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Jagjit Chadha (ex head of NIESR and now a Professor at Cambridge) and Issam Samiri have an article in the Journal of Economic Surveys that focuses on the UK’s recent productivity problem. The chart above is taken from that article. Economic growth (or not), and therefore how fast living standards rise (or don’t) is all about productivity growth over the medium and long term. The UK’s problem is this. Productivity growth slowed in all the advanced economies from around 2005 onwards, but it declined by more in the UK, and that relative decline has continued until today.
There is not much the UK can do to buck international trends in productivity. There was no way UK GDP per head was going to continue to grow at pre-2005 rates, so the chart above greatly exaggerates the problem. The survey discusses potential reasons why global productivity growth started slowing around 2005. One story is that the earlier boost to productivity provided by IT in the 1990s started to fizzle out, but to be honest we have more stories than clear answers on this. However, between around 1980 and 2005 the UK kept pace with the US, Germany and France on productivity growth, so there was no UK productivity problem over that period. Those who say the UK has always been in relative decline are just factually wrong.
So what caused the relative UK decline in productivity from around 2005 onwards? The paper goes through various different studies and explanations, and I cannot repeat them all here. How much is due to the importance of banking to the UK economy, so the Global Financial Crisis had an outsize impact on UK productivity growth? Did slower global growth have more of an impact on the UK than elsewhere? Coyle and Mei in a 2023 paper in Economica found that the UK productivity slowdown was largely driven by the manufacturing and information and communication sectors.
Below, in another chart taken from the paper, is the UK’s investment to GDP share relative to other major economies. Investment doesn’t just provide capital that helps produce output, but it is often how technical advances are embodied in production. [1]
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In the 1960s UK investment was substantially lower than in the US, Germany or France, but by the 1970s the UK was at least within touching distance of these other countries. It may reasonably take some time for higher investment rates to show up as higher productivity growth, so perhaps the UK’s relatively good productivity performance from around 1980 was the delayed response to this higher level of investment. Equally, perhaps the decline in relative productivity from around 2005 was due to the decline in the UK investment share compared to these other countries from around 1995.
One idea I looked at in a previous post was that austerity, by delaying the UK’s economic recovery from the Global Financial Crisis, may have had a permanent negative impact on productivity through lower investment. I concluded that austerity, in creating an unusually protracted recovery in aggregate demand from the GFC recession, did have some negative impact on productivity growth and therefore a persistent negative impact on output supply, but how large that effect may have been is very difficult to quantify.
As the chart at the top of the page shows, we actually have two UK productivity/growth problems: the one discussed above, and another that is more recent. In the UK the pandemic appears to have been assciated with a fall in productivity, and perhaps a subsequent growth rate that is even slower than since the mid 2010s. Luckily that is easier to explain, as we can see from the chart above. Whereas the investment share in Germany, France and the US went on increasing through the 2010s, the UK share started declining around 2016. The reason is of course Brexit, and lower investment isn’t the only reason that Brexit would lead to lower productivity growth.
While Brexit was clearly an act of national self harm in terms of productivity growth and therefore UK living standards, the reasons for the UK’s relative decline in productivity growth from the mid-2000s remains something of a mystery, with many potential stories with little consensus about which if any are the more important. My own instinct is that the UK’s low levels of investment compared to other countries since the mid-1990s has to be a key part of any explanation of relatively low productivity growth, but the reasons for these low levels of investment in the UK also remain largely unexplained.
[1] The structural econometric macromodel I and others created in the 1990s had a vintage production function, where technical progress is embodied in new investment.
