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Could everything you have been told about Britain’s low productivity be wrong?

October 5, 2024

If you’ve been paying any attention to the news in recent years you will know that Britain has a productivity ‘problem’.

August publications such as the Financial Times, and The Economist will tell you Britain’s ‘poor productivity’ is ‘holding us back’ as a country on the world stage.

Institutions from the London School of Economics, Economics Observatory and the National Institute of Economic and Social Research put it down to a ‘lack of investment’.

And if you look at the latest Office for National Statistics figures you can see it in black and white.

For every hour we work in the UK we make £46.92, while in the US they make £58.88, Germany makes £55.83 and France makes £55.50. If only we could work harder and more efficiently they bemoan.

But what if we look at those same statistics as a customer. Suddenly the UK looks the best value. All things being equal customers can buy an hour of work in the UK for the less than in some of our G7 neighbours.

When customers are global suddenly that ‘poor productivity’ is not a disadvantage its an advantage. The UK looks cheap.

Now some might argue that I am simplifying too much; economists also use a second measure of productivity and that is Gross Value Added (GVA). Simply put, it’s the difference between a raw product and the output after a worker has turned it into something.

This measure works really well in manufacturing. You just take the end price of a car, minus the cost of the raw materials in making that car and then divide the remainder by the hours worked. If the factory becomes more productive and they produce cars in less time then productivity is up.

But here’s the problem with using that measure in the UK. Our economy is 81 per cent services! Our service sector is an unusually high proportion of our economy. In France it is 70% and in Germany 62%.

Now the thing about services is the human hours generally is the product. And the price people can charge for those hours flexes according to the market.

If the raw materials of a car goes up, the overall price of all cars will go up so companies can make a profit.

But in the service sector, companies can cut back much further if the economy is doing badly because the hours are the only thing they are really selling.

So you can see what I am talking about let’s look at an example.

I run a professional services firm. One of the things my firm provides for its clients is PR services. Broken down in very simple terms we might say to a client that we can generate four high quality pieces of coverage for £X per month. And for simplicity I calculate that it is going to take my team 50 hours of work per month to achieve that.

Now this client is a global client and also needs to achieve the same in the US. Their agency takes the same amount of time and achieves the same result but charges twice as much.

According to the economist which company is more productive? That’s right, if you’ve been following you will know that the US agency has charged twice as much for its time even though the output for the end consumer was the same.

I’m no economist but I do understand value and I know that all things being equal something half as much is better value.

But it’s not just me spotting it, our customers do to. Despite my company being an agency of just 15 people, around a third of our customers are headquartered abroad. We don’t market ourselves outside the UK – they just know they get better bang for buck.

That’s also why after seven years in the UK we are looking to expand into North America. We already have interest in us setting up an office in Toronto.

I will be taking an exploratory trip out next month. And guess what, I’ll be taking two of my ‘unproductive’ British workers with me.