Are we measuring UK productivity all wrong?

You get the impression that the productivity of the UK is under the microscope, more now than ever. So, business leaders will be pleased to hear that in the latest figures released by the Office for National Statistics (ONS) the UK has seen the strongest two quarters or productivity growth since the recession of 2008.

Productivity is measured by the amount of work produced per working hour and output – per hour – rose 0.8% in the three months to December, which follows growth of 0.9% in the previous period.

Productivity puzzle

But these recent figures will only be a dent in solving the UK’s productivity puzzle which has seen us under-perform stubbornly for the last several years.

Statistics such as, a Briton takes five days to produce what a German worker can produce in four, are often used.

Why this is the case is a deep and complex situation – with explanations ranging from Thatcher’s legacy of decimating industry in the 1980s to more immediate problems of low interest rates and lack of investment in key infrastructure by big business and government.

But one other explanation is that we are measuring productivity wrong. Economics and productivity expert at UWE, Professor Don Webber explains: “I believe we are looking at a measurement issue when it comes to UK productivity. Now, productivity is measured by dividing gross value added by the number of hours of work. But GVA has previously been boosted by the financial services sector, which experienced a huge crash.

“Prior to 2008 the line kept going up and GVA and GDP was strong, and everybody expected it to continue but it has flatlined. Everybody says we’re not innovative enough or the banks don’t provide enough support, but I don’t think these are the main reasons for the productivity slowdown.”

Push down costs

Professor Webber continues: “The value of output is an imperfect measure of productivity. A business’s ability to increase productivity is dependent on three things – to push down costs, push up prices and sell more units. That’s how we measure an increase in productivity but that says nothing about the businesses’ ability to convert inputs to outputs.”

“Many of the firms I talk to question whether this productivity puzzle exists – a more significant challenge for them is whether they are able to charge the same prices as they did last year. Austerity is having an impact on this as it is affecting consumers’ willingness to buy goods and services.”

Austerity

He continues: “Austerity is also seeing fiscal policy curtailed and jobs in the public sector reduced. It comes back to the economic principal of ‘your spending is my income’ and this all feeds into our productivity numbers.

The UK economy is built on consumerism and austerity is cutting that demand. People always look to measure productivity from the perspective of supply and there is a lack of understanding around the demand side.

“I don’t believe we’re as unproductive as people think we are, but we do need to update some of the technology and infrastructure in the UK.

“I also believe it would be better to start re-focusing away from productivity all together and looking at employment figures and measuring the contribution companies make to society.”

Tools

Whether the tools we have in place to measure productivity are sufficient or not remains a major question.

But one specific part of the puzzle that is having an adverse impact is supply chain training, according to the Federation of Small Businesses (FSB).

Recent research by the FSB found only one in ten (12%) small suppliers surveyed reported having been given any skills or workforce development at all by those they supply to, despite a growing skills shortage.

Federation of Small Businesses National Chairman, Mike Cherry, had this to say: “There is a clear skills gap emerging between big and small firms that is endangering jobs, growth and productivity.”

What do businesses think?

In regards to how business owners feel about UK productivity, a recent survey of UK SMEs by HSBC found that whilst 90% were worried for the future of their businesses only 7% had plans to focus on productivity challenges.

Despite Government continuing to make it a central business theme, the survey revealed that just one in ten small businesses were concerned about weak productivity, highlighting a potential chasm between industry and those in power.

Interestingly the survey showed that the transportation and distribution sector are most concerned about weak productivity (20%) followed by those working in real estate (19%) and the legal sector (18%).

Amanda Murphy, Head of Commercial Banking at HSBC UK, comments: “Given the ongoing decline in UK productivity, and the emphasis the Government is placing on reversing this trend, we were surprised to see that just 7% of small businesses plan to prioritise productivity for action next year.

“This suggests we may need to redefine how we talk about productivity.

“In order to make it more meaningful to businesses, but also that small businesses may need to think about efficiency at a more strategic level.”

Potential solution

The research from HSBC also looked at potential solutions and found that workplace culture is a key factor to increasing productivity.

It found that businesses that offer employees the opportunity to work flexibly are more productive.

With UK workers now placing flexibility ahead of financial incentives when asked about what motivates them the most.