Why are British workers getting less productive?

The IFS produced a new report today examining why British workers are getting less productive.

Low wages, low business investment and a misallocation of capital have led to a ‘dramatic fall’ in labour productivity, according to a new report.

The Institute for Fiscal Studies (IFS) believes Britain is producing 12.8% less than had labour productivity growth continued at pre-recession rates. [Source: The productivity puzzles (pdf)]

Falling productivity helps to explain why employment has been rising in the UK despite sluggish growth in output.

British workers now produce 2.6% less output per hour worked than they did at the start of 2008. The IFS believes the key reasons for this are low real wages, low business investment and a misallocation of capital.

Its research suggests lower wages allow firms to employ more people, and this in turn has a negative effect on productivity. According to the report, a more flexible labour market and more demanding benefit system are combining to cause employment to remain stable.

These two changes mean labour supply in this recession have remained higher than in the recessions of the 1980s and 1990s.

The second main reason given by the IFS for falling productivity is a fall in business investment. Investment is now around 16% lower than its pre-recession high. This is a sharper fall than in previous recessions, and a fall that has demonstrated significant persistence.

“If workers have less, and less good, capital to work with they will produce less,” says the report.  The report also blames the misallocation of capital, suggesting an impaired financial sector is failing to effectively deliver capital towards more productive and away from less productive firms.

The report rejected some of the other explanations given for what it terms the ‘productivity puzzle’. One was the ‘labour hoarding’ argument, the suggestion firms are employing more workers than necessary. It also dismissed the idea the demise of financial services has led directly to a fall in productivity.

Another interesting finding by the report was the public sector has bucked this trend. There has been a 6% fall in public sector employment since 2009, a period during which public sector output rose slightly.

The report notes:

“The long run effects of lower employment on service quality remains to be seen.”

Wenchao Jin, a research economist at IFS, commented:

 “The fall in labour productivity seems to have been driven by low real wages and low firm investment. Productivity slowdown has happened right across the economy. They have not been driven by a change in the composition of the economy nor by a change in the composition of the workforce.”

See also:

This depression is the longest in modern history, so why is the economy still creating jobs?January 25th, 2013

GDP growth masks fall in wages and impact on union rightsOctober 29th, 2012

The economic puzzle: The stats may be good but the grim jobs news keeps comingOctober 26th, 2012

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29 Responses to “Why are British workers getting less productive?”

  1. Newsbot9

    Part-time labour too. Less investment and less time doing the job…with people more worried about their wages and a deteriorating economic climate. (Diets and living standards are deteriorating, etc.)

  2. Independent England

    “Why are British workers getting less productive?” Don’t you mean workers in Britain?

  3. LB

    There has been a 6% fall in public sector employment since 2009, a period during which public sector output rose slightly.


    Yet the cost has rocketed.

    That’s less productivity per tax pound. Even worse when you throw into the mix that 30% at a minimum is funded by borrowing. A Keynsian stimulus that has failed to work.

  4. LB

    Yep. State takes too much. So firms don’t have much left to invest. Likewise, its after tax earnings that matter for diet and living standards.

  5. Newsbot9

    Complete nonsense. Companies are sitting on vast amounts of cash. They don’t spend it because there is no demand.

    And keep focusing on tax, when the issue is slashing benefits, and your attempts to raise the poverty premium!

  6. Newsbot9

    Nope, wage bills have not rocketed. The additional spending has been counter-Keynsian, spending to cover for the axing of cheaper cost-saving measures.

  7. blarg1987

    Don;t forget alot of these companies are technically subsidised by the tax payer like styarbucks who on paper make no money in the UK, have employees claiming some state benefits and is asking the tax payer for tax breaks.

    We need a detailed break down and open book policy for all companies as their is a difference between not having money to invest and not having money to invest on paper, which large number of companies are the latter of the two options.

  8. LB

    So are subsidies wrong?

    Benefits are a subsidy.

    Don’t forget too, that starbucks, amazon, google etc are still growing investing billions.

    However, 7,000 plus of debts, 550 bn of taxes, 700 bn of spending. How does that work?

  9. blarg1987

    I believe it is wrong for a company to claim pverty and use state benefits to top up wages for staff to live then pay them a real wage.

    \yes they are still growing but how much of that growth is at the tax payers and as you keep claiming mounting onto the debt pile? As these companies are claiming against tax to oincrease profits NOT as an investment tool.

  10. LB

    It may or not be true for the company.

    However, if a company is paying min wage, and without tax, that is sufficient, then we have to lay the blame for insufficient take home pay at the doors of the state.

    For companies, they have to make a profit, or they go bust. So employees need to generate more profit that the costs of employing them, or in a smaller number, more savings than the cost.

    \yes they are still growing but how much of that growth is at the tax payers and as you keep claiming mounting onto the debt pile? As these companies are claiming against tax to oincrease profits NOT as an investment tool.

    I can’t work out what you are trying to say here. Can you put some more detail on it?

    I think you might be arguing they are getting a subsidy, and growing at the tax payers expense. For example, railways, wind turbines, all get subsidies to make profits.

  11. blarg1987

    I am talking about companies like starbucks that pay no corporation tax, but use our infastructure, the people we educate etc to increase their profits but directly give very little or nothing back.

    the state is elected by us the electorate so we are all partially responsible for the state of the economy both left and right.

    yes companies need to make profits or they go bust however one must question said company when it tells the tax man and its own employees it has no money to improve wages, buy new equipment, employ extra staff, pays no taxes and requires state support, while on the other hand it pays its shareholders large dividens, the board gets a massive pay rise and it has record breaking profits that is greed.

  12. LB

    Well, you pay corporation tax on profits. Are they profitable?

    If you are talking about tax on turnover, then that’s VAT.

    I’m not responsible for the state. You can take collective guilt, but don’t force it on others. It’s a fraud under section 2, 2006 fraud act. Inducing people to contribute to the pension via voluntary contributions, whilst hiding the debt off the books. The risk is they lose money, and that’s going on now.

    Now Starbucks has money, because it earns it. However, its chosen to invest it, rather than pay tax. That’s I think what you don’t like. It’s acting as a company, not as some surrogate tax cow for the state.

    So what did the board in the UK get as bonuses? What were these record breaking profits at Starbucks UK?

    Meanwhile, the real issue is the state and its debts. 7,000 bn plus of debts, taxes of 550 bn, and spending of 700 bn. End result is the state is bankrupt. That means those dependent on the state because its taken their money for their pensions, have been ripped off, and will be destitute as a consequence.

  13. LB

    So what’s moral about taking 3K a year off someone earning 12K?

    25% of their wages going to the state. Pretty much their biggest item of spending.

    Why no comment on that?

  14. blarg1987

    it is moral as it pays for services that we use as a society, it is right will all contribute to those services, so dare I ask what do you recommend?

  15. blarg1987

    So are you admititng you do not vote? In which case surely you can not complain or hippercritical? The issue is seperate from the point I am making.

    No if a company invests into an economy that is a good thing, but it should also pay a contribution to society, you moan about the state but you do not say private companies who also make up part of the debt through tax payers subsidies?

  16. Newsbot9

    Because they don’t take 3k. 12k? Let’s see, per ListenToTaxMan…£1,300.00

    And it’s not their biggest item. Rent, food, utilities, transport – all bigger items for their tax, in reality!

    (It’s also completely ignoring what they get back from the state, which
    you are desperately trying to slash, leaving them worse off.)

  17. Newsbot9

    Companies can offset foreign losses against UK taxation, after moving profits here without paying any additional tax if the rate in their tax havens is lower.

    You are indeed a fraudster, unable to tell the difference between your frauds a the state, You no doubt are heavily invested in Starbucks..

    The issue is your lies about the debt, and your claims that you have to stuff the poor so your profits won’t go down, and how you want to make people destitute, rather than pay tax!

  18. Newsbot9

    I don’t think he’s a British citizen per previous statements.

  19. LB

    8.55 an hour living wage, 37.5 hours a week.

    Income tax.1,713.50

    NI – employee 1,089.66

    NI – employer 1,267.46

    Total 4070.62

    Ho hum. That ignore all the other taxes, such as VAT, IPT, ….

  20. Newsbot9

    You said £12,000 Not £16,672, 39% higher!
    And the worker does not pay employers NI, so the total is £2,800.00.

    You’re lying as usual.
    And you’re ignoring all the benefits, as usual.

  21. LB

    Don’t you believe in a living wage?

    Take the living wage, less the tax. What do you end up with?

    Hmm, min wage with no tax.

  22. Newsbot9

    Incorrect as usual!

    Minimum wage, pre-tax 12,070
    Living wage, post-tax 13,870

    You are attempting to slash billions in services, and expect this to NOT cost the poor more. It’s ludicrous, and self-centred.

  23. LB

    No, I did vote.

    1. I didn’t vote for the winner. How can I be held responsible for his crimes?

    2. I’ve just been asked to select an MP. I’ve not been asked about any of the issues. So if he decides to do something stupid, I’m not responsible for him.

    3. So from memory, you’re party voted for the Iraq war. Doesn’t that make you a war criminal? Collective responsibilty.

    If a company invests the are making a contribution. Then, and only if they make a profit do they pay corporation tax. In the meantime they pay the VAT on their turnover.

    As for tax payer subsidies, let me repeat ad nauseum, its theft. It’s wrong. All subsidies should stop.

    Likewise, if a company goes bust, it should not be rescued. It’s liquidated.

    Likewise, if someone runs a ponzi, any ponzi, they should be jailed for life. That deals with the whole of Westminster.

    And the post below just shows Newsbot at his racist best. All foreigners out, is his mantra.

  24. blarg1987

    Well considering pandoras box was opened over 30 years ago, we are all directly or indirectly responsible, through the media we consume, to the choices we make etc.

    When did I say I voted for Labourjust because some of my views are on the left does not mean I agree with all of them, and I did punish the local MP at the ballot box over Iraq.

    Secondly to turn it on its head and maiing an assumption should you go to jail for corruption as it was mainly the conservatice party that sold british assetts and then signed on as directors after tax payers invested money into them.

    Also companies do claim against VAT so they do not necessarily pay VAT.

    I think we do need subsidies in some areas although if it is required it should not be run for profit.

  25. LB

    I’m responsible for my decisions. I’m not responsible for yours. (Or any MP)mainly the conservatice party that sold british assetts and then signed on as directors after tax payers invested money into them

    Name them.

    Which areas need subsidies?

    e.g Why subsidise the production of wind power when the result is born by poor people when they are forced to but it?

    That’s just allowing the green rich to harvest tax payer’s money.

    If we take rail and HS2. It’s never going to make money. Plus it probably goes past Newsbot’s front door. Why should people in Cornwall get screwed for a minority to get around fast?

  26. blarg1987

    Norman Tebbit to name one.

    Well Nuclear power, the space race, early computing, all required state subsidies to become viable.

  27. LB

    1. Is nuclear viable? For example, Sellarfield hit 69 bn of clean up, so far.

    2. 100 bn off the books, for clean up.

    Computing. Hmmm, not much is government. Pretty much most of the investment has been private. It’s a good example of where private has done most of the research, and funding, without the state.

    So lets see. Tilting trains? Failure in the UK.

    British Leyland? Financial Failure

    Concorde? Financial Failure

    The only real success was the bailout of Rolls-Royce, offset against myriad failures.

    Green power? Where is the British industry? It’s all imports. None are built here. 100 bn going overseas.

    Where’s Tebbit’s profits. etc? I’m not saying he didn’t, but I’d like you to tell me what he did do.

  28. blarg1987

    Nuclear long term is as fossile fuels are exhausted, who created the first modern computers and their client, hmmm me thinks the state to break the enigma machine, and the first offical computer was used by the U.S army to work out gunnery tables all paid for by the tax payer.

    Smaller and lighter computers came about by the space race so R and D was funded by……… yup tax payer.

    Concorde was a success as the facilities and co operation put in place led to airbus whch is now a major player in the world aviation market.

    Ask his accountant, but he was an advocate and voted for the selling of BT, and then sat on its board of directors which saw their pay largley increase compared to pre privatisaion.

  29. Julia Cannetti

    These figures show how important it is to invest in your employees. Offering a competitive wage, employee benefits and pension will help to attract and retain valuable staff who stay motivated thus increasing output, reducing sickness absence and increasing profits!

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