Growth prospects

As we saw in Table 1.11, it is manufacturing which has led the way in productivity growth. Manufacturing lends itself to rapid growth of labour productivity because of the scope for capital investment and technical progress.

At the same time rising incomes in manufacturing generated new demand for goods and services, the multiplier process encouraging still further growth of output, and with it productivity. Indeed Green- halgh (1994) points out that in the eight-year period 1985-93, manufacturing contributed about 70% of the average rise in output per worker in the whole economy.

In parts of the service sector there is little scope for improved productivity; even the concept itself is often inappropriate. First, there is often no clear output - how do you measure the output of doctors, or nurses? Second, even where a crude output measure is devised, it often fails to take into account the quality of service - are larger class sizes an increase or a decrease in educational productivity? The national accounts often resort to measuring output by input (e.g. the wages of health workers), so that produc­tivity is by definition equal to 1. There are, however, some services where productivity can be meaningfully measured and in these there is scope for productivity growth, especially where the new information tech­nologies can be applied. But many workers who lose manufacturing jobs move into service sector jobs, where their productivity may be lower, into unem­ployment or out of the labour market altogether.

Nevertheless, as the process of deindustrialization progresses, the overall growth of productivity will depend on productivity gains in the service sector. This is in line with the theory of ‘asymptotic stag­nancy’ which indicates that if there are two activities, one of which is ‘technologically progressive’ whilst the other is ‘technologically stagnant’, then it can be shown mathematically that in the long run the aver­age rate of growth of an economy will be determined by the sector in which productivity growth is the slowest (Baumol et al. 1989). In this context manu­facturing can be regarded as the ‘technologically progressive’ sector with services ‘technologically stag­nant’ in comparison, suggesting that the growth rate of the economy as a whole will depend on the growth of productivity in the service sector. Future develop­ments in information technology will be a key ele­ment in further raising productivity in a broad range of service sector activities. The process of deindus­trialization is clearly making productivity in the service industry a major determinant of the prospects for future economic growth and increases in welfare in the UK. In this context, despite the improving comparative performance of the UK, service sector productivity may be seen as of particular concern and a focus for remedial policy action.