Productivity

Productivity refers to how efficiently the factors of production are being used. Productivity levels have a significant impact on an economy, and how effectively it performs in terms of meeting its macro-economic objectives.

Measurement of productivity

There are two basic ways in which productivity can be measured:

Output per worker – the value of an economies output/workforce
Output per hour worked – the value of output/total amount of hours worked)

Marginal productivity refers to the additional output products from additional inputs of labour (or other factors).

Output per hour and per worker (Index)

International Comparisons

Determinants of productivity

Labour productivity is affected by:

The level of skills and the quality of training – better skills and training enable workers to exploit their talents and abilities and produces higher quality labour.
The use of new technology – the use of technology is important in determining the level of productivity in manufacturing industries.
The extent of innovation in new of new production methods or processes.
The transfer of knowledge and technology between countries through open trade relationships and foreign direct investment between countries.
The level of unemployment – as unemployment falls, less productive workers may be attracted into the labour market.
The level of competition in an economy – more competitive economies encourage the improvement of productivity as this helps improve competitiveness.

Measures to improve productivity

Measures to improve productivity include:

Use of the tax system to provide incentives for unemployed workers to join the labour market, or to gain new skills.
The promotion of greater competition in labour markets, through the removal of restrictive practices, and labour market rigidities, such as the protection of employment.
Measures to improve labour mobility will have a positive effect on labour productivity.
Improvement in the education system to develop general skills of numeracy and literacy, and to promote flexibility – referred to as human capital development.
The adoption of performance-related pay in the public sector is also seen as an option for government to help improve overall productivity.
Providing grants, subsidies or tax incentives or credits to firms to upgrade their technology or engage in effective R&D.
Deregulation of product markets and removal of unnecessary bureaucracy which can bring down barriers to entry, and encourage new and dynamic market entrants.

Comment

Andy Haldane tapped to tackle UK’s productivity puzzle

George Parker, Political Editor

Andy Haldane, chief economist at the Bank of England, is to be

made a senior government adviser on improving Britain’s poor productivity record.

Greg Clark, business secretary, will name Mr Haldane, 51, chair of the new industrial strategy council, a body charged with overseeing delivery of the UK’s flagship economic policy.

Industrial strategy was a key plank of Theresa May’s programme for government when she seized the leadership of the Conservative party in 2016. The concept involved promoting industries of the future, improving skills and spreading wealth, but it has been overshadowed by business anxiety about Brexit.

The prime minister insists a good deal is in sight and that Britain could enjoy an economic bounce in 2019 if a “hard exit” is avoided.

Mr Clark believes Mr Haldane’s appointment to head the new industrial strategy council — which meets for the first time next month — will help to hold the government to account and improve implementation of the policy.

The BoE said Mr Haldane’s appointment did not amount to an extension of the bank’s remit and that he would be carrying out the part-time role in his own right as an economist with a longstanding interest in productivity issues.

But the appointment will create an informal link between the government and the central bank in addressing the “productivity puzzle” that has hobbled growth in Britain

Mr Haldane, in a lecture in 2016, cited the limitations of monetary policy and quoted the US economist Paul Krugman, who said: “Productivity isn’t everything but, in the long run, it is almost everything.”

Mr Haldane, who is regarded by the business secretary as one of Britain’s leading authorities on productivity, also sits on the BoE’s Monetary Policy Committee. He will be joined on the council by figures from business, academia and civil society.

Mr Clark said: “I am delighted that Andy Haldane has taken on this important role which will give the council authority and independence, as well as the benefit of his thought leadership in this area.”

The appointment was given the blessing of Mark Carney, BoE governor, who said: “Productivity is an important determinant of the MPC’s forecasts for economic growth and inflation.

“Understanding the impact of the government’s policies on the outlook for productivity is therefore of great importance to the Bank’s work. Andy’s new role will help both to deepen that understanding and, consistent with our remit, to support the government’s objectives for growth and employment.”

The industrial strategy council will publish a regular report assessing progress towards specific targets and will meet three to four times a year.

Mr Haldane said: “The industrial strategy is one of the most critical strands of work taking place across government and has the potential to raise living standards across the whole of the UK, boost people’s earning powers and put the UK at the forefront of future industries internationally.”

Mr Clark has asked the council to develop new ways of judging the success of the industrial strategy, rejecting the historic measure of output per hour worked as too “crude”. He argues this does not take into account Britain’s high employment rate, compared with countries such as France, where workers are more productive but where the jobless rate is much higher.

ft logo FT Source: George Parker 2018 “Andy Haldane tapped to tackle UK’s productivity puzzle” Financial Times 7th October. Used under licence from the Financial Times.© The Financial Times Limited [2018]. All Rights Reserved.