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Analysis of Productivity Growth in the United Kingdom

Table of Contents

1.

1. Introduction

2. Returns Derived from Productivity

3. Sustainability of Productivity Trends in the United

Kingdom

4. Comparison to Productivity in the United States

5. Key Implications for Investors and Senior Managers

2. List of Figures

1. Figure 1 Productivity Levels in the United Kingdom

 4

2. Figure 2 United Kingdom - Regional Productivity

3. Figure 3 Output Series of the Current Business Cycles

4. Figure 4 Gross Domestic Product per Employee

8
1. Introduction

The scope of this paper is to give a broad perspective of the return derived

from industrial and commercial productivity in the United Kingdom. A

productivity trend is identified in this paper and the sustainability of this

trend is assessed. The productivity of the United Kingdom is also

compared with that of the United States in order to derive country specific

factors. Finally, attention is given to key implications that the factors

identified hold to investors and senior managers.

2. Returns Derived from Productivity

Industrial and commercial productivity can provide macro- and micro-

returns. Macro-returns are the returns that a whole country or community

can derive. A key return generated from productivity is that the country

can be more competitive than other countries on particular goods or

services (Carayannis and Grigoroudis, 2014). This stimulates foreign

entities to invest in this country and also increases the ability of the

country to export goods and services that it is productive in. The second

return derived from higher industrial and commercial productivity is

linked to the increase in the gross domestic product. Gross domestic

product can increase due to a number of factors, such as new technology

or more government spending (Williamson, 2014). Hariri (2017) posits

that productivity growth also provides stronger growth in the gross

domestic product. Gross domestic product can be defined as the quantity

of goods and services created in a country during a specified time frame

(Williamson, 2014). When the gross domestic product increases it leads to

economic growth. Economic growth helps to decrease the rate of

unemployment and increase disposable income. Higher disposable income

positively affects the standard of living of the people because they can

start buying more luxury products (Cartwright, 2011). Moreover, it

increases the revenue that can be generated by organisations providing

luxury goods and services. Harari (2017, p. 3) supports the above claim by

stating that productivity is directly related to standard of living and the

ability of a country to enhance its standard of living during the years is

“entirely dependent on productivity growth”. However, higher disposable

income, which leads to better standard of living will have a negative

impact on companies that produce inferior products because customers

will start preferring to acquire luxury substitute goods and services.

Micro-returns reflect benefits that organisations can derive from better

productivity. Horngren et al. (2015) posit that productivity helps the

organisation to improve its profitability. This arises because an increase in

productivity reflects more units produced from the resources inputted in

the production process. Thus, this aids in decreasing the total cost per unit

produced (Atrill and McLaney, 2009). Better profitability is also beneficial

for investors because it increases the ability of the firm to pay dividends

(McLaney, 2014). Moreover, it decreases the risk that the company

becomes insolvent. Thus, it helps to decrease the investment risk of

ordinary shareholders.

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3. Sustainability of Productivity Trends in the United Kingdom

The productivity level in the United Kingdom has increased significantly

from 1971 to 2007 (Harari, 2017). It has decreased during the financial

crisis and stagnated after the financial crisis.

 Fi
gure 1 Productivity Levels in the United Kingdom.
Source: Harari, 2017, p. 5

Figure 1 shows that there was a rising trend from 1971 to 2007. During the

financial crisis (2008 and 2009) the productivity level decreased by 0.9%

and 1.6% (Harari, 2017). In 2010 and 2011 there were signs of recovery as

indicated by the percentage growth of 1.6% and 0.9%. However, in 2012

and 2013 there was another decrease of 0.9% and 0.4% (Harari, 2017).

There was again recovery in 2014 and 2015 (0.6% and 0.9%) but in the

third and fourth quarter of 2016 there was a decrease of 0.1% in both

quarters (Harari, 2017). Jackson (2018, p. 1) contends that the United

Kingdom has “experienced a lost decade of productivity growth”. This is

due to the fact that the increase in the labour productivity in the United

Kingdom over the last decade is the worst in comparison to previous

periods since the 1820s and productivity level is barely above that prior to

the financial crisis (Jackson, 2018). Therefore, there is stagnation in

productivity level. Harari (2017) outlines a number of reasons that led to

productivity stagnation in the United Kingdom. For example, an ageing

population, the banking crisis led to lower lending to productive

organisations, and lower productivity in the oil and gas industry and

financial services industry (Harari, 2017).

Brexit is regarded as a key challenge to the productivity in the United

Kingdom (Murphy and Glennon, 2016). Membership with the European

Union facilities United Kingdom exports, which amount to around 45%

(OECD, 2017). One of the key consequences of Brexit is that it influences

the investment decisions of organisations. A survey performed by the

Confederation of British Industry shows that 40% of the 357 organisations

researched are influenced by Brexit (Colson, 2017). 98% of these

respondents said that Brexit is negatively affecting their investment

decisions. Thus, there is the risk that organisations may go out of the

United Kingdom and start residing in other countries members of the

European Union in order to continue benefitting from the free market.

Brexit can also decrease foreign investment, which aids in the introduction

of new technologies (Harari, 2017). Foreign investment and new

technologies influence the industrial and commercial productivity.

Moreover, access to large markets permits local organisations to

“specialise and expand”, which aids in the attainment of economies of

scale (Harari, 2017, p. 16). Economies of scale take place when a rise in

output (productivity) is higher than the increase in input (Samuelson and

Marks, 2012). Therefore, Brexit significantly challenges the ability of the

United Kingdom government to maintain growth in the productivity level

in the country. The key factor to the sustainability of this trend is that the

United Kingdom government negotiates appropriate new trading

agreements with countries members of the European Union. This would

stimulate organisations to remain in the United Kingdom, attract foreign

investment and facilitate specialisation of local firms.

Figure 2 United Kingdom - Regional Productivity

Source: Harari, 2017, p. 7

Figure 2 indicates the regional productivity in the United Kingdom. The

most productive areas, which are exceeding the average productivity level

of 2007 and 2015 are London and the South East region. Thus, these

regions are providing the highest productivity returns, which were noted in

the previous section. England and the East region meet the average

productivity level. However, the other regions especially Wales and

Northern Ireland are substantially below the average productivity level of

2007 and 2015. Therefore, these regions are the key problems that are

limiting productivity growth in the United Kingdom.

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4. Comparison to Productivity in the United States

The trend in productivity level in the United States is outlined in this

section. Such trend will be compared with that of the United Kingdom in

order to identify similarities and differences between the two countries.

Figure 3 Output Series of the Current Business Cycles
Source: Sprague, 2017, p. 5

Figure 3 portrays the productivity output from the financial crisis to the

third quarter of 2016. Productivity in the United States decreased from

2007 to 2009. This is similar to what happened in the United Kingdom.

The financial crisis led to a high rate of unemployment, which subdued

productivity in the country. Productivity growth in the United States

started increasing after the third quarter of 2009, as shown in Figure 3.

However, productivity growth after the financial crisis has not increased

above 3.2% in any year (Sprague, 2017). This implies that the productivity

in the United States was unable to “climb back to pre-recessionary trends”

(Sprague, 2017, p. 5). The United Kingdom also faced stagnation after the

financial crisis, as already stated above. Therefore, the trend in

productivity output in the United States at the commencement of the

financial crisis till the third quarter of 2016 is similar to that of the United

Kingdom.

Harari (2017, p. 12) posits that “an ageing population” is one of the factors

that led to stagnation in productivity in the United Kingdom. Jacobsen et

al. (2011) posit that there is also the issue of a growing ageing population

in the United States. Therefore, an ageing population is a common country

specific factor that is leading to such a trend in productivity.

Harari (2017) contends that stagnation in productivity in the United

Kingdom also emerged due to a decrease in bank lending provided to

productive organisations. Kwan (2010) researched the impact of the

financial crisis on bank lending in the United States. This scholar found

that bank lending was tightened by large and medium-sized banks in the

United States. Small banks operating in the United States also tightened

bank lending but to a lower extent (Kwan, 2010).

Despite these similarities it is important to remark that the productivity

level of the United Kingdom is significantly lower than that of the United

States.
Figure 4 Gross Domestic Product per Employee
Source: Office for National Statistics, 2015, p. 1.

The productivity in the United Kingdom, which is marked with an index of

100 is substantially lower than the United States. Indeed, the United States

is the country that was able to generate the highest productivity level in

comparison to Japan, the United Kingdom, Canada, Germany, France,

Italy and the G7 excluding the United Kingdom. Tetlow (2018, p. 1)

argues that the United Kingdom holds such a low level of productivity,

which is also deteriorating because in the last five years employees have

shifted to “less efficient industries”. Tetlow (2018) contends that more

British employees are working in inefficient industries, such as health and

hospitality. Furthermore, there was a decline in the number of workers

employed in productive industries like mining and aviation. Inman (2016)

identified two other factors that limit industrial and commercial

productivity in the United Kingdom in comparison to other countries like

the United States and Germany. The first factor is limited research and

development. Research and development is considered a key factor that

can help in the attainment of technology advancements. Technology is a

key factor that stimulates productivity, as already stated above. The second

factor identified by Inman (2016) is low skills training in comparison to

other countries. Konings and Vanormelingen (2010) conducted an

empirical study with the aim of investigating the influence of training on

marginal productivity. These scholars researched 17,000 organisations and

examined employees who took training between 1997 and 2006. The

results of this research indicate that marginal productivity of employees

increased after training was provided (Konings and Vanormelingen, 2010).

Thus, this supports the claim of Inman (2016) that the lower staff training

provided in the United Kingdom is negatively affecting productivity

growth of this country in comparison to the United States.

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5. Key Implications for Investors and Senior Managers
There was stagnation in productivity growth in the United Kingdom after

the financial crisis. Ideally there should be productivity growth in

industries and organisations located in the United Kingdom. Productivity

growth is desirable for investors and senior managers because it leads to a

more prosperous economy and enhances the profitability of business

enterprises. The United Kingdom is in a worse situation than stagnation

because Brexit is challenging such a trend and there is a high risk that

productivity decreases in the future. Lower productivity would raise

concerns among senior managers because the financial performance of the

organisation would deteriorate. Senior managers are the individuals

accountable to ordinary shareholders (Kieso et al., 2012). Thus, they may

be held responsible for keeping the organisation in the United Kingdom

and not transferring it to another country that is a member of the European

Union. Deterioration in financial performance would also hold serious

implications about the return that investors can get and on the investment

risk. This may stimulate investors to sell ordinary shares in companies

domiciled in the United Kingdom and acquire shares in companies located

in other countries. Therefore, it is imperative that the United Kingdom

government adopts measures to decrease the doubts concerning Brexit that

productivity level will deteriorate due to trade barriers and other issues

noted in section 3.

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