One of the prime characteristics of the economic performance in the UK after the global recession in 2008 has been the disconnect between unemployment and wages.  Whilst the unemployment rate has reached record lows, wages have largely stagnated.

One of the central hypotheses for this trend is that productivity in the UK has stalled.  A recent McKinsey report explores some of the possible reasons why the country may be performing so poorly in terms of its productivity.  The paper identifies four main culprits that explain much of the decline in productivity growth:

• Strong employment growth, with hiring in the UK significantly ahead of European peers after the recession.  Firms generally hired people rather than investing in capital of efficiency improvements, with this growth especially strong among the young and old.
• A decline in investment, which went hand in hand with the investment in personnel mentioned above.  It resulted in a job-rich but investment-weak recovery.
• Uneven digitization, with the digitization efforts that have taken place at too small a scale to really be showing in productivity statistics.
• Boom and bust in the financial sector, with the UK financial sector experiencing twice as large a slowdown in productivity as the US experienced.

The paper highlights that low productivity is not a new thing in the UK, and the country went into the financial crisis with lower productivity levels than their peers in the G8, and it has remained significantly lower to this day.  What’s more, these challenges have been seen across sectors and regions, suggesting a degree of commonality in the problems faced.

What can be done to improve things?  The authors highlight how the supply of labor is unlikely to continue expanding, and so if the economy is to grow, productivity of the workforce has to be addressed.  Perhaps unsurprisingly, the first place to look is in a renewed investment in education and skills, but with additional focus on an acceleration in the adoption of digital technologies, and support for investment and exporting.

Investing in skills

The most important change however has to be an education and skills system that enables the UK to meet the demands of a rapidly changing and largely digital economy.  Whilst technical skills are often in the focus, not least because of well publicized skills gaps in digital fields, management skills are also incredibly important.  Poor management not only means that workers are less efficient, but also that digital transformation efforts are less likely to succeed.

Suffice to say, with the vast majority of workers already in employment, much of this training will have to be provided by employers, especially if they are to develop the skills required to operate effectively alongside new digital technologies, such as AI.

Of course, investing in these skills can also play a big role in supporting the digital transformation of companies across the UK.  The McKinsey paper identifies a worrying lack of awareness of the digital technologies entering the market however.

Scaling up (overseas)

In various previous reports looking at how companies, and especially startups can ‘scale up’, there has been a consistent focus on exporting overseas.  This was something picked up on by the McKinsey report too, with the authors highlighting that up to 15% of UK firms are what the report terms ‘latent exporters’.  This means that they have all of the characteristics of firms that do export, yet don’t trade overseas themselves. Supporting these companies could provide an additional boost to both productivity growth and economic resilience.

Suffice to say, identifying these shortcomings and actively addressing them are very different things, and the authors themselves admit that their report poses as many questions as answers.

“What kind of education system better equips young people for the workplace of the future? When retraining workers, are government or private-sector programs more effective? How can reskilling and upskilling be delivered affordably and at scale? How can firms overcome change resistance and inertia in adopting new practices and technologies?,” they say.

The report does provide a number of policy approaches that have appeared to succeed in these areas in other countries however, and hopefully by both highlighting the shortcomings and providing case studies of change elsewhere, they will help to motivate and guide action by the UK government, and indeed the private sector, in overcoming the productivity puzzle that has blighted the country for the last decade.