What is productivity, and why is Britain lagging behind other advanced economies? James Meadway, senior economist at the New Economics Foundation, explains

What is productivity?

Productivity is the rate at which the economy turns inputs into outputs. It’s basically the efficiency at which you can produce things. So you’ve got labour, capital, and raw materials, and when you put them all together to produce something, how much output do you get? This can be a physical thing, or a service: you produce people working in a shop, and that’s producing a service. Productivity is the rate at which you can do this.

How is it measured?

The way you measure this is usually output per hour worked. So you take the number of hours somebody has worked, then you work out how much they are actually producing, you divide the one by the other, and that tells you how much output per hour worked is.

Why does productivity matter?

Because the world is competitive, because capitalism is a competitive system, there is this pressure to continue to grow and compete and try and accumulate and produce profits. But in order to do that consistently over time, you have to deliver productivity growth. So it’s a very important measure of the health of the system.

And how can you achieve productivity growth?

For developed countries, i.e. advanced economies, if you want to have any kind of growth over a long period of time you don’t really have the option of what happened in China over the last decades: very large numbers of people moving off the land to work in factories in the cities. That meant that they were moving from a relatively low-productivity kind of work to a much higher-productivity type of work. In the case of Britian and most of the older capitalist countries, this process has already happened – the process was complete by the time of the enclosures in the 1830s. So there is no real option to make that productivity gain by just moving people from the countryside into the factories. If you want growth to continue as a developed country you have to improve productivity over time.

Why has Britain been so bad at doing this? Its productivity is more than 20 percent lower than that of other advanced countries.

Britain has had lower productivity than somewhere like France of Germany, and the US in particular, for a long period of time, at least going back to the Second World War and probably beyond that. We used to have a lead and then became less productive – it’s a long-standing feature of British capitalism. What you saw in the 2000s was what appeared to be a process of catching up: productivity appeared to be improving during the boom. The last government sought to secure Britain’s place in the capitalist world by closing that productivity gap, and it did appear to be closing right up until 2008.

And then the crash happened.

Yes, after which productivity collapsed not only in this country, but everywhere. This is kind of what you expect to happen in a recession: As we said, output per hour is the measure, and because you’re in a recession, output falls. But you’re employing the same number of people to work, so clearly your productivity is going to drop. You’re selling fewer things, but you have the same number of people working. What you then expect to happen is for productivity to recover again. Partly because people are laid off, so unemployment goes up, partly because there is a kind of clearing out of old producers, or less efficient firms, there’s redundancies and plant closures and so on. So you have this process by which productivity growth starts to pick up again.

But this hasn’t happened?

No. What is exceptional since 2008 – exceptional in terms of previous history here or anywhere else, and relative to other developed capitalist countries – is that productivity just has not picked up. We’d expect it to rebound after the recession, but it hasn’t. It’s actually fallen since the recession (it first picked up and then fell again recently). So this is really quite mysterious. It’s not quite clear what’s going on, but I suspect the story goes something like this.

The big picture is that large capitalist developed countries – the older bits of capitalism – have been having trouble with productivity for a while. Growth has been slowing down over time. There was this weird thing in the 2000s where things would appear to go right, but it turns out that was quite illusory, because it’s just debt-driven, it’s driven by the economy shifting money around, rather than really producing something. So you have this debt-driven growth in which debt can give the impression of prosperity, even when real earnings for most people are flat of ralling. It’s increasingly difficult for large capitalist countries to increase productivity growth. That’s the general picture.

And in Britain?

There is a productivity problem that is specific to Britain. As we said, Britain has had lower productivity for a long time, but it seems to be getting worse. And that’s due to two things. Firstly, British capitalism is just very bad at investing. If you don’t invest in new machinery, new equipment, new buildings, training for your workforce, all those things – if you don’t invest, you don’t get higher productivity, it’s as simple as that. As in capitalism in general, you have to put money into buying new machinery, new equipment – to make cars, to have faster computers, all that sort of stuff. And if you don’t continually do that, you don’t get the productivity gains from new equipment. So you have a low rate of investment, and the British rate of investment is lower historically than in pretty much every other pre-eminent advanced capitalist country (a recent exception may be Italy). Much lower than China, espcially, where investment accounts for 40 percent of GDP. So you have this historic problem of low productivity associated with a low rate of investment.

What happened more recently?

Since the crash, the rate of investment has fallen still further – the investment share of GDP has fallen ever since 2008. Companies are investing less, which means they are less able to deliver productivity growth over time. Companies are investing less and less. So, slowly everything is grinding to a halt. The return to growth that we’ve seen is really a return to the kind of growth we saw in the early 2000s, that is to say, it is fuelled by debt – it’s got that illusory quality. Underneath that, investment has fallen still. In other words, British capitalism is in a very bad place. That’s the productivity puzzle.

What are the consequences of this?

What’s compensated for the lack of productivity is the fact that we have very few protections in the labour market: trade unions are weak, strike levels are very low, we witness the spread of flexible work and a massive spread of zero-hour contracts. So the labour market has compensated for low investment and low productivity by making people work harder.

This can be seen in the recent skills and employment survey: intensification of work is absolutely huge – people are working much harder than before the recession. So we’re compensating for the failure of British capitalism to invest. What we’ve got is people working longer hours if they can get them (a lot of people are reporting that they’re underemployed because they can’t get the hours). Real wages are falling, you have this intensification of work, the spread of zero-hour contracts and unpaid internships etc., a whole load of things that are really unpleasant, which are all just compensating for low productivity. Because of the faults of British capitalism, people have to work longer hours for less money over time.

Is there a way out of this?

Not as things stand. It will be very hard to deliver increases in real wages. The only way you can do this without improved productivity is if you have redistribution of some sort. If that doesn’t happen, and if you have weak trade unions – and a government which is not doing anything about sorting out redistribution in favour of most people, whatever gloss or rhetoric they put on it – then the chances of people’s real wages improving whilst productivity is falling are very slim indeed. It’s almost certainly not going to happen.