UK Labour productivity is a principal
factor in determining the long-term economic growth rate, Government tax
revenues, inflation, and actual wage levels. Since the 2008 recession, UK
labour productivity growth has remained well below the historical average. The
Office for National Statistics (ONS) estimates 20% below its 2008 pre-crisis
trend.
In post-war Britain, UK labour
productivity growth averaged 2-3% annually. However, since 2008, UK labour
productivity has increased by only 5% in 13 years. There are a multitude of
factors affecting UK labour productivity:
- Skills and qualifications of staff.
- Nature of employment.
- Staff morale.
- Technological progress.
- Substitution of capital for labour.
- Manufacturing capacity utilisation.
- Levels of investment.
- Politicism of the management process.
Pay trends generally reduce as the level
of skill and productivity falls within the available labour force. Raising
skills and productivity increases the output level per hour worked, resulting
in staff earning proportionally more and with increased sustainability. In this
scenario, organisations increase the hourly rates they pay staff and reduce
labour costs by employing fewer people.
There are many explanations for the fall
in UK productivity growth. Unemployment rose much less during the 2008 - 2012
economic recession than in the previous recessions of 1981 and 1991. Current
levels of unemployment have fallen to 3.8% in the UK.
Recent increased employment levels
support the theory that organisations retain staff for longer and are far less
likely to make redundancies despite lower economic demand, resulting in lower
hourly productivity rates. Maintaining staff numbers prevents organisations
from having to rehire and retrain staff after a recession ends, to the
detriment of hourly labour rates, which invariably fall due to lower
productivity levels.
In recent years, the UK has seen falling
absolute wage levels and a slowing of wage growth. Organisations may be more
willing to employ staff than invest capital in reducing the labour required, as
low wage growth means retaining staff is relatively more attractive than usual.
Therefore, with lower labour costs, organisations are willing to employ more
staff and use labour-intensive production methods.
During the early 2010s, the credit
crunch held back investments because of the general lack of funds available for
new capital investments, to increase less labour-intensive manufacturing
capacity, or to fund research and development projects. This ultimately held
back employment opportunities and productivity growth.
Labour market flexibility in recent
years, with increased part-time, temporary, and zero-hour employment contracts,
has helped further reduce organisational production and service costs.
Therefore, organisations are more willing to employ additional staff without
increasing hourly productivity rates.
The growth of EU labour productivity,
measured by real GDP per hour worked, increased at the onset of the COVID-19
pandemic before declining during the subsequent economic recovery. This
contradicts the general notion of productivity being procyclical and reflects
the unique nature of this crisis.
Between Q4 2019 and Q1 2021, EU labour
productivity growth remained positive. It accelerated compared to before the
pandemic as staff were furloughed, fewer hours were utilised, and production
rates remained constant. The average annual GDP per hour worked increased by
1.7% during this period.
The increase in GDP was more than twice
the average productivity growth for 2014 – 16 and 2018 – 19, during which real
GDP and total hours worked declined by annual averages of 5.7% and 7.4%,
respectively. The decline was principally due to organisations seeking to
increase production levels through increased labour, rather than looking
internally to improve production efficiency.
During the COVID-19 pandemic,
unemployment was reduced due to the job retention schemes employed across the
EU. Employment levels, on average, fell by an annual 1.6% during the pandemic.
However, in Q2 2021, these trends reversed, with the number of hours worked and
employment rates rebounding sharply, causing productivity growth to slow.
Increasing productive growth is crucial
for the UK, as it navigates the economic headwinds in an increasingly uncertain
world, as factors such as an ageing population, an ongoing shift to
low-productivity services, and the uncertain outlook for trade and investment
post-Brexit take hold. However, there are measures that the UK could take to
improve its productivity:
- Provide funding grants and tax incentives to
organisations to increase the use of technology and engagement in
effective R&D.
- Deregulate market sectors and decrease unnecessary
bureaucracy to remove barriers to entry and encourage new and dynamic
market entrants.
- Reduce the politicisation of the
management process and adopt performance-related pay measures to increase
hourly productivity levels.
- Promote greater competition and mobility in labour
markets by removing restrictive work practices and protecting employment
rights.
- Improve the education system to develop general
numeracy and literacy skills, promoting educational flexibility and human
capital development.
- Use the tax system to incentivise training to upskill
the UK labour force, invest in R&D, and develop markets outside the
EU.
An often-overlooked area of falling
productivity levels is the politics of the management process. An organisation
is as reliant on its staff as its managers to service its customers' needs. An
organisation is only as strong as its weakest part, which is often the low
productivity of its staff.
Customers do not have the right to incur
poor performance. Organisations must be accountable for their performance and
customer service offerings. It is important to remember that staff are paid for
their services in exchange for a salary. There is an important balance to be
struck between prioritising staff "rights" at the expense of customer
service. Staff and customers have equal importance, and one should never be put
at a disadvantage compared to the other.
Many organisations prefer to hire
additional staff to resolve their service or productivity difficulties, which
leads to reduced productivity levels and real wage growth, rather than looking
at their operating procedures to negate the need for additional staff and
increase productivity levels.
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