Politicians and policymakers have long recognised that one of the real challenges holding back the UK economy is the low level of productivity, especially when compared to our nearest competitors such as the USA, France and Germany. In fact, sixty years ago, the UK had a highest level of productivity in Europe but this has declined considerably since then.
As a result, there have been a broad array of potential solutions proposed to address this problem in the last few years including developing a highly skilled workforce, building a modern infrastructure and encouraging greater openness and competition.
As yet, it would seem there has been only a small impact on the productivity of the UK as a result of these initiatives which form a vital part of the UK Government’s Industrial Strategy.
Indeed, the latest figures from the Office of National Statistics (ONS) released last month show that for the third quarter of 2018 (July to Sept), labour productivity measured by output per hour had only grown by 0.2 per cent as compared to a year previously and was the weakest quarterly growth since 2016. Indeed, there was a decline of 0.4 per cent on the previous quarter.
As the ONS notes, this continues the ‘so-called’ productivity puzzle where rather than recovering after the recession of 2008-10 as one would have historically expected from previous trends, productivity essentially flatlined, something which has never previously happened since the end of the Second World War.
Annual growth in productivity was, before the recession, around 2.3 per cent per annum and if output per hour had continued at the same rate as it had prior to 2008, it would now be 24 per cent higher.
If we examine where there has been a growth in productivity since 2008, then the data suggests that output and labour has been moving from highly productive sectors to lower productivity sectors.
For example, whilst manufacturing and construction have made a small contribution to the growth in the output of the UK economy, the largest impact has come from non-financial services. Indeed, output per hour in the higher value added financial services sector has actually declined over the same period with key sectors such as computing, energy, finance, pharmaceuticals and telecommunications generating 60 per cent of the decline in overall productivity.
It has also been argued that another key reason for the drop in productivity is the regional gap between richer locations like London and the rest of the UK. Indeed whereas London’s productivity is at 130 per cent of the UK average, Wales’ performance (at 84 per cent of the UK average) is the worst in the economy. Clearly it means that there needs to be a greater focus by policymakers on improving productivity outside of the more prosperous areas of the UK.
But it is interesting to note that a recent survey from the ONS of over 25,000 firms demonstrated that one of the biggest impacts on productivity came from improved management practices in businesses.
Incredibly, it found that a significant positive correlation between management practice scores and labour productivity with 0.1 increase in management was associated with a 9.6 per cent increase in GVA per worker. In particular, it was continuous improvement (i.e. how the firm monitored its operations and used this information to make it a better business) which had the biggest impact. Improved employment practices, whilst important, had a lower impact on productivity.
Given this, you have to wonder why business schools, especially here in Wales, are not focusing more of their efforts on supporting organisations to improve their management practices and why the Welsh Government is not making a greater effort to encourage them to do given the woeful performance of the Welsh economy? In fact, a survey from the Federation of Small Businesses showed that a quarter of small business owners had never undertaken specific management training with only 20 per cent having invested in external leadership and management development in the last twelve months.
And whilst an £8 million fund has been launched to boost the productivity and performance of small businesses in England and a Small Business Leadership Programme was launched in last year’s Budget to support 2,000 firms across England, there is nothing similar to this in Wales.
Certainly, supporting Welsh businesses to invest in the development of their managers is an area of economic development that policymakers should be focusing on if we are to close the gap in productivity with the rest of the UK and, more importantly, improve its competitiveness across all sectors.