John Redwood: The UK productivity puzzle

John Redwood

Yesterday, the UK government tackled the productivity problem with its Industrial Strategy. Everyone agrees that if you raise the amount of output each person produces you can pay people more and the society is better off.

In the post war world, waves of innovation have enabled advanced economies to do more and more with less labour. Factories enjoy far more machine power, robots perform tasks people used to do, computers are transforming clerical functions in offices, larger cranes, diggers and concrete mixers have taken a lot of the physical work out of the building site.

The digital revolution offers more of the same. These big technical changes offer big opportunities to share investors to buy into the new ideas, goods and services which are going to transform our lives. As Apple, Google and Microsoft have shown in recent years the winners can generate a lot of wealth.

The UK economy has productivity levels below those of its main competitors on the Continent. Productivity had a bad patch after the banking crash of 2008. Part of the explanation is good news. The UK economy has been better than many Continental economies at creating a large number of lower-paid jobs. Where people are unemployed in France, Italy and Spain and therefore not included in any calculation of productivity, in the UK they are in lower-paid jobs which reduce average productivity given the way the figures are calculated.

Another part of the explanation of post-crash figures is the UK economy lost a number of highly paid jobs which added more to output than the average. The sharp decline in investment banking hit the UK more than the continent as investment banking is a larger share of the UK economy. The North Sea oil fields which had contributed substantially to higher UK productivity with their very well paid jobs and high levels of per person output have been in sharp decline in recent years. As the fields age so they produce less oil until they have to close.

As the Industrial Strategy Green Paper revealed, there are no quick fixes to raising productivity. It hinges on consistent work to raise educational standards, improve skills, speed the rate of new company formation and encourage innovation. Backing an economy with improved infrastructure can help attract more business.

Sometimes innovation and better infrastructure go hand in hand. If railways can move onto a basis of signalling and warning systems on board each train with a central control that sees the whole network and keeps it safe, it will be possible to run more trains per hour on any given piece of track. This will give a welcome boost to productive use of an existing infrastructure and reduce the need for expensive new track. If new ways of generating and using fuel can be developed which reduce the demand at peaks and spread the load over the rest of the day and night, the system can become more productive with fewer high cost new power stations needed. Making productive use of assets is also important, as well as helping people work smarter for better pay.

We are living through a major technical revolution. Digital technology has already transformed personal communications, business data handling and many control systems in industry. There is great scope for it to make many more changes to the way goods and services are delivered, to the way we travel around and to the way we handle everything from buying and selling a house through how we bank to how we are entertained. Much of this will raise productivity, and much of it will offer many exciting new opportunities for business growth and investment success. Over the last year investors did well by owning the US technology giants. The challenge for countries in the rest of the world is to find their own Googles and Facebooks.