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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