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'Awful' productivity of UK workers puts pay rises at risk

Tom Belger
Finance and policy reporter
UK productivity growth has been 'awful' over the past decade, according to a think tank. Photo: REUTERS/Stefan Wermuth

Britain’s “awful” productivity growth over the past year is now the biggest threat to the size of workers’ pay rises, according to a leading think tank.

The most recent official figures published on Wednesday showed labour productivity creeping up just 0.1% in the year up to last summer, on top of four quarters of stagnation.

Katherine Kent, head of productivity at the Office for National Statistics (ONS), said there had been “sustained weakness” since the economic downturn from 2008.

Such weak growth troubles policymakers as more output per hour potentially “increases salaries and profits, improves standards of living and enables the tax-take to grow,” as the ONS notes.

But in reality UK workers also saw a significant squeeze on pay levels in the years after the financial crisis, until higher employment eventually began to push up wages from 2017.

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Now the Resolution Foundation think tank has warned Britain’s “disastrous productivity performance” since the 2010s threatens to derail the recent recovery in wages.

“Weak productivity is a major brake on rising living standards, now posing the biggest threat to the UK’s much needed pay recovery,” said Cara Pacitti, a researcher at the think tank.

She said recent real pay growth of 1.8% could not be maintained indefinitely if productivity continued to stagnate, suggesting employers may struggle to afford high pay rises.

“A slight pick-up in productivity growth last summer can’t hide the stagnation of the past decade and even worse performance in 2019,” she added.

Analysis by the foundation suggests productivity growth averaged just 0.3% a year in the 2010s. By contrast, official figures show average growth of 2% a year in the decade before the financial crisis, which was around the historical average.

Productivity in Britain is now 22% lower than where it would be if pre-crisis trends in growth had continued.

Experts have been trying to understand Britain’s so-called ‘productivity puzzle’ for years, with Britain’s official statistics body calling it “arguably the defining economic question of our age.”

The ONS itself has said economic uncertainty since the financial crisis may have deterred firms from long-term investments in technology that could boost productivity.

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Firms may have boosted production instead by hiring more staff or offering more hours, preventing significant increases in output per hour worked.

The Resolution Foundation called on the UK government to make raising productivity a “top priority” in the budget, confirmed yesterday for 11 March.

Tej Parikh, chief economist at the Institute of Directors, said the “lacklustre” figures laid bare the challenges facing the government and also called for swift action.

He said prolonged uncertainty had “sapped business leaders’ confidence to invest,” while talent shortages and infrastructure “bottlenecks” also constrained growth.

HM Treasury said on Twitter the stats showed “why we need to do more to boost productivity and unleash Britain’s potential.”

Chancellor Sajid Javid said in the Commons on Wednesday the government would invest billions in infrastructure, R&D and a new national skills fund.