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Why do national productivity gaps persist?

  • Philip Hammond, UK Chancellor of the Exchequer, says: “It takes a German worker four days to produce what a UK worker makes in five”

  • Others say much the same about French workers

  • But such claims are not new, they’ve been made over the last 30 years at least

  • The ONS data on which such claims are based seriously flawed however:

    • Whole sections of the economy are ignored, such as household activities or the consumer surplus obtained from freebies offered via the likes of iphones

    • Other sections are difficult to measure such as public sector outputs so assumptions are made that their costs can be thought equivalent

    • Other sections take time to collect and verify all the data given the number of organisations involved so errors are numerous and considerable

  • That said, most economists still seem to think the ONS data is worthy of at least indicating the order of productivity gaps and basic trends

  • Not so anyone else in the UK or G7 however

  • Hence, big national changes are never made so big productivity gaps are never closed – G7 economies just continue to chug along whilst experts mutter about ‘more capital intensity and greater investment in R&D’ to explain France’s apparent superiority over the UK

  • We say it’s not G7 workers who are to blame – they’re all  about as productive as each other, whatever the sector

  • It’s the mix of sectors in the different economies and the overall unemployment rate that makes the big difference between the UK and France and Germany, say:

    • If one country has more and bigger high-productivity sectors than another then, despite workers in each sector being about the same productively, the overall productivity of the former will seem much better than the latter

    • And if one country has a low unemployment rate (UK = 4.3%) compared to another (France = over 10%) then, as this percentage falls, the previously unemployed (usually less skilled, less productive) are mopped up by the market but this will lower its overall productivity level

  • It’s why Japan apparently has a much worse national productivity level than the UK, a claim which, given their work ethic, has to raise suspicions about the data on offer

Conclusions:

  • There’s apparent big productivity gaps between nations, especially G7 nations, mostly explained by their mix of sectors

  • There’s also big productivity gaps between sectors within each of those nations

  • Finally, there’s more big productivity gaps between organisations within each of those sectors within each nation

  • Huge opportunities to improve thus lie everywhere

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