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You can’t have your cake and eat it: the UK productivity conundrum

Anyone reading the financial news over the past few weeks can’t have missed the emphasis given to the importance of raising UK productivity.

Productivity is defined as the amount of input required to generate a certain output and is most often applied to labour. This is why statistics such as ‘it takes one French worker four days to produce something which a British worker would produce in five’ are used to demonstrate that UK productivity is lower than most large economies and has not improved since the financial crisis of 2008. Many perceive that economic growth is only possible through increased productivity and it is indeed significant that for the thirty or more years that preceded the financial crisis, both the UK economy and UK productivity grew at an average rate of about 2.5% per year.

So what changed in 2008 and is the lack of productivity gains all bad news? Whilst the financial crisis itself was an unusual event, its effect was to cause a significant decrease in the size of the UK economy (as measured by Gross Domestic Product – GDP). A sustained reduction (two successive quarters of negative growth) in GDP is known as a recession and is not something particularly unusual if we look back over a number of years. It therefore becomes possible to look at the effects of different recessions and draw some conclusions as to their possible effect on productivity.

The clue as to why there has been no growth in productivity since the recessions spanning 2009 and 2010 could lie in looking at employment statistics and comparing this data with other periods when our GDP declined. Since 1970 we have had 4 occasions where over a period of more than twelve months UK GDP declined compared with the previous year. In each of these periods there followed a sharp increase in the level of unemployment as companies went out of business or laid off workers. Significantly whilst the loss of output in the economy was greater than any of the previous downturns, the latest recession saw far fewer workers lose their jobs than one would have expected by looking at earlier data. The relevant information is shown below:

Years of Recession% Loss of GDP% Rise in unemployment per 1% of GDP loss
1974/75-1.7%+24%
1980/81-3.1%+35%
1991-1.1%+48%
2008/2009-6.0%+13%

So how is this data relevant to UK productivity? The statistics shown above suggest the emergence of an unofficial and unspoken agreement between employers and employees whereby workers kept jobs they would have expected to lose in return for showing flexibility in working hours and not demanding wage increases. Since 2009 UK unemployment rates have hit historically low levels, but both wages and productivity have not risen in a way which followed every previous downturn in the economy. The obvious conclusion is that the cost of labour in the UK is at a level which has encouraged businesses to increase output by employing more people, rather than making those employed more productive.

Whilst a lack of improvement in productivity is quite rightly a major concern, our response to the recent economic downturn has kept larger numbers of people employed than has been the case in other major economies. Whilst it might take one French worker four days to produce something which a British worker would produce in five, France has an unemployment rate of nearly 10% compared to just over 4% in the UK. In an ideal world, all countries would like low unemployment accompanied by improving productivity and higher wages. In Europe, it is Germany that currently enjoys the best of both worlds.

Andy MilsomAndy Milson, Head of Partner Training & Development at BNP Paribas Leasing Solutions

Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.

If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.

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