Why do national productivity gaps persist?

Philip Hammond, UK Chancellor of the Exchequer, is forever saying: “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

We already know the ONS data on which such claims are based are seriously flawe:

  • 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
  • And other sections take time to collect and verify all quarterly data so estimates are made which can involve significant errors

 

That said, many economists still think the ONS data is worthy of use, at least to indicate the order of productivity gaps and basic trends

Not so anyone else in the UK or G7 however, particularly managers who together are most responsible for a nation’s collective productivity performance

Hence, big national changes are never made, and apparent 20% productivity gaps are never closed – instead, G7 economies just continue to chug along at the same speed as before whilst their experts mutter about the need for ‘more capital intensity and greater investment in R&D’ to close any gaps

Shame on those managers, unaware and unconcerned about their individual productivity performance, never mind their nation’s

One things is for sure – it’s not their workers who are to blame – given the same working methods and gear, each nation’s workers are 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 both France and Germany, say:

  • If one nation has more and bigger high-productivity sectors than another then the overall productivity of the former will seem much better than the latter
  • And if one nation has a lower unemployment rate (UK = 4.3%) than another (France = over 10%), if this percentage falls, previously unemployed workers (usually less skilled, less productive) will be mopped up by the market but this will lower the nation’s overall productivity level

 

It’s why Japan apparently has a much worse national productivity level than the UK, despite the many world-class manufacturers in their midst

Conclusions:

  • The apparent big productivity gaps between the UK and some G7 nations can be mostly explained by their different mix of sectors
  • Such mixes cannot be radically changed overnight – that will take decades if such changes are desirable, which might explain the persistence of the apparent UK 20% productivity gap
  • As long as the mix in each nation plays to its strengths, then productivity improvements may well be needed within each of their sectors, particularly in the long tail of companies usually found in each one
  • Huge opportunities to improve productivity would seem to lie everywhere

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