For three years, successive shocks have shaken the British economy. Covid-19 has pushed consumers online, office workers to their kitchen tables and older workers into retirement. Energy prices soared, while Brexit rewrote trade and immigration rules, reshaping the labor market.
Yet the latest official data suggests that this upheaval has changed the trajectory of UK productivity — the crucial factor that will determine the long-term standard of living.
The figures published last week by the Office for National Statistics showed that output per hour worked, the critical measure of labor productivity, was 2.1% above its 2019 average in the last quarter of 2022.
The data provided the first reasonably reliable picture of the UK productivity situation in the aftermath of the pandemic, as previous figures were skewed by Covid Lockdowns and employment support programs.
This suggests that the weak trend that has weighed on UK living standards since the global financial crash of 2008-09 is essentially unchanged. This is a surprise given the magnitude of the changes in the economy and the way businesses operate.
Policymakers at the Office for Budget Responsibility, the independent fiscal watchdog, and the Bank of England initially warned that Covid could drag down productivity for years. They said the crisis had robbed businesses of opportunities to invest or innovate while workers who lost or changed jobs would not be able to make the most of their skills.
Other economists hoped the pandemic could have the opposite effect – generate a productivity bonanza as the recession sent weaker businesses to the wall and pushed survivors to adopt technology and practices faster than they expected. would have done otherwise.
“That’s one of the puzzles of the pandemic,” said ONS chief economist Grant Fitzner. “Typically, major crises lead to major structural changes.”
Low productivity growth is a huge problem, given the UK’s low starting point. International comparisons suggest the United States, France and Germany produce about a sixth more than the United Kingdom per hour worked. As Fitzner told a House of Lords committee last month, countries with such increased productivity “can afford higher tax rates, they can afford to pay for better public services , and they can probably afford to have a better standard of living”.
One theory of the unchanged trend in productivity is that the Covid government fiscal support, which kept businesses from going bankrupt and workers from having jobs, prevented the process of “creative destruction” from occurring. But other economists say the most likely explanation is that there have been both positive changes and large offsetting effects – and the long-term outcome has yet to be seen.
Bart van Ark, director of the Productivity Institute, a UK government-funded research network, said “if you focus on the macro number, you miss what’s going on under the hood.” For many businesses, the Covid lockdowns brought an “instant boost” in productivity, he said, as they led to the overnight adoption of existing technologies to meet online, communicate with teams or share documents.
Greg Thwaites, research director at the Resolution Foundation think tank, said later staff shortages could also have spurred companies to work more efficiently, even if they hadn’t invested in labor-saving machines. ‘work.
There is anecdotal evidence to support Thwaites’ view: many pubs and restaurants have simplified menus due to difficulty in hiring chefs, while transport companies say a lack of drivers has led to jobs much more streamlined with supermarkets.
But individual firms are struggling to increase productivity in the face of short-term shocks and large structural headwinds. Activity in some sectors, such as hospitality, has only just returned to normal, while productivity gains in energy-intensive sectors, including manufacturing, have been eroded over the past year .
Paul Mortimer-Lee, a researcher at the National Institute for Economic and Social Research, a think tank, said the UK had over time made a “societal choice” to focus on growth sectors of generally slower productivity, rather than reviving manufacturing, which has greater potential. He had therefore entered the pandemic “with pre-existing conditions, to use the Covid analogy”, he said.
One of the biggest headwinds has been the coming into force of the UK’s post-Brexit trade rules. The BoE has always said these barriers will weigh on long-term productivity, but now it thinks the effects are being felt faster than originally expected.
Brexit, Covid and the energy shock have all deterred companies from investing in the IT, machinery and other equipment needed to improve worker performance. The BoE, which previously thought productivity growth would pick up, now expects no improvement until 2025.
These are problems that ministers could solve, Thwaites said, by negotiating better terms of trade with the EU and offering businesses sustainable tax incentives to invest, as well as by stepping up successive governments’ efforts to reform planning rules and strengthen the skills of the workforce. “Much of it is under our control.”
In his spring budget, Chancellor Jeremy Hunt announced a three-year £27bn tax relief package aimed at increasing business investment, as well as measures to boost the UK workforce. But the OBR said that unless the tax relief becomes permanent, it will simply lead to companies accelerating investment. It would not change the capital intensity of the economy or the trajectory of productivity.
Even without government intervention, some economists predict a rebound in productivity in advanced economies as the forces unleashed by the pandemic begin to take effect. So far, the most profound change – the widespread adoption of hybrid working – does not appear to have helped or hurt productivity significantly, measured in output per hour worked.
But global surveys suggest that people split the time saved on commuting between work, leisure and family responsibilities, which should in theory boost productivity on the alternative measure of output per worker.
Fitzner described this as “a rare occasion where a change in work practices has been positive for both workers and employers”, with the latter having “a happier workforce working slightly longer hours “.
Recent breakthroughs in generative AI have fueled hopes for a greater rebound in productivity, which would be slow to materialize but could transform wealthy economies.
“Productivity is a long-term measure,” said van Ark of the Productivity Institute. “The technology is there. The ability to generate skills, to have a better work-life balance, will be there. Some of the bad things have to go.
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