The productivity puzzle: what is the missing piece?

The financial crisis of 2008 took a huge toll on productivity in the UK, and more than a decade on, levels have failed to recover. Often referred to as the ‘productivity puzzle’, it is the biggest enigma of the UK’s post-crisis economy that continues to baffle economists to this day.

The slowdown in productivity has had a huge impact on our nation’s output, wages and living standards, but is there a solution in sight?

The startling stats

During the four decades leading up to 2008, the UK’s labour productivity – the amount of gross value added (GVA) generated per hour worked – grew at a steady rate of more than 2% per year

But the financial crisis completely destroyed this: at the end of 2009 the annual productivity increase had fallen to around 0.7%, meaning the amount being produced per hour of work had fallen by two thirds. 

By 2016, the UK’s productivity was 16.3% lower than any of the other G7 countries and in 2018, productivity levels were 19.7% below the pre-2008 trend path – the worst productivity rates since the start of the Industrial Revolution.

We can’t afford to ignore the productivity crisis – solving it could yield £83bn a year for the economy. We need to work out what went wrong, why productivity levels remain so low, and most importantly, how we can shift the balance. 

Why has productivity plummeted?

Despite extensive research and a wide range of suggestions from experts, the causes of low productivity levels remain poorly understood.

One thing that is clear is that it is definitely not because workers in the UK are lazy – in fact, we are towards the top of the European league table according to a number of work intensity measures.

Suggested reasons for our dismal productivity rates include Brexit, low hiring costs, cuts to public investment, slowdown in the rate of innovation, and mismeasurement of output growth. 

All of these things are likely to have contributed, but they are only one piece of the productivity puzzle. The UK’s productivity problems run deep and there will be no one-size-fits-all answer.

How has COVID-19 changed things?

At the start of the pandemic, there was hope that COVID-19 might help to solve the productivity crisis. And on the face of it, the initial figures were promising, with productivity rising by 0.9% in the first quarter of 2021, around twice the pre-pandemic rate.

However, it soon became clear that this apparent increase in productivity was coming at the expense of burnout. Throughout 2020, four in five workers in Britain felt close to burning out, with 34% of them considering therapy for the first time.

Research shows that employees were spending more hours working in order to maintain output. The figures were exceptionally bad in London, with 51% of staff admitting they were working beyond their usual hours when working from home, compared with 40% of all those across the UK.

It is clear that the pandemic was not the immediate silver bullet for productivity and workplace wellbeing that many were hoping. However, it may offer us the chance to reflect, reset, and change the way we do things going forward.

Who is responsible for improving the UK’s productivity?

The Government undoubtedly has a role to play in finding solutions to the productivity crisis. 

In his speech to the 2021 Conservative Party conference, Boris Johnson claimed that his party would ‘solve the national productivity puzzle… by investing in skills, skills, skills’. And Rishi Sunak’s Autumn Budget argued that ‘providing a world-class education to all our people’ would help to create a ‘higher-wage, higher-skill, higher-productivity economy’. 

Other important steps include increased investment in infrastructure and further R&D spending and credits.

Companies also have a pivotal role to play in increasing productivity, and it seems as though they are starting to realise this, with 80% of business leaders planning to take significant steps to improve productivity in 2022.

What is the missing piece of the productivity puzzle?

The single most effective way to optimise productivity is to put people first.

Companies need to invest in employee engagement tools and offer more comprehensive training. And managers need to lead the way by giving manageable workloads and eliminating long hour cultures. 

Encouraging employees to take regular breaks is also absolutely key, as this leads to better and more sustainable performance.

There are many pieces to the UK’s productivity puzzle – now is the time to start fitting them together and working towards a more productive future.