The UK Productivity Slowdown

Professor Nicholas Crafts explains why the current downturn in UK productivity growth is unprecedented.

UK productivity growth has slowed considerably over the last ten years. In the decades leading up to the 2008 financial crisis, productivity – which is a measure of economic output per hour of work – had grown steadily year on year. However, since 2008 this growth rate has plummeted.

A recent estimate from Nicholas Crafts, Professor of Economic History at the University of Sussex Business School, has put current productivity levels at 19.7% below the pre-2008 trend in 2018. However, for Prof Crafts, the true extent of the current slump can only be understood by looking to the past.

“The UK has experienced productivity slowdowns before,” says Crafts, “but what we’re seeing today is far worse than anything we’ve seen over the past 250 years.

“It is fair to say that the current UK productivity slowdown is unprecedented”.

A History of Slowdowns

Professor Crafts measures the extent of productivity slowdowns by estimating how far the level of labour productivity falls below what would have been expected if the previous trend in growth had been sustained for the next ten years. By applying this technique to past slowdowns, Prof Crafts can compare the severity of the current drop off in productivity growth to those of previous periods.

The most recent comparable slowdown occurred in the early 1970s, when the so-called ‘Golden Age’ of the European economy – two decades of intense growth that followed the end of Second World War – came to an end.

However, the slowdown in productivity growth during this period was only half as steep as today, estimated at 10% below the expected growth rate after ten years.

Other high-profile slowdowns include the Great Depression of the 1930s, the Edwardian Climacteric at the turn of the 20th century, and the end of the mid-Victorian boom in the early 1870s. None of these slowdowns reached the heights of the current crisis.

A perfect storm

So, what are the reasons for this unprecedented downturn in UK productivity growth?

“It is not easy to pinpoint precise causes,” says Prof Crafts, “but we can offer a conjecture. I would say that a combination of three adverse circumstances, itself unprecedented, is largely responsible for the evaporation of productivity growth since 2008.”

The ebbing away of the Information and Communications Technology (ICT) boom is one such adverse circumstance. New general-purpose technologies such as ICT often have a substantial impact on productivity growth when they first appear, but this contribution to growth cannot be sustained indefinitely.

At the turn of the century, the contribution of ICT capital to labour productivity growth averaged 0.82 percentage points per year. However, between 2008 and 2018 this figure was down to only 0.19 percentage points per year. Meanwhile, the contribution of ICT to Total Factor Productivity (TFP) growth fell from 0.23 to 0.04 percentage points. Cumulated over the ten years from 2008, these figures imply labour productivity in 2018 was about 8.5 per cent lower than if the earlier ICT contribution had been sustained.

A similar phenomenon occurred at the turn of the 20th century, when the influence of steam power waned, but the electric revolution had not yet begun. Prof Crafts explains that we may be experiencing a similar technological hiatus today:

“A new general-purpose technology is on the horizon. Artificial Intelligence has the potential to make a huge impact on productivity in the near future, but we’re not feeling the benefit yet.”

The financial crisis of 2008 and Brexit are the other two adverse circumstances in Prof Crafts’ perfect storm. However, unlike many economists, Crafts sees these as interrelated shocks rather than two distinct events. He explains:

“The crisis of 10 years ago probably reduced the level of potential output in the UK by somewhere between 3.8 and 7.5%, but its effects do not end there.

“The fiscal implications of the banking crisis required a period of painful consolidation in order to restore fiscal sustainability. In the UK, this was felt in the Government’s prolonged programme of austerity.”

Austerity has political ramifications. Those feeling the squeeze are motivated to protest at the polls, which may explain the political rise of the UK Independence Party and the subsequent Leave votes in the EU referendum in June 2016.

“Put simply,” says Crafts, “Brexit can be seen as a consequence of the fiscal costs of the financial crisis.”

A recent study from the Bank of England estimated that productivity has reduced by between 2 and 5% since the Brexit vote. This slump in productivity can be explained by the negative effects of Brexit-related uncertainty on investment, and the diversion of top management time towards Brexit planning rather than business as usual.

The future of productivity

Productivity slowdowns have real impacts on people and society. In the short term, wage growth is impacted, while in the long run, the economy grows less rapidly and so there is less money available to finance the expansion of public services and welfare benefits.

So, what does the future hold for UK productivity?

Some have suggested that leaving the EU will lead to a medium-term boost in productivity growth, but Prof Crafts is sceptical of these claims.

“UK productivity performance in the decades leading up to the financial crisis was quite disappointing, but the weaknesses in supply-side policy were a result of decisions taken in Westminster rather than Brussels,” says Crafts. “Exiting the EU is neither necessary nor sufficient for reform, and may open the door for unhelpful interventionist approaches to productivity.”

COVID-19 will also have an impact on productivity – but it is difficult to say how big or long-lasting the adverse effects will be. Long term effects may result from lower educational attainment of students affected by the pandemic, from the loss of skilled jobs, from the loss of experience of the workforce, and from lower investment.

“A key unknown is the productivity implications of the shift to working from home,” says Crafts, “is it a better or worse way of working?  Are there previously unrecognised gains in efficient use of time or a loss of experience and new ideas as a result of fewer interactions with colleagues?”

Whatever the future holds, there are always lessons to be learned from the past.

“The slowdown of the 1970s was partly reversed by a combination first of 1980s supply-side policy reforms which increased the pressure of competition on management and unions, and second by the ICT revolution of the 1990s.

“This points to policy reform and/or technological progress as possible sources of a revival of productivity growth today.”

Photo of Nicholas CraftsAbout the researcher

Nicholas Crafts is Professor of Economic History at the University of Sussex Business School. His research interests include the Industrial Revolution, British relative economic decline, The history of general purpose technologies, and why growth rates differ.

Read the papers

Crafts, Nicholas and Mills, Terence C (2020) Is the UK productivity slowdown unprecedented? National Institute Economic Review, 251. R47-R53.

Crafts, Nicholas (2019) Persistent productivity failure in the UK: Is the EU really to blame? National Institute Economic Review No. 247 February 2019

Crafts, Nicholas (2019) The Fall in Potential Output due to the Financial Crisis: A Much Bigger Estimate for the UK, Comparative Economic Studies 61:625–635