Productivity can turbo charge economic growth – and ensure the survival and expansion of individual firms. But while a productivity slowdown has put the brakes on many developed economies since the 2008 financial crisis, the UK has been particularly hard hit.

In fact, the UK’s productivity growth has lagged behind that of other comparable economies since the 1970s and the country has suffered virtually zero growth in labour productivity since 2008, the latter known as the UK ‘productivity puzzle’. By 2016, the output per hour worked in the UK was 16.3% below the average of the rest of the G7 countries – although this has improved following adjustments to how labour input is measured.

But why? What is clear is that there is no single cause. In the short term, tumbling global and local demand and a slow economic recovery following the financial crisis arguably have played a part, as have other factors such as falling real wages.

As part of the UK government’s austerity programme, around half a million jobs were slashed from the UK public sector, while the private sector added 1.7 million jobs between 2012 and 2015. But evidence suggests that many of these new private sector, self-employed roles were low-productivity, part-time and based on zero hours contracts – with few opportunities for skills development. Meanwhile, the acute decline in demand has also made firms less willing to invest in innovation.

So where does that leave us? In a recent White Paper, we argue that technology, innovation and skills are, in fact, central to the conundrum.

There is some hope for the UK economy in this regard. High skills are relatively abundant in the country – 46% of adults aged 25-64 have some form of tertiary education, compared to an Organisation for Economic Cooperation and Development (OECD) average of 37%. Meanwhile, in 2015, 13% of UK university students were enrolled in science, technology, engineering and maths (STEM) subjects, compared to an OECD average of 6%.

But the situation is far gloomier when it comes to low and medium skills. In fact, while the UK is predicted to be ranked 7th among OECD countries in 2020 for high (tertiary level education) skills, it is projected to be 22nd for low (below upper secondary) skills and an even lowlier 28th for intermediate (upper secondary) skills.

The UK also still lags behind its competitors in vocational education and training – and many adults remain hampered by poor literacy and, particularly, numeracy. Ranked 13th out of 18 countries by the benchmark Surveys of Adult Skills, a staggering quarter of UK adults scored at level 1 or below for numeracy skills (the OECD average is 19%). Worryingly for the future, the UK is also the only country where older people (aged 55-64) outperformed younger people (16-24) in both literary and numeracy.

Productivity is driven by technology, but it demands the right level of skills, deployed when and where needed. And in the UK, growth in this new environment continues to be held back by workplace skills shortages, gaps and mismatches.

New technologies and their subsequent adoption require varied skills. Technology leads to rising demand for the highest-paid, skilled jobs, which require non-routine cognitive skills, and the low-paid, least-skilled jobs, which rely on routine manual skills. Meanwhile, demand will fall for ‘middling’ jobs, which require routine manual and cognitive skills. These changes must be adapted to.

As technology advances, it’s no surprise that there are skills shortages and mismatches. But they must be addressed by policy and innovative thinking. They may impact productivity growth and lead to decreased short-term research and development (R&D) expenditure and fixed capital investment. They can also reduce the exchange of knowledge, preventing workers from learning from one another and improving their skills. This will likely slow productivity further.

There is clearly a long way to go before a healthy balance is maintained. The UK Commission for Employment and Skills (UKCES) 2015 Employee Skills Survey (ESS), for example, found that one in seven employers identified workers who were not sufficiently proficient in their positions, amounting to an estimated 1.4 million employees.

Meanwhile, three in ten employers are estimated to experience ‘over-skilling’, whereby employees are over-qualified and under-utilised. Indeed, as many as two million UK workers could be in this position, amounting to a clear waste of resources and a missed opportunity for productivity growth.

But while skills gaps are a central part of the productivity problem, current efforts to assess their scale tend to fall short. This is because skill levels are often measured via formal educational attainment. While most people finish their education by their early twenties, they can, in fact, continue to acquire skills throughout their lives – particularly if their workplace offers training. Indeed, existing statistics suggest the UK should encourage lifelong learning and better use of skills if it wants to boost growth, productivity and earnings.

Future research should reflect this – by focusing on levels of training and skills rather than education among the workforce – and must also ensure that any suggested links between skills and productivity are rigorous and causal.

But the UK is perhaps also letting itself down on R&D. As we said above, innovation is a motor for productivity – and R&D helps drive firms’ innovations. The good news is that among economies producing the largest volume of top-cited scientific publications, the UK is ranked fourth. Despite this, however, it spends less on R&D, relative to GDP, than many other major world economies. In 2016, the UK ranked just 11th in the EU. Government support will play an important role in improving this.

In this new economic environment, information and communication technologies (ICTs) will play a key role, accounting for 70% of global patents. The UK, however, doesn’t feature among the top countries patenting emerging ICT technologies. And while it is on a par with France and Germany when it comes to artificial intelligence (AI) related patents, it is a long way behind Japan, Korea, the US, China and Taiwan. It also lags behind many other countries in robotics. These are issues the UK should consider as it seeks to thrive in this technological new world.

Productivity slowdown is not unique to the UK – it is a global issue in need of a global solution. Skills and technology are key components of that solution, but it is vital that the two are correctly balanced. Crucially, skills must meet the demands of evolving technologies, for they not only lead to the innovation of new technology, but also drive and facilitate its adoption and implementation.

This is far from straightforward and there is no easy fix. But forward-looking, bold policies, inspired and informed by solid research and a global perspective, are key to lifting the UK out of the productivity doldrums.


By Mustapha Douch, Research Fellow at Aston Univesity; Jun Du, Professor of Economics at Aston University;  Tomasz Mickiewicz, Professor of Economics at Aston University; and David Morris, Assistant Professor in Industrial Economics, Nottingham University

August 2019