Productivity

The total output of any economy is determined partly by the quantity of factor input (labour, capital, etc.), and partly by the use to which factors are put. Differ­ent economies may achieve different volumes of total output using similar quantities of factor input, because of variations in productivity.

Productivity is usually expressed in terms of labour as input, i.e. labour productivity, or of capital as input, i.e. capital productivity. However, a produc­tivity measure which relates output to both labour and capital inputs is called total factor productivity (TFP). We now seek to investigate the UK’s pro­ductivity performance relative to other countries with the aid of these measures.

The most widely used measure of a country’s eco­nomic efficiency is labour productivity and this is often defined as output (or value added) per person employed. However, since there may be changes in the structure of jobs between full- and part-time or in the length of the working week or number of holidays, then a more useful measure of labour productivity is arguably output (value added) per person hour.

A major issue in recent years has been whether the UK has been able to catch up with its major com­petitors in terms of productivity. Table 1.7 shows the

Table 1.7 Growth of real GDP per hour worked (% per year).

Source: OECD (2010e) Stat.

growth rates of real GDP per hour in four major economies between 1950 and 2009.

The very sound productivity performance of Germany and France in the 1950-73 period reflects their rapid post-war recovery phase. From 1973 to 1995 the growth rates of productivity slowed down in all the countries, but especially in the US, giving the European countries a chance to catch up. However, since 1995 the US figure has accelerated once more while the other countries’ productivity rates have continued to fall. The performance of Germany and France has deteriorated, especially after 2003, while that of the UK has kept reasonably stable with an average growth of productivity of 1.8% over the 1995-2009 period. The above figures provide us with rates of growth of productivity, but what also matters is not only the rate of growth of productivity but also the base level from which that growth takes place. The calculation of these statistics is fraught with problems, such as deciding whether employment refers to persons or jobs and which price deflator to use. With these thoughts in mind we will investigate the most appropriate statistics available for produc­tivity comparisons.

Table 1.8 compares the absolute levels of produc­tivity in the UK, France, Germany and the US using index numbers based on UK = 100. It provides statis­tics for both GDP per hour worked and GDP per worker between 1991 and 2008. From the figures it can be seen that the differential between the UK and these three competitors still remains large in terms of GDP per hour worked. However, whilst the differ­ence between the UK and the other three countries has decreased in terms of both GDP per hour and GDP per worker, the absolute gap still remain relatively

Table 1.8 International comparisons of productivity: GDP per hour and per worker (UK = 100).

Note: Figures for GDP per worker in brackets.

Table 1.9 Major sectoral contributions to average annual labour productivity: market economies 1995-2004 (% growth rates).

Note: (1) = (2) + (3) + (4) + (5), rounded to the nearest whole number. Source: Van Ark et al.

large in most cases. For example, the UK remains 22% behind productivity in the US in GDP per hour and 33% behind in GDP per worker. For France the UK lags behind by 16% and 9% respectively, but for Germany, whilst the UK has a 17% productivity deficit in terms of GDP per hour, it has only an 8% deficit in terms of GDP per worker.

Table 1.9 provides a sectoral comparison of labour productivity growth amongst ten European countries and the US. Three points can be observed from this table.

First, overall labour productivity in the European economies only increased at a rate of 1.5% a year between 1995 and 2004 as compared to 3% a year in the US, and the market services sector of the Euro­pean economies contributed only 0.5% points to that productivity growth as compared to 1.8% a year in the US. Clearly the difference in labour productivity growth between the EU and US has much to do with the disparity in labour productivity in market ser­vices. Second, although labour productivity growth in market services was much greater in the US than in the EU, the contribution of market services to labour productivity varies considerably across the EU coun­tries, being very low in some countries such as Italy and Spain, while much higher in other countries such as the Netherlands and the UK. Third, growth in labour productivity in goods production seems to be very similar in the US and Europe, with some EU countries such as Austria, Finland and France outperforming the US.

To investigate the productivity issue a little fur­ther, it would be helpful to look at productivity in the market services sector in more depth. Table 1.10 shows the contributions which the subsectors of mar­ket services have made to the growth of productivity in Europe and the US; ‘Distribution services’ have clearly made the major contribution followed by ‘Finance and business services’ and, lastly, ‘Personal services’. Within these subsectors, the table identifies the sources of the productivity performance, which include additional labour and capital (factor intensity growth), and the increased efficiency with which these factors are used (multifactor productivity or MFP).

The gap in productivity between Europe and the US in the ‘Distributive’ and ‘Finance and business’ sectors was particularly high in the (later) 1995-2004 period showing the US pulling away in terms of pro­ductivity in these subsections from Europe. The better productivity performance in the US seems to be due to multiproductivity rather than factor intensity, i.e.

Table 1.10 Contributions of sectors to average labour productivity growth in market services 1980-2004 (%).

Note: (1) = (2) + (3) + (4) + (5), rounded to the nearest whole number.

to the efficiency with which factors are used rather than the amount of factors. Reasons for this more rapid growth in US efficiency are numerous but may include the faster rise in information and communica­tions technology in the US, new retail formats, better labour scheduling systems, more effective marketing campaigns, more attractive opening hours, deregula­tion, and also the higher productivity levels of new firm entrants into the US market.