Is Britain the sick man of Europe?

Continued lower productivity is seen as a sign that the sun's still setting in Britain. But how far will it go?

By Larry Elliot
September 19, 2013 1:59AM (UTC)
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Productivity is a key measure of how well an economy is doing. Put simply, it measures how effective a nation is at making stuff and providing services.

Looking back over the decades, it has tended to increase by a bit more than 2% a year in the UK as more skilled workers use better-quality kit to provide the new products that come on the market.


In the five years since the start of the financial crisis in 2007, Britain's productivity growth has not just stalled but gone into reverse. Had the pre-recession trend continued, output per hour would have been 13% higher than it was when the markets froze up; in reality, it was 2% lower.

The recession was global, so the UK is not alone in suffering a productivity hit. The impact was, however, more severe in Britain than elsewhere, which is why the latest international comparisons show a drop down the league table.

One way of looking at the official data is to conclude it marks a return to the days when Britain's relatively poor productivity record saw it dubbed the sick man of Europe. There was a marked improvement in the 1990s and the first half of the 2000s, but this came to an end in 2007. Now the gap with the US, Germany and France is as big as it was two decades ago.


A slightly more optimistic way of looking at the figures is to say that a period of weak productivity is unwelcome but better than the alternative, provided it is only temporary. The reason output per hour worked is down 2% on five years ago is that the economy is around 3% smaller than it was at its peak while the number of people employed is broadly the same.

Productivity would be higher had firms responded to the recession with mass sackings, which is what they have done in previous slumps.

There has been a trade-off as employees have swallowed pay cuts, falling living standards and zero-hours contracts rather than join the dole queue. Although this is clearly a sub-optimal labour market, things could be worse.


That would certainly be a fair assessment if productivity now starts to pick up smartly in line with rising output. The ONS international comparisons only go up to 2012, a year in which the economy was treading water: 2013 has seen GDP recover and the assumption of many economists, including those at the Bank of England, is that firms will respond to rising demand by making their existing workers do more. If that happens, some of the current gloom about productivity will be dispelled.

There are, though, grounds for long-term concern. Why? Because employers have a choice about how to respond to increases in demand. They can either employ more labour or invest in new capital (although more often than not they will do both in varying quantities). In the current climate, workers are easy to come by while squeezing money out of the banks is difficult and time-consuming. There are strong incentives for firms to use more labour and less capital which would – if they persist during the upturn – condemn Britain to a low-productivity future.


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Britain European Economy Global Recession Productivity The Guardian U.k.