Economics

Business Statistics User Group 8 September 2003

UK Productivity

Christopher Moir Director, Industry, Economics and

StatisticsDepartment of Trade and Industry

Economics

UK Productivity

• Why productivity matters

• The UK productivity ‘gap’

• The drivers of productivity

• The policy response

• Conclusions

Economics

Breakdown of UK Growth

-4%

-2%

0%

2%

4%

6%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

GVA Growth due to Productivity

GVA Growth due to Jobs

Source: ONS

Economics

Latest Gap

100

110

120

130

140

150

1991 1993 1995 1997 1999 2001

USA

France

Germany

Per Worker Per Hour

100

110

120

130

140

150

1991 1993 1995 1997 1999 2001

USA

France

Germany

Source: HMT / ONS

Economics

UK manufacturing productivity

0

50

100

150

200

250

300

Manufacturng Petroleum

products

Chemicals Basic Metals Electrical and

electronic

equipment

Motor Vehicles Textiles,

clothing and

footwear

Food drinks and

tobacco

US

France

Germany

Selected sectors, UK = 100

Economics

UK services productivity

0

20

40

60

80

100

120

140

160

180

200

Transport Communications Distributive

trades

Hotels and

catering

Financial

intermediation

Business services Personal services

US

France

Germany

Selected sectors, UK = 100

Economics

UK Productivity by Sector

0.0

50.0

100.0

150.0

200.0

250.0

All act

ivitie

s

Agri,

For a

nd Fish

Indu

stry

Man

ufactu

ring

Food,

Bev

and

Tob

Text a

nd L

eath

Paper

, Pub

and

Prin

t

Chem

icals

Rubbe

r and

Pla

stic

Min

erals

Met

als

Mac

h an

d Equ

ip

Elect

and

Opt

Equ

ip

Trans

port

Equip

Oth

er M

anuf

Servic

es

Distrib

. and

Hotels

Source: ONS (2000 data)

Economics

Recent productivity performance

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

US UK France Germany

Manufacturing

MarketServices

Growth in Labour Productivity by sector (1995-1999)

Economics

Accounting for the Gap by Factor

Source: Porter and Ketels (2003)

Economics

What Drives Productivity?• The Government has identified five

drivers of productivity:

• Innovation• Enterprise• Skills• Investment• Competition

Economics

Michael Porter on the UK

Source: Porter and Ketels (2003)

Economics

Weak R&DBusiness R&D per worker

0

200

400

600

800

1,000

1,200

US Germany France UK

1995 US Dollars (PPP)

1990 1995 2000

Source: OECD

Economics

The UK Skills Problem• Some problems on supply side• But failing on the demand side:

• Interaction of low value added product strategy with low demand for skills• Reduces individual incentives to acquire new

skills• Undermines business’ ability to deploy skills

– 24% of firms have a training plan– 17% have a training budget– 15% have a HR strategy looking at their own

future skills needs• Low skills equilibrium

Economics

Investment

Economics

Business Investment per Worker

5,000

6,000

7,000

8,000

9,000

10,000

11,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

1995 US Dollars (PPP)

US

France

UK

Germany

Source: OECD

Economics

Capital Stock by Sector

0 50 100 150 200 250

Mining

Gas, Electricity & water

Manufacturing

Construction

Distributive trades

Financial & business services

P ersonal services

US France Germany

Relative Capital per hour worked (UK = 100)

Source: NIESR

Economics

Competitive Markets: Business Environment

1998-02 2003-07

Netherlands 2 1

Canada 3 2

USA 1 3

UK 4 4

Germany 15 13

France 16 16

Italy 23 23

Japan 27 26

EIU Competitiveness Ranking November 2002

0

2

4

6

8

US UK Germany France

Survey Score (0-10)

1996 & 1997

2001 & 2002

Business Perceptions of How Government Supports Competitiveness

Source: IMD Source: EIU

Economics

Examples of other policy on productivity

• Investment

• Innovation

• Skills

• Enterprise

• Competition

• Modernising and Simplifying VAT• Manufacturing strategy• Myners• Higgs Review• Audit and Accountancy work

• R&D Tax Credit• SR2002 £1.25bn annual increase in the science

budget• Lambert Review

• Skills Strategy• Employer Training Pilots• Modern Apprenticeships• Higher Education White Paper• Enterprise Advisers and Enterprise Promotion Fund• DTI Business Support changes• Competition Act 1998• Company Law work• Enterprise Act 2002• Doha trade round• Energy White Paper

Economics

Conclusions• Raising productivity growth vital to sustaining

economic growth• UK productivity gap with other countries a long-

standing phenomenon• Will not be solved quickly

• Indicators suggest UK key weaknesses in investment, skills and parts of the innovation system

• Effective microeconomic policy works with the grain of the market

• Some progress – but much still to do