IFS - Weak productivity growth is not confined to a few sectors of the economy
Productivity is currently the most talked about topic in town, and for good reason. At the end of 2014,
UK productivity remained below its pre-recession level and 16% below where it would have been had the pre-recession trend continued. Looking forward, it is only productivity growth that is likely to spur increases in real wage growth and living standards. Alongside the upcoming budget, George Osborne will set out a plan for how to boost productivity.
This Observation aims to provide some context for current discussions by setting out what the most recent data shows about the trajectory of productivity across different sectors of the economy.
Productivity trends by industry
Figure 1 shows how total productivity – output per hour worked – fell at the start of the recession and recovered up to 2011. A similar pattern was observed in both manufacturing and service industries. Across the economy, productivity actually fell through 2011. Since then, manufacturing industries have regained some of their lost ground, but service sector productivity has been stagnant over the past three years. A large part of what explains the trend in the production sector is the ongoing decline in North Sea oil production, which accounts for around 1.4% of the economy and is likely to see a permanently reduced rate of productivity growth. While there are differences between sectors, it is clear that none is close to where they would have been had the pre-recession trend continued.
The service sector accounts for close to 80% of output and is therefore the most important driver of economy-wide productivity growth. Within the stagnant productivity performance of the sector as a whole there is considerable variation, with some sub-sectors quickly returning to pre-recession growth levels and others remaining well below pre-recession levels.
The relatively good news stories are administrative and support services,wholesale and retail and professional services (Panel A). These sectors, which together account for approximately 25% of output, saw strong productivity growth before the recession and have recovered to their pre-recession levels. Administrative and support services and wholesale and retail trade are now seeing productivity growth rates above the average pre-recession trend, while professional services has seen little growth in productivity since 2011.
Accommodation and food services and ICT services were sectors with productivity growth before and immediately following the recession (Panel B). Yet in the last two years productivity has been in decline. These sectors account for around 9% of output.
Transport and storage and finance and insurance together make up around 12% of output and are notable as examples where productivity is still substantially below the pre-recession level and has shown little sign of recovery. It is often highlighted that the financial industry was important for UK productivity growth before the recession and that going forward productivity growth may be permanently reduced. However, as these figures show, weak productivity growth is a feature of much of the service sector. Even if productivity in financial services had continued on its very strong pre-recession trend, overall productivity levels would still only be 2.3% above their 2008 level, and still 11% below where it would have been had the overall pre-recession trend continued. The slowdown in productivity growth in financial services is therefore only part of the explanation for recent trends.
Finally, there are some industries that did not see growth either before or after the recession. These include government services (19% of output). As such, the weak performance in these industries does not explain why overall service sector productivity growth is so much lower than before the crisis.
Productivity growth has been weak in almost all sectors of the economy, and negative in some. The lack of productivity growth in the finance sector has been important, but cannot explain the majority of the recent weakness.
Much has been written about the various explanations for the lack of productivity growth, which include low investment in new capital, an impaired allocation of resources, higher employment as a result of weak wages and possibly some measurement error. When the Chancellor sets out his productivity plan, the focus is likely to be on those areas of public policy that we can be confident matter for productivity, such as investment in skills, science and infrastructure. Such investments could provide a welcome boost to productivity in the medium term but are unlikely to provide immediate fixes for current productivity. Finding ways to boost productivity today will be much harder.
Latest News from
Delay to roadmap could lead to “a further rash of business closures”: IEA expert comments on ONS labour market figures15/06/2021 13:30:00
Professor Len Shackleton, Editorial and Research Fellow at free market think tank the Institute of Economic Affairs, commented on the labour market figures from the Office of National Statistics showing the unemployment rate has fallen to 4.7 per cent
“Chancellor right to reject calls for furlough extension”, says IEA expert15/06/2021 12:30:00
Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, commented on calls to extend the furlough scheme
Civitas - Study finds over 80% CofE dioceses appoint clergy who advocate racial justice activist claims & over 70% promoting climate activism – marking Church’s ‘separation of the head from the body’10/06/2021 11:35:00
In a new report, researchers have set out to investigate the scale of support for ultra-progressive radical activist agendas alleging ‘systemic racism’ in English society, the understanding and use of ‘unconscious biases’ and prescribing a ‘climate emergency’ doctrine within the Church of England.
‘Special relationship’ can thrive if UK forges new green trade agenda with US at G7 summit – IPPR report10/06/2021 10:35:00
Ahead of the G7 leaders’ summit in Cornwall, the IPPR think tank is urging the UK to spearhead efforts to rewrite the rules of global trade.
IEA - “Social distancing rules must go on 21st June”: IEA expert responds to ONS data on UK pubs and bars sector10/06/2021 09:35:00
Christopher Snowdon, Head of Lifestyle Economics at free market think tank the Institute of Economic Affairs, responded to figures from the Office for National Statistics showing that 55 per cent of pub staff are still furloughed and only 24 per cent of pub owners have “high confidence” that their business will survive the next three months
‘Bitter irony’ that health and care staff are made ill by their work: The King’s Fund response to the Commons Committee report on workforce burnout and resilience08/06/2021 11:35:00
Suzie Bailey, Director of Leadership and Organisational Development at The King’s Fund, responded to the Health and Social Care Committee report on workforce burnout and resilience in the NHS and social care
Adam Smith Inst - Aussies & Brits tell Govts: Get trade deal done08/06/2021 10:35:00
A new poll from the free market think tank the Adam Smith Institute (ASI) and research and strategy firm at C|T Group RSR has found Brits and Australians want to expand trade and secure a comprehensive deal.
G7 Tax Agreement: IPPR says countries can still go further to end ‘race to the bottom’ on tax08/06/2021 09:35:00
IPPR - New developments must prioritise environmental and community needs, say locals on Thurrock climate jury04/06/2021 15:10:00
Local people should have more meaningful ways to shape planning and development decisions to ensure environmental and community needs are met, according to 20 Thurrock residents participating in an innovative climate citizens’ jury.