Productivity is notoriously hard to measure meaningfully. There are various metrics to use at firm level and at national level.
In our chart of the month this year we have looked at a single, macro measure of productivity – GDP per hour worked (source OECD).
Britain’s low productivity relative to some of its peers is a subject of constant discussion. Indeed, GDP per hour worked is somewhat lower in the UK than in France and Germany.
The question we are trying to look at in our chart of the month is the source of this lagging behind.
At least part of the answer seems to lie back in the 1970s.
As the first part of our chart of the month shows, productivity growth stalled between 1972 and 1976 – a period of Britain in crisis:
“Britain was hit throughout the 1970s by skyrocketing inflation and unemployment (stagflation, in other words), a wide range of strikes, power cuts, and states of emergency. Trade unions could be called “robber barons” (Taylor 1980; Milligan 1976), as they opposed the Conservatives’ statutory incomes policy and brought down the Conservative government, thereby answering the question asked by Edward Heath, when he called a general election in February 1974: “Who Governs Britain?” After 1975 they were also deemed responsible for tearing to pieces Labour’s Social Contract, paving the way for the 1978-1979 Winter of Discontent which in turn sealed the Labour Party’s defeat. British people suffered from a sense of despair and pessimism, while Britain struggled in the 1973 oil crisis and, on the brink of bankruptcy in 1976, was forced to ask for a loan from the IMF. At the same time, academics started to argue that the country was “ungovernable” (King 1976) or “dying” (Kramnick 1979), while the power of the trade unions seemed impossible to curb.”
Britain was still stuck in the post-war corporatist settlement. The governments of Edward Heath and James Callaghan were unable to define a new direction, instead focusing on trying to make the existing settlement work better. The result was aimless drift and constant firefighting.
A further period of flattening productivity growth was seen from 1983, possibly associated with the turbulence of the Thatcher reforms.
Yet, as our second graph shows, since 1990 Britain has outperformed other comparable European countries in terms of productivity growth as measured by this single metric.
A further period of flattening seems to have followed the financial crash – maybe not surprising given Britain’s outsized financial services sector. The trajectory now seems to be correcting itself once more.
When talking about UK productivity, it seems that the damage done in the 1970s is still with us today. We have not managed to recoup those losses fully despite decades of subsequent good performance.
As the chart shows, Britain lost ground in its relative performance between 1970 and 1990. Improvements since then have not yet put it in the same position as it was then relative to other countries – except for Italy with its plummeting productivity.
As Nick Tiratsoo put it:
“Britain needed strong government in the 1970s, but its politicians dithered and trimmed, flunking difficult decisions and necessary confrontations. They were ultimately culpable. The experiences of the 1970s are, therefore, taken to illustrate one central lesson: that political leadership must always be absolutely resolute and uncompromising.”
There are, maybe, lessons in this for today’s and tomorrow’s political leaders.
The first is that economic success is largely dependent on appropriate and significant internal reforms to keep up with the times. Let us look to ourselves, not outside our own borders. for the reasons of success or failure.
The second is that dithering and avoiding difficult decisions leads to governance failures that burden the country for many decades after the political leaders responsible leave office and ride away.
It’s time we again got some resolute leadership. Sadly, none seems to be on the horizon.
Firm Level Productivity. One final comment.
Much is made of the fact that there is a big gap in productivity between the most and least productive British firms. While true, is this unusual?
On average across the OECD, the most productive (90th percentile) manufacturing companies produce around 6.6 times as much value added per worker than the least productive companies (10th percentile). For services, the multiple is 7.9. For some countries (Ireland, the Netherlands, Hungary, for example) the gaps are wider.