Fall in UK labour productivity is worst in 5 years
Labour productivity in the UK contracted in the second quarter at the fastest pace in five years, highlighting how a trend that has persisted since the global financial crisis has accelerated as a result of Brexit uncertainty.
Output per hour worked, the standard measure of productivity, dropped 0.5 per cent over the three months to June, compared with the same quarter last year, the worst performance since the April-June period in 2014, the Office for National Statistics (ONS) reported on Tuesday. It follows two quarters of stagnation.
Productivity is considered the single most important determinant of a country’s standard of living and lack of growth limits a country’s ability to become richer.
In the UK, productivity has stagnated since the 2008 financial crisis and failed to recover as it typically does following contractions. Moreover, it has weakened since the 2016 Brexit referendum and contracted in the past year.
Many economists and businesspeople point to the lack of business investment as a reason for deteriorating productivity. Business investment has barely expanded since the second quarter of 2016 and contracted 0.4 per cent in the three months to June.
“The low cost and flexibility of labour relative to capital has certainly supported employment over investment,” said Howard Archer, chief economic adviser at EY Item Club, a consultancy.
As the Brexit deadline approaches, businesses have been more inclined to postpone costly investment.
“This unwillingness to invest is partly down to the ongoing unpredictability which is looming large for all businesses,” said Mike Cherry, national chairman of the Federation of Small Businesses. “The political uncertainty is not only dragging down confidence, but is now also a drag on the UK’s productivity.”
The inability to increase the value of goods and services produced per hour of work limits what companies can afford to pay their workers.
“Business investment collapsed in the wake of the referendum [and] that will weigh on productivity and wages for a long time to come,” said Paul Johnson, director of the Institute for Fiscal Studies, a think-tank.
Richard Heys, deputy chief economist at the ONS, noted that “both manufacturing and services saw a fall on this time last year, with only a couple of other relatively small sectors contributing positively”.
Utilities and construction were the only sectors which recorded a rise in productivity, while output per hour fell 1.9 per cent in the manufacturing sector and by 0.8 per cent in the services sector. Services account for about 80 per cent of the UK economy.
The fall in labour productivity represents a continuation of the UK’s “productivity puzzle”, with productivity since the economic downturn in 2008 growing more slowly than during the long period before the downturn.
In the 11 years to the second quarter of 2008, UK productivity grew 25 per cent, compared with near stagnation over the past 11 years.
The UK also underperformed its peers. Since the second quarter of 2008, the UK’s lack of growth contrasted with an average 9 per cent expansion in labour productivity for the 36 member countries of the OECD, the Paris-based club of mostly rich nations
Nicholas Bloom, professor of economics at Stanford University, calculated in a paper published in September that Brexit had reduced UK productivity by between 2 per cent and 5 per cent over the three years since the referendum. A large part of the reduction was because companies were “committing several hours per week of top-management time to Brexit planning”.
Moreover, Brexit-related expenditure reduced spending on intangibles such as research and development, software and training, and led to lower levels of multinational investment and lower supplies of skilled foreign workers, all of which have had a negative impact on productivity.