The biggest current issue in the UK’s economic situation is the continuing slump in productivity. It’s this poor productivity performance that underlies slow or no real wage growth, and that also contributes to disappointing government revenues and consequent slow progress reducing the government deficit. Yet the causes of this poor productivity performance are barely discussed, let alone understood. In the long-term, productivity growth is associated with innovation and technological progress – have we stopped being able to innovate? The ONS has recently released a set of statistics which potentially throw some light on the issue. These estimates of total factor productivity – productivity controlled for inputs of labour and capital – make clear the seriousness of the problem.
Here are the figures for the whole economy. They show that, up to 2008, total factor productivity grew steadily at around 1% a year. Then it precipitously fell, losing more than a decade’s worth of growth, and it continues to fall. This means that each year since the financial crisis, on average we have had to work harder or put in more capital to achieve the same level of economic output. A simple-minded interpretation of this would be that, rather than seeing technological progress being reflected in economic growth, we’re going backwards, we’re technologically regressing, and the only economic growth we’re seeing is because we have a larger population working longer hours.
Of course, things are more complicated than this. Many different sectors contribute to the economy – in some, we see substantial innovation and technological progress, while in others the situation is not so good. It’s the overall shape of the economy, the balance between growing and stagnating sectors, that contributes to the whole picture. The ONS figures do begin to break down total factor productivity growth into different sectors, and this begins to give some real insight into what’s wrong with the UK’s economy and what needs to be done to right it. Before I come to those details, I need to say something more about what’s being estimated here.
Where does sustainable, long term economic growth come from? Continue reading “Growth, technological innovation, and the British productivity crisis”