“Why is UK worker productivity stagnant? Exploring the connection between wages and productivity, investment in technology, and other factors #UKproductivity #wages #technologyinvestment
Want to understand why UK worker productivity seems to be stuck in place? Let’s dive into the factors at play and untangle this complicated situation together.
Revisiting the connection between wages and productivity
– Are low wages the cause of stagnant productivity or is it the other way around?
– Do higher wages lead to increased productivity, or is there a mix of factors at play?
Investment in technology and its impact on productivity
– Could low wages be discouraging firms from investing in technology for more efficiency?
– Are people cheaper to employ than investing in long-term technological solutions?
Exploring other frequent reasons for stagnant productivity
– High marginal tax rates in the UK
– Under-investment by UK firms domestically
– Obsession with property investments in the UK
Join the conversation and help us uncover the reasons behind UK worker productivity stagnation. Your insights are greatly appreciated! #UKeconomy #productivityanalysis“.
May I be so bold and start the ball rolling on this discussion with one question: what exactly do you understand by productivity and how do you measure it?
Although the most common understanding of productivity refers to labour productivity (basically GDP per person), there are a number of ways to measure it. There is partial productivity, total productivity.
From your text I gather what you are interested in the most is why average Briton is so seemingly ineffective in generating wealth?
One study says it’s lack of investment:
 https://www.lse.ac.uk/News/Latest-news-from-LSE/2023/k-November-2023/Chronic-under-investment-has-led-to-productivity-slowdown-in-the-UK#:~:text=UK%20productivity%20is%20lower%20than,Economics%20and%20Political%20Science%20shows.
There’s a lot going on here, I’ll try to touch it all.
First off, the relationship between wages and productivity goes both ways. If productivity is high but wages low, there should be lots of labor market competition (since employing people is so profitable) which pushes up wages. If wages are high but productivity low, you instead have some combination of businesses failing (because they can’t cover the wages) and increased investment (in capital or training) to increase productivity to match wages.
‘Why should I work hard for low wages?’ is a thing; it’s been found that raising wages for low income workers can on its own increase productivity from increased effort. There’s a lot of debate about how big this effect can be though – it’s likely to be a temporary effect from raising wages, and I’m skeptical that it applies to higher wage workers (who tend to be paid more fairly). It certainly isn’t the main reason for the UK’s lagging productivity.
Low wages can allow a business to *get away* with lower investments in tech, for a time. But it doesn’t make the tech improvements worse – the productivity improvement is still there if you make the investment, and a larger share would be captured by capital if the labor market reflects a generally lower level of investment. So it’s an unstable circumstance, as any business that made the investment would have a significant advantage – high tech and low labor costs means high profits!
As for the other reasons you mention – all of them are true to some extent, but are symptomatic of how the UK’s economy has evolved. The story, as I understand it, is something like this.
The UK became *the* financial powerhouse of 20th century Europe. London was the financial hub of Europe, and capital flowed into the country to take advantage of its financial markets. A consequence of this was currency appreciation and ‘Dutch disease’ – the high value of the British Pound made manufacturing and exports from the UK less competitive internationally. The UK gradually offshored its manufacturing. It substituted higher taxes on the high wages of the financial sector, and redistributed them across the country. The high value of the pound and import substitution maintained living standards despite deindustrialization.
In the late 20th century London’s advantage as a financial hub started to diminish with the formation of the European Union. While London today is still the biggest financial hub in Europe, its advantage has been slowly eroding as Amsterdam and Paris are growing more quickly. Brexit accelerated this transition; on the margin, less new financial deals are flowing through London than in the past.
All of the pieces you mention – under-investment in manufacturing, high levels of taxation and social transfers, and restrictive, luxury building restrictions that protected the neighborhoods of well off financial workers in London – were luxuries that depended on London’s privileged financial position. As that erodes, the bargains that depend upon it have eroded as well.
So in the big picture, the UK has a hangover from the 20th century. It still has many advantages and is well positioned to recover, but that is going to require everyone to give up some of the privileges they enjoyed that are not coming back.