NIESR: The UK’s Productivity Puzzle: Labour, Investment and Finance

1 Jun 2017 11:34 AM

None of the political parties are coming to terms with the underlying weakness in the British economy – the astonishing slowdown in productivity growth – or offering the right mix of policy solutions to address the problem, a  new briefing by the National Institute highlights today.

The briefing  outlines that:

• UK growth in both total factor productivity and labour productivity has disappointed markedly since the start of the financial crisis, with a gap of some 15-20% between the previous path and current levels
• The overall mix of capital to labour employed in the economy is too low to allow sufficiently high growth in real wages.  This outcome, whilst limiting the impact of the recession on unemployment, has limited the growth in income per head in the recovery. 
• Whilst increasing investment, public and private, is a key part of the answer it must be investment that that firms actually would choose as part of their production set.  Whilst we do not have a history of overinvestment in the UK, it would be possible for investment to increase and not increase productivity because it not the type that would otherwise be chosen. 
• The banking system in a period of retrenchment and reform may be limiting firms’ access to finance or creating real or anticipated constraints on credit availability. 
• The public sector may be able to increase public investment and R&D but there will be some difficult choices to be made given the costs of healthcare with an ageing population.
• Ultimately economic growth is a function of the quality of our institutions which public policy underpins by providing incentives for those creating economic growth.

NIESR Director Jagjit Chadha, who authored the briefing, said: “Above and beyond the question of exit from the EU, the biggest economic problem facing the UK is of the astonishing slowdown in productivity, as it explains stagnant real wages and much of the rise in regional inequalities.  The causes are many and will require concerted co-ordination by an incoming government to solve.  Unfortunately, none of the political parties have addressed the solutions in a wholly convincing manner, which include – reform of fiscal policy, incentives for R&D, assessment of the system of finance for firms and commitments to infrastructure development.” 

Notes for editors:

Prof Chadha will be expanding on the theme of his briefing during his Gresham College Lecture , ‘The Policy Responses’, tonight at 6pm at Barnard’s Inn, London EC1.

The full briefing, “The UK’s Productivity Puzzle: Labour, Investment and Finance” is available on NIESR’s special General Election page.

The Briefing is part of our General Election Briefing series. The series was made possible thanks to funding by the Nuffield Foundation to ensure public debate in the run-up to the vote is informed by independent and rigorous evidence.

For more information or to arrange an interview with the authors of this briefing please contact NIESR Press Office: Paola Buonadonna on 020 7654 1923 / p.buonadonna@niesr.ac.uk  / press@niesr.ac.uk 

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