The Productivity Puzzle… Is there an answer?

The mystery of the nation’s productivity flatline from 2010 is one that still sparks conversations and debates to date. Economists have pored over mountains of data for years in an attempt to map out a logical explanation, yet an exact reasoning continues to elude them.

And now, as we navigate our way around the next major economic downturn, the issue of productivity is fresh in everyone’s minds once again.

Soon after the sudden change in trajectory nearly a decade ago, the nation posed two questions: what caused the flatline to begin with, and why isn’t it improving? As experts concluded, it is not unusual for dips in productivity to occur, especially in line with global disruptions. Given the proximity to the ‘08 financial crisis, that part of the mystery is a little more clear-cut.

The second question has been harder to address. Theories have piled out of institutions that have conducted extensive research into the trends over the years. And whilst there are still uncertainties around the absolute reasoning, we’ve made genuine progress in understanding what could be done to help kickstart the upwards trajectory once again.

The analysis to date

In this section, we’ll explore just a few of the reports released by institutions on the Productivity Puzzle, starting in 2015 with the Office for National Statistics (ONS).

Amongst its in-depth commentary, ONS’ analysis demonstrates a particularly significant gap between the UK and other major developed economies like the US, Germany and France. That’s not to say that the UK is alone in this conundrum, but the shortfall has persisted for an unprecedented amount of time.

Jumping forwards to 2018, McKinsey publishes its latest findings. In the aftermath of the ‘08 crisis, the UK recorded one of the lowest productivity-growth rates and steepest declines, falling by 90%. The productivity rate came in at 0.2% between 2010 and 2015.

The report goes on to discuss the different potential drivers for these dramatic dips, re-emphasising the point that productivity growth is critical for navigating economic fluctuations. The first culprit was the natural boom/bust cycle, and how the impact of activities in recent years had had a huge effect on these figures. Productivity growth slowed 6.1 percentage points in the post-crisis period. The size of the impact was in part due to the extent of the boom ahead of 2008.

A second potential reason behind the longevity of the issue is that firms focused on employment over investment in the years after. UK organisations hired nearly as fast as the output grew, rather than dedicate budget to invest in capital or improving efficiency. Instead, two million new employees entered the workforce between 2010 and 2015.

One final jump to 2019, and PwC revisits the Puzzle. Following on the investment line, PwC recorded that, at the time, the UK had the 3rd lowest investment rate in the entire OECD. This was across a number of channels, including housing, corporate and infrastructure investment.

The big question being asked here is: why? The UK is part of an innovation surge, where new solutions are being developed and released every year, entirely dedicated to transforming how services are delivered. So, why are UK firms not investing more in ways to drive up productivity?

An evolving market needs an adaptive workforce

The overview of analysis above barely scratches the surface of how much work and resource has gone into uncovering the mystery of the productivity flatline. Other educational and research bodies have tackled the Puzzle from different angles, including LSE’s assessment of the political perspective, and Henley Business School’s analysis from the consumer side.

A decade later and the silver bullet still hasn’t been found. Ultimately, this generally means that there isn’t one. A conundrum on this scale isn’t going to be solved overnight and, at this point, it’s more about the tangible steps that businesses can take.

A common assessment that pops up across different reports is that upskilling the workforce to become more adaptable is becoming an increasingly critical requirement. Ultimately, we need adaptable workforces that can develop skills to meet market requirements.

However, first we need effective platforms to facilitate this level of development.

With powerful technologies like AI at our fingertips, the possibilities are endless. In times of economic hardship, businesses are often forced to do more with less – especially when it comes to its people. If you can’t afford to recruit more resources into the business, then your entire focus should be on championing the talent you already have.

This means recognising each individual need and providing them with a platform to learn and grow.

The national Productivity Puzzle continues, but organisations have the tools to contribute to the recovery.