Productivity is Everything:
Devolution, Good Growth and the Future
Beautiful Enterprise | Think Piece
By Tim Thorlby
6 min read
Productivity has become a major talking point in policy circles. But what is it, how do we address it effectively and what role do local authorities have in all of this?
This think piece looks at the issues involved and advocates for a new approach to improving productivity – with place-based leadership and with full recognition of the social and environmental implications.
1 – Productivity is (almost) everything
No conversation about the UK’s economy gets very far until someone mentions ‘productivity’. At which point, everyone sighs loudly and looks a bit anxious. The UK has a longstanding problem with productivity. And we don’t really seem to have a plan for fixing it.
It matters because productivity is the best indicator of whether living standards are going up or down. If productivity grows, then living standards will tend to rise too.
As Paul Krugman, Nobel Prize-winning economist has said:
“Productivity isn’t everything, but in the long run it is almost everything.”
‘Labour productivity’ is defined as ‘output per hour worked’. So, if the average worker can produce a bit more per hour (because of new skills, or new technology or better management, for example), then their employer will be better off, and then there is a fighting chance the employee will get paid more. This is (broadly) how it works.
Before the 2008 Financial Crash, our productivity was improving at the rate of something like 2% per year. This is not huge, but it’s not nothing. Since 2008, it slowed down even further and its growth became ‘sluggish’, according to commentators[1]. Since the pandemic, it has almost ground to a halt. Not good.
This is why a lot of people don’t feel like they are better off than they were a few years ago. It’s because they’re not.
Not only is the growth of productivity slow, but now – after years of being outpaced by others - the UK’s productivity per hour lags those key competitors in other countries. We rank in the bottom half of the OECD’s 38 comparable countries and below the Euro zone average. The UK’s rate of productivity is 20% lower than the USA and 10% below France and Germany. We’re currently on a par with Italy and still descending down the international table.
Why? Well, that is a fantastic question.
There is no simple answer and no ‘silver bullet’ solution. Economists have identified a wide range of possible causes for our malaise, and there is much argument about it. Possible causes include:
failure to invest
failure to innovate
‘short-termism’ among business leaders and financial institutions
technological backwardness relative to others
lack of entrepreneurship
workplace cultures
the rigidities of the class structure
It’s a fun list, eh. There is more, but we’ll stop there.
Key message: it’s complicated.
2 – So, what’s our motivation here?
It may seem entirely obvious that our response to the challenge of stagnant productivity is simply to try and find the accelerator again. Let’s go back to increasing our national productivity! Surely?
Well, I think there may be a slightly better answer.
Our economy doesn’t simply exist to maximise material wealth, so simply boosting GDP is really an inadequate answer. We also need to attend to Net Zero and the transition to a greener and more sustainable economy. This is not properly priced into GDP, but it needs doing anyway. So, we want to increase national wealth in a way which is environmentally sustainable. That’s a rather different objective.
I’m personally not persuaded by the more radical arguments of the ‘de-growth’ lobby who want to begin shrinking the economy in order to make it more sustainable. There are arguments to make about innovation and technological improvements which this lobby has yet to properly address, together with how you would actually go about doing it. Whilst the jury is still debating this (and it may be out for a while) we can, and should, still be proceeding to ‘green’ our growth.
I would also add that our growth needs to be more socially equitable in nature too. It is not enough to promote economic growth and then redistribute a bit afterwards, that is also an inadequate answer to the challenge of our times. With accelerating regional inequality in the UK, stark divides of wealth and much that is wrong with how we invest in skills and training (too many people and employers miss out), the changes we make to productivity are also an opportunity to fix up our national social fabric as we go.
So, in summary, I don’t think we can just ‘go back’ to the old playbook of ‘raising productivity’; that is yesterday’s answer. We need to find a way of securing ‘good productivity growth’. This is productivity growth which is greener and fairer than the previous version. Good productivity growth will not only deliver gradually rising living standards, but in a way which addresses social and environmental objectives too.
3 – So, how do we secure Good Productivity Growth?
The average productivity growth rate from 2010 – 2022 in the UK was 0.5% per year. According to the academic Productivity Institute, if we want to ‘feel the difference’ in improving living standards, we probably need to increase our annual productivity growth rate to something more like 1.5% per year – ie to treble our current rate of productivity growth[2].
The Institute have brought their own expertise to bear on the problem and suggest that there are three broad areas to think about when deciding how to address this challenge. I think their analysis is rather helpful, so I am summarising it here very briefly.
Problem 1 – Chronic under-investment
There has been a significant reduction in investment of all kinds in the UK in the last 30 years – public and private sector. This includes underinvestment in machinery, technology and skills, at all levels (training courses at FE colleges, not just university degrees).
The Institute reckon that “the lack of investment has trapped many UK firms in a low-skill, low-wage, low-productivity mode of operation”.
The Financial Crash undermined investment even further, as did Austerity, then Brexit.
Investment is also very uneven between places and between sectors. Some places do better than others.
Key message: our public and private sectors have both been under-investing for decades.
Problem 2 – Most employers are not improving their productivity (AKA ‘inadequate diffusion of productivity-enhancing practices’)
The UK is pretty good at science and innovation-led economic growth. Finally, some good news!
These are the high-tech, research-led firms working in life sciences, AI and different kinds of technology. This is what much of the Government’s new Industrial Strategy is seeking to expand. These are the kinds of companies that Government Ministers like to be photographed in and the sort of investment that local councils fight to attract. Everyone loves an innovation business.
These firms are the ones who are contributing much of the UK’s current productivity growth, where it exists. The ONS has worked out that the UK’s top 10% most productive workers contribute well over half of its productivity growth each year, and they have done so quite consistently in recent decades. So, our most productive firms and workers are doing a great job and delivering much of our productivity growth.
The bad news is that the number of people working in these innovation-led firms is still relatively small. They only account for a small proportion of UK industry. But you can see why the Government wants to invest in these sectors and expand them – this is where the ‘productivity action’ seems to be.
But there is another angle to this. Imagine the UK workforce divided into three groups, by productivity:
Top 10% - First, there is the ‘top 10%’ we have already talked about, who contribute more than half of our productivity growth. A small number of productivity big hitters, if you like.
Bottom 50% - Something like half of our workforce contribute almost nothing to the growth of productivity each year, they just do what they do every year and not much changes.
Top 50 – 90% - But what about the missing 40%? It turns out that those workers who are in the top 50% of the class for productivity, but excluding the top 10%, are the ones where productivity seems to have yo-yo-ed the most in recent years and where productivity growth has been lost.
This is illustrated in the chart below, reproduced from the Productivity Institute. Keep your eyes on the pink bit of the bars on the right-hand side:
Interestingly, it may be these firms – the top half of the class, but minus the star performers – which represent our greatest opportunity. They are good, but not great. They have not been taking on board innovation and technology at the same rate in the last 15 years as they did before. We could think of them as ‘coasting companies’.
They may not be the most exciting firms, or at the cutting edge of science, but in terms of their potential for productivity gains and the sheer number of people they employ (4 times as many as the ‘star performers’), this may be a crucial place for Government support and investment. At the moment, it appears they are being largely overlooked for government support.
Analysis by others[3] has suggested these ‘coasting companies’ are drawn from numerous quite disparate sectors – from transport manufacturing and pharmaceuticals to knowledge-intensive sectors like ICT. Many are not ‘low-tech’ firms but recognisable knowledge economy firms, which perhaps makes it even more surprising.
Key message: We need a much larger proportion of businesses to adopt innovations and technologies to increase their productivity
4 – Institutional fragmentation and lack of joined up policies
The productivity of London and the South-East has consistently grown faster than the rest of the UK for much of the last 40 years. We now have one of the most unequal countries in Europe, with the biggest regional divide. The dominance of London has led some to describe the UK economic model as ‘a hub with no spokes’. Ouch.
Whilst addressing regional productivity differences is a complicated business, it has become abundantly clear that beefing up a more strategic and powerful local government is an essential part of the mix. The UK – and England in particular - lacks a powerful regional and sub-regional tier of government which is capable of planning and delivering the sorts of things which increase productivity – investing in skills, education, transport, business innovation, land-use planning, etc.
Our cities and regions lack the powers, joined-up implementation, funding and general ‘ooomph’ that other comparable European cities have. For them to have the impact necessary to move the dial on productivity would require the sorts of long-term stability and powers that council leaders have, until now, only had in their dreams.
This may possibly be changing now. The current reorganisation of local government in England, if it is accompanied by serious devolution, could be a game-changer. Could be. Possibly. Keep your eyes on this.
Key message: Beefing up local government is key, but devolution alone is not enough; it needs to be a kind of devolution that actually enables long-term strategic investment in productivity, by joining up programmes into a coherent approach, city by city.
5 – Productivity in the foundational economy
Most people recognise the wisdom of investing in our most dynamic sectors (that ‘top 10%’), and we have also seen that supporting productivity gains in the rest of the ‘top 50%’ might be a sensible thing to do through the broader adoption of innovation and technologies.
But what about the bottom 50% of the UK workforce? Do we just write them off?
This is mostly the foundational economy – the everyday economy of retail, hospitality, social care and transport. The ‘hand and heart’ economy.
This is indeed usually written off entirely in productivity discussions. There is relatively little research on productivity in these sectors and not much government support for addressing it. All of the focus is on the big shiny, innovative, science-led projects.
This is a mistake. The foundational economy is not only a large part of our national economy, it is a disproportionately large part of the economy of many major northern cities. We will not redress the North-South divide by simply ignoring a huge chunk of the North’s economy.
Also, some very interesting new research by the Centre for Progressive Policy[4] has shown that, in fact, the foundational economy may be quite capable of increases in productivity.
We know this by looking at comparable countries and can see that they seem to have managed this impossible feat. If the UK raised the productivity of its low-wage sectors to the OECD average for low-wage sectors, this would add £105 billion per year to our GDP.
That is quite a lot and worth having.
How is this done? Well, the traditional way of raising productivity has four bits to it, and they still work:
Wider adoption of digital technologies by businesses. The UK leads the world in some technologies but we seem to be quite bad at sharing it, or adopting its use, across our own industries and regions. The innovative technologies emanating from the hallowed spires of Oxford and Cambridge are admired and used in New York and Berlin, but not in Manchester or Birmingham. We should fix that.
Training and skills of all kinds. Businesses of all kinds can benefit from training that improves services and processes – whether its ICT or Health and Safety or something more technical in a particular sector. This is about levelling-up good practice – whether you’re a manufacturer or a hotel or a cleaning company. British companies have been spending less and less on training in recent years and it shows.
Management. This has been singled out because many studies on productivity suggest that this may be a particular weakness in the UK. More training and coaching would drive better leadership in the foundational economy, driving helpful business changes.
More competition. Some specific sectors may lack competition - where there are only a handful of sizeable providers - and can end up a bit ‘flabby’. This is the sort of thing only Government and its regulators can address, but it’s an important consideration. There’s nothing like the whiff of competition to make a company Board pay more attention to performance.
What does this look like for the foundational economy? On the ground, it’s about good quality business support programmes, tailored to places and sectors, complemented with serious investment in FE colleges and universities to provide short courses that reflect employer needs. A reinvention of Apprenticeships would probably help too. None of this is new, it just needs funding, doing and doing well.
A concern for the foundational economy is no longer a marginal or eccentric concern. A growing number of respectable bodies are recognising the need to do this. For example, the Chartered Institute of Personnel and Development (CIPD) has recently called for the foundational economy to be properly included in the Government’s new Industrial Strategy[5]. The Carnegie UK Trust have also published an evidence review of how ‘good work’ – fairer pay, better management and decent working conditions – across all sectors, could play an important role in boosting productivity[6].
It is also clear that the foundational economy has a crucial role to play in such national priorities as house-building and the transition to a greener economy (who is going to install all those heat pumps and solar panels and service those electric cars?) This is a great opportunity as much as anything.
6 – Developing a new approach to Good Productivity Growth
Productivity is one of those ‘wicked issues’. It’s terribly important to fix, but it’s also jolly complicated and there is no simple solution.
What I think the evidence shows is that if are to take productivity seriously, not just at a national level, but in Town Halls across the land, then we will need to adopt a new approach to promoting economic growth.
How we drive productivity improvements has implications for the forthcoming Devolution to local government in England. It needs to be done in a way which gives councils the tools to actually move the dial on this core challenge.
Productivity also has implications for all those local and sub-regional city economic growth strategies; they need to include plans for investing in Good Productivity Growth.
Of course, this needs to be properly backed by central Government with funding, devolved powers and joined up policy. It won’t happen overnight, but it needs to happen as part of the many changes now unfolding.
In practice, promoting productivity means:
A national institution to build momentum – Institutions eat strategies for breakfast, so let’s have a national body of some sort which can’t be easily abolished and which will provide the long-term focus and continuity required for promoting higher productivity across the land and across sectors. A one-stop-shop for good practice and good ideas.
Funding beyond London - We must prioritise public investment in cities outside of London. The UK will never achieve its full potential until every region of the UK achieves its full potential.
Every sector is invited – We need to move away from thinking about productivity as something that only our star performers can do. We need to find ways to involve the whole economy. There are at least three tiers and each one may well need its own approach, with further variations by sector:
1 - Investing in our star performers: Yes, we should continue to invest in the top-performing high-tech innovation firms that everyone loves. We already do this.
2 - Helping coasting companies to perform better: We also need to invest in promoting much broader innovation and technology diffusion in the next tier down of ‘coasting’ companies that are doing well, but not well enough.
3 - Investing in foundational economy skills: We need a serious plan for supporting firms in the foundational economy – the everyday economy. This is fundamentally about skills, and should be largely delivered by the FE sector. In the future, when we look back, the period of our national life when we completely overlooked half of our economy will probably look quite silly.
None of this is easy. That’s a good reason to start today.
This think piece was written by Tim Thorlby. If you found it interesting, do get in touch.
Footnotes
[1] House of Commons Library (Feb 2025) Economic Indicators: Productivity | Access: https://researchbriefings.files.parliament.uk/documents/SN02791/SN02791.pdf
[2] What explains the UK’s Productivity Problem? Insight article Feb 2024 | Access: https://www.productivity.ac.uk/news/what-explains-the-uks-productivity-problem/
[3] D. Coyle, J. Mei (2022) Diagnosing the UK Productivity Slowdown: Which Sectors Matter and Why?, Working Paper No. 018 version 1, The Productivity Institute | Access: https://www.productivity.ac.uk/wp-content/uploads/2022/03/WP018-Diagnosing-the-UK-productivity-slowdown-FINAL-v1-140422.pdf
[4] Singh, T (2025) The Productivity Blind Spot: Why UK Policymakers Can’t Afford to Ignore Low-Wage Sectors, Centre for Progressive Policy | Access: https://www.progressive-policy.net/publications/the-productivity-blind-spot-why-uk-policymakers-cant-afford-to-ignore-low-wage-sectors
[5] CIPD (2023) An industrial strategy for the everyday economy
[6] Bosworth & Warhurst (2021) Does good work have a positive effect on productivity? Research findings