The Economy

Sizing Up the U.K.’s Flatlining Productivity

Economic efficiency in Britain has declined over the past decade to its worst level in centuries, and it's not the only country struggling to be pr...
David McCannFebruary 27, 2020

Most of the world may think we’re long past the financial crisis of 2008. But new research suggests that in the United Kingdom, and perhaps elsewhere, the harm has been much more lasting — and still needs correcting.

According to new data that only makes the timing of Brexit more worrisome, during the decade after the crisis, the U.K.’s economic efficiency fell to its worst level in 250 years.

Productivity growth, or the annual increase in output per worker, fell to an average of less than 0.2% per year over the decade, compared to a normal trend line increase of between 1% and 3% a year. More recent figures suggest little improvement last year.

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As a rule, productivity data falls under the radar because it bounces around so much from one year to the next. But the slump this century has been dubbed as “unprecedented” by the authors of a recent paper in the U.K.-based National Institute Economic Review. They looked at data as far back as the dawn of industrialization in the 1700s.

In such environments, leaders should assess whether they are providing enough capital, machinery, and training to guide more efficient working levels.

Indeed, part of the efficiency slump — which is occurring in the United States, Germany, and Japan as well — is the result of a managerial misunderstanding about what makes companies more efficient. Companies are focusing too much on quick financial wins, such as eliminating costly but highly skilled workers.

The best leaders fight the trend by embracing a culture dedicated to improvement. That can manifest as simply as quick and regular shop floor meetings to discuss production problems or an exchange of ideas between employees on better ways to work. The most efficient companies might dedicate 5 to 15 minutes per week to get people together.

That also has the knock-on effect of empowering workers to seek out improvements in production processes. Overall, this cultural approach makes a company more effective.

Over the past few years, the companies that supply carmakers have embraced the approach to streamlining processes and maintaining a culture of improvement. That has resulted in huge improvements in quality. In turn, it has led to a boost for key profit measures across the industry. The mindset is for people to review what they are doing continuously.

Another issue closely related to the productivity slump is a lack of investment in training and improved labor-saving devices. Focused retraining and better equipment tend to help increase output per worker. But the business climate was gloomy for much of the decade following the financial crisis, which made executives more cautious than usual about spending. There was an air of risk aversion.

Globally, pay raises have nudged up recently, but the lack of productivity growth can make regular pay hikes tricky.

If a company raises wages but gets the same output from its workers, profits will tend to slide. That may be doable for short periods, but it’s unsustainable in the long term. Pay raises are sustainable so long as output per worker increases broadly at the same rate.

Without that boost in productivity, things likely will collapse in a heap.