disparities, with low-tech sectors like administration showing surprising productivity gains despite lower output per hour. Proposed remedies include easing planning regulations, improving industrial clusters, and reforming bankruptcy laws to enhance productivity and growth.

Uploaded by

judenyjo055
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The Productivity Puzzle (The Economist May 2015)

Britain’s stall in productivity is more serious than that of any rich-world peer. A
closer look reveals different industries travelling at very different speeds
The fastest-improving part is the transport-manufacturing industry. The
345,000 workers making cars, planes and trains produce 56% more in an hour
than they did in 2009. Whereas from 2005 to 2009 the car industry made 9.3
vehicles per employee per year, from 2010 to 2014 it managed 11.5. Over that
period Britain’s car industry benefited from investment in new technology,
improved supply-chain efficiency and better management.
Technological advances, aided by collaboration between firms, universities and
government, are making manufacturing more efficient. Rolls-Royce, an
aerospace company, has halved the time it takes to manufacture fan discs and
turbine discs used in jet engines, thanks to a network of government-backed
“catapult centres”, who forge links between academia and industry.
Some companies are confident that the productivity gains will continue. The
investment cycle in manufacturing can be decades long, so the impact of
catapult centres, which were launched only in 2011, is yet to be fully felt.
There is potential for still more efficient production, even in low-volume,
labour-intensive manufacturing.

Some low-tech industries have overcome the productivity problem, too. The
“administration and support” sector saw the next-biggest rise in productivity.
Output per hour dipped by 6% between 2008 and 2009 but has since risen by
32%. Even now, hourly output is only around £22 ($34), meaning that admin
workers are still far less productive than those in sectors such as IT (who
generate £42 per hour) or finance (who generate £62). This means that even
their relatively low average wages of £12.50 an hour take 58% of the value that
they create, so there is little room for pay rises.
Yet the sector provides a counterexample to the argument that low
productivity has been caused by employment growth. Firms have managed to
increase both their productivity and their staffing levels: the sector has been a
jobs powerhouse, with employment rising by more than 300,000 (close to
25%) since 2009. The hope for Mr Osborne is that the improved productivity
will start to translate into higher wages.
The contrast with the worst-performing industries is stark. Productivity in
finance and insurance is 10% lower than in 2009. That partly reflects artificially
high productivity in the boom years, when the sale of overvalued financial
instruments. It is also partly down to a heavier regulatory burden on banks,
which has caused the ranks of legal and compliance officers to swell. The
benefit of this—reduced risk of another crash—does not show up in
productivity statistics.
A more surprising underperformer is the chemicals and pharmaceuticals
sector. Some argue that manufacturing industries are inherently likelier than
service industries to make productivity gains, since they are more intensive
users of technology, which delivers productivity windfalls as it evolves. The
chemicals and pharma sector is currently an exception. It is hugely productive,
with output per hour of £72 per worker. But it has stalled badly, with hourly
output dropping by 11% since 2009. Real wages are down by 4% and
employment has fallen by more than 5%.

One possible cause is a failure to invest. Following the 2008 crisis Britain’s
banks cut corporate lending. As investment become more expensive some
firms hired cheap workers instead of pricey machines. Neither investment nor
lending has recovered so many Britons, have out-of-date kit and scant chance
of becoming more productive.

Other possible remedies:


 Firms, people and capital must be freed to move more quickly from
unproductive sectors into fizzier ones.
 Lighter planning rules would enable productive industries to grow:
Oxford, for instance, has one of the world’s leading medical schools, but
its tight “green belt” of land that is off-limits to developers makes it hard
to find space for life-sciences firms to flourish.
 A social-housing system less reliant on waiting lists would make workers
more footloose.
 Stronger industrial clusters would help. Firms can cut costs by sharing
infrastructure, and attract both talent and finance.
 More streamlined bankruptcy laws would allow money to flow out of
failing businesses and into growing ones more quickly (the World Bank
rates Britain’s insolvency framework 11 out of 16; America and Germany
both score 15).

Discuss:
Poor productivity results in poor growth
OR
Poor growth results in poor productivity
15 marks

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