How can the UK revive its ailing productivity?

The UK’s poor productivity limits wage growth and better living standards. But the problem has no quick fixes. To boost productivity, policy-makers must establish and stick to a long-term strategy that includes diverse sectors – from technology and innovation to education, housing and transport.

The people of the UK are working hard. But all the toil and sweat does not seem to be doing enough to support a truly buoyant economy.

Herein lies the productivity problem. You can think of productivity in terms of not how hard people work, but how smartly. Economists commonly measure a country’s productivity using the value of goods and services produced per hour (in GDP) of its workforce’s labour (its ‘labour productivity’).

On average, the value of each worker’s hour to the UK economy is lower than in similar countries, such as France and Germany. And although overall productivity is rising in the UK, it grows very slowly. For better living standards, we need to be working much smarter.

The UK’s productivity problem does not sit with workers. While business leaders can help to shape national productivity, the problem largely lies with government decisions that fail to unlock the full value of workers’ time and energy to the economy.

As one of the greatest challenges for our economy, productivity has featured heavily in Economics Observatory articles, with in-depth analyses from economics and policy experts.

Here we look at key lessons from these pieces and other authoritative sources to consider policy-makers’ options for revitalising the UK’s productivity.

Why does productivity matter?

Strong productivity drives higher wages because it boosts the profits that employers ultimately share with their workers. Before the global financial crisis of 2007-09, UK wages improved along with the country’s productivity. Post-crash, wages have stagnated as productivity growth has slowed to a crawl.

Average UK real wages today are much the same as in 2005. On some measures, this is the longest stagnation for centuries.

Strong productivity further supports better living standards through the higher tax revenues that the government receives from these greater profits and wages – income that can be channelled into core public services, such as healthcare and education.

The pending general election only intensifies politicians’ debates over what they can, or cannot, afford for the country. Constrained spending on public services is, at least partly, caused by flatlining growth and productivity.

The UK’s productivity in numbers

To be clear, low productivity growth is not unique to the UK. Labour productivity has plummeted in most advanced economies since the late 1990s. It has been especially pronounced since the global financial crisis and following a major hit from the Covid-19 pandemic.

But the UK performs worse than several comparable economies. It ranks mid-table among G7 countries, based on GDP per hour worked, below France, Germany and the United States (see Figure 1).

Figure 1: Productivity (GDP per hour) for G7 countries, 2022

Source: House of Commons Library, 2024

In 2019, the United States produced an estimated 28% more value added per hour than the UK, according to a 2023 analysis by researchers from the London School of Economics. The French and Germans were, respectively, 13% and 14% more productive than their UK counterparts.

When we look back through time, we see that the UK has performed worse than these three top-ranking countries for decades. It also recovered more slowly from the global financial crisis (see Figure 2).

Figure 2: GDP per hour (in US$, PPP converted), 1990-2023

Source: The Conference Board Total Economy Database, April 2023

In 2023, UK productivity was 24% lower than it would have been had it continued climbing at the rates seen before the global financial crisis, as Figure 3 shows (Van Reenen and Yang, 2023) . Before the crisis, the UK’s labour productivity growth rate was 2% a year. It is currently just 0.5% a year, a drop that costs the average household about £11,500.

Experts calculate that productivity growth rates need to triple to about 1.5% a year for better living standards in the future.

Figure 3: Index of GDP per hour (Q2 2008 = 100), 1979-2023

Source: Van Reenen and Yang, 2023

Which investments could help to fix the UK’s productivity problem?

Slow productivity growth since the global financial crisis is dubbed the ‘productivity puzzle’. Why has productivity struggled more in the UK than in other nations?

Investment feeds productivity, but the UK suffers from chronic underinvestment. The government and businesses have underinvested for decades (Chadha and Venables, 2023). The country’s especially severe brand of austerity from 2010 greatly weakened public investment further (Resolution Foundation, 2023) and Brexit has deterred private investment.

This lack of investment traps many UK firms in a ‘low-skill, low-wage, low-productivity mode of operation’.

So which investments will help workers to deliver more per hour? The key is to enhance skills and capabilities, but also the opportunities to use them. Let’s first assess the range of policy sectors discussed by Economics Observatory authors in which investment would enhance national productivity, namely: innovation, including artificial intelligence (AI); education; housing; and transport.

Investing in innovation for productivity: the role of R&D and AI

Innovation in new products and processes is the engine of long-term growth in productivity. It adds value to both the manufacturing and services sectors – not least because investing in innovation-based services, such as design and research and development (R&D), adds value to manufacturing. But UK investment in R&D is relatively low compared with global levels (see Figure 4).

Figure 4: Nominal vs GDP share of research and development (R&D) spending, by country

Source: OECD, 2022

Investing in innovation alone is not enough. Here we have another productivity puzzle. Major scientific progress in recent years – from biomedicine to advanced materials and AI – has not made a difference to overall productivity.

A closer look at AI helps to solve this riddle. It is hard to avoid speculation on this technology’s potential to usher in a new industrial era of high productivity. Some firms and sectors are certainly benefiting from its powers – whether accelerating medical discoveries or designing marketing strategies more efficiently. But overall, across the economy, AI is not helping productivity – yet.

Why is this? A likely explanation is that it currently only benefits large and/or young, digitally savvy businesses. The top 5-10% of businesses, whose managers know how best to use new technologies, are pulling ahead of the majority. This harms competitiveness and may actually reduce the country’s average productivity.

This picture, seen across OECD economies, emphasises why complementary investments are essential. These could be in developing new skills, organisational changes and buying equipment that allow more firms to absorb knowledge and generate new practices. In short, the need is for investments that help people to understand and make the most of innovations.

Illustrating this point, a study of US manufacturing firms found that using big data for predictive analytics only translates into productivity benefits for firms that invest sufficiently in skills, hardware and workplace organisation (Brynjolfsson et al, 2021).

But organisational change is difficult and expensive. To speed it up effectively, government will probably have to share the cost of this investment.

Investing in education and skills for productivity

Education gives people skills and knowledge that increase the value of their time and energy to the economy – their human capital. But government spending per school pupil has fallen since 2010 and the pandemic stalled children’s learning. What’s more, for adults who need to retrain or improve their skills, UK employers are increasingly unlikely to offer training.

The case of Northern Ireland demonstrates the value of education to productivity. It is the least well-qualified nation of the UK, and this is the main reason why it is also the least productive region. Over a fifth (21.4%) of its working age population has low or no qualifications, compared with 15.1% in Scotland, 16.1% in England and 17.9% in Wales. If Northern Ireland’s workers matched Scotland’s for education, the region’s GDP growth rate, through better productivity, would be 0.25% higher (FitzGerald, 2019).

The links between education and productivity have justified major investments in higher education across the UK, including significant expansions in 1992, 1997 and 2013. But the UK’s stagnating productivity shows that we urgently need to look at other sectors of education.

Indeed, the productivity of today’s workforce began to take shape before even starting school. Research identifies early childhood education as one of the most cost-effective strategies for promoting economic growth. It not only helps children to do better at school, but it is also essential for their emotional, social and overall wellbeing.

Investing in more teaching staff – especially in primary schools, which deliver greater long-term returns on every pound of investment – will also improve productivity. While the quality of teaching is also very important, students generally do better at school when there are more teaching staff.

But the ratio in the UK – around 17 pupils per teacher – is among the highest in Europe. Reducing the ratio to match the average level of the top three OECD performers could add 1.7% to GDP per capita in the long run.

Raising skills levels among adults is another productivity booster. While the UK does well at higher education, it does badly for its non-graduates. Reforming further education, vocational and adult skills and apprenticeships could both raise skill levels and reduce inequality (Layard et al, 2023). This entails building a better understanding of employers’ needs (recall the AI skills shortage, for example).

Compared with employers in other countries, UK firms invest very little in staff training – and this picture is worsening. We increasingly see ‘blended workforces’ of in-house workers and outsourced freelancers to improve productivity, an arrangement that could make employers less willing to train their workers.

Investment in training, thus, needs to come from both employers and government, and government must increase the financial incentives for businesses to provide training. An example could be offering more generous tax credits.

Investing in housing and transport for productivity

Housing and transport can also affect levels of productivity. We can think of this as getting the right people in the right place. If a firm’s ideal employees cannot afford local housing, or their commute from a cheaper neighbourhood is just too long, the firm will miss out on the workers and their productivity-boosting skills.

High house prices and rents stop people moving to where their skills are needed and impede agglomeration – the clustering of employees and firms – something that further strengthens productivity.

For example, one Australian study estimates that the movement of younger households out of the Sydney metropolitan area to more affordable, but remoter, areas significantly weakens productivity in Sydney and New South Wales (Maclennan et al, 2019).

A shortage of accessible public transport further erodes productivity. In European cities, 67% of the population can reach the city centre by public transport in just 30 minutes. But in large UK cities outside London, only 40% of people can do so. This poor urban transport costs the UK economy over £23.1 billion every year, one study estimates (Rodrigues and Breach, 2021).

The evidence suggests that we need much more emphasis on joining up housing-transport policy and planning. This is true even with the rise of working from home. According to figures from the Office for National Statistics (ONS) for 2022-23, just 16% of adults work from home only, and 28% are hybrid workers. In the future, higher fuel costs and net-zero targets are likely to make denser and more work-accessible housing increasingly necessary.

On the subject of working from home, evidence shows that it can stifle productivity for many individuals. But recent data suggest that it does increase productivity overall, albeit at the cost of wage growth. It seems that workers are happy to forgo higher pay in return for more time at home.

How can devolved policy-making support productivity?

As well as considering which specific policy areas support productivity, we should also look at how pro-productivity policies are implemented, and by whom.

The UK – England in particular – has some of the biggest regional inequalities in productivity among OECD countries. These differences have widened over the past three decades. London’s productivity is now more than one and a half times the UK average.

Many pro-productivity policies come from Westminster, including education, innovation, transport, planning and regional development. Moving away from these heavily centralised politics towards more localised decision-making may not necessarily support national growth rates. But it would reduce regional inequalities and deliver the benefits of higher productivity to poorer areas – such as greater resilience to crises and disruptions.

Experts argue that policies should be devolved to the level where locally driven strategies and resources will translate into outcomes most effectively. At this level, decision-makers can combine economic development, planning and infrastructure with public services. In other countries, policies with a big impact on productivity, including infrastructure and planning, are typically overseen by ‘mid-level’ governments.

The core problem: disconnected and short-term policies

‘One major cause of our current economic failure is our chronic inability to stick to anything for very long’ (Westwood, 2024).

The diversity of issues discussed so far – education, AI, housing, devolution – emphasise how poor productivity is a multifaceted problem. We therefore need a joined-up approach to boosting productivity.

The even bigger message that comes through expert analyses of the UK’s productivity is that we must prevent policy churn. The UK is not short of plans and strategies to boost productivity. But they have achieved little thanks to the constant chopping and changing in government policy, especially in recent years.

For example, between 2011 and 2023, the UK had 11 growth strategies, nine business secretaries and seven chancellors, tallies a 2023 report from the Institute for Public Policy Research (see Figure 5).

Figure 5: A timeline of economic strategies in the UK, 2010-23

Source: Institute for Public Policy Research, 2023

This churn causes extreme uncertainty, and this ‘does not help when asking businesses to invest on a 20-year horizon’, explains Diane Coyle (University of Cambridge and a lead editor of the Economics Observatory).

Businesses and individuals hesitate to invest in new equipment, technologies or skills, not knowing if they’ll be needed in future. Constant readjustment to new policies also saps time and resources.

Could a new policy institution be the solution? A number of otherOECD countries have a public body focused on productivity and growth. The UK does not.

Some economists call for a Growth and Productivity Institute (GPI) for the UK. An institution independent of government – ideally a non-departmental body – could join the dots between different policy areas and stakeholders, and provide the expertise and capacity for long-term pro-productivity policies. Similar institutes in Australia and New Zealand appear to be effective.

A GPI would not fix all productivity problems, but it could help policy-makers to take decisions that, while they may not be immediately popular, are in the long-term interests of the UK.

Because to fix productivity, we must look past the short term. Productivity improvements won’t happen overnight and failing to play the long game will only worsen the problems for decades to come.