Britain’s poor productivity record is only partly explained by less capital and poorer training, says Howard Davies. It seems Britons are badly managed too

For about a quarter of a century, from the early 1960s through to the mid-1980s, the United Kingdom was, in economic terms, the sick man of Europe. Its growth rate lagged behind that of most of the rest of western Europe, at least, and the key measure of gross domestic product per head showed Britain slipping below first the Germans, then the French and Italians. Relegation to the second division of industrial nations beckoned.

In the two decades since then, and particularly in the past few years, the positions have flipped. The British economy has grown more rapidly than those of the other large European Union countries, and on most measures the country’s living standards are now a little ahead of the average in France and reunified Germany.

More hours, less output
But the British record still remains distinctly poor by one measure – labour productivity. And since labour productivity, in the long run, is the key determinant of wages and wealth, it is a crucial weakness. Output per hour worked in Britain is around 40% below America’s, and still 20% or so below France’s and Germany’s.

How do we reconcile these two apparently inconsistent observations – higher per capita income, yet much lower labour productivity? At one level the answer is straightforward: British workers work longer hours. The average Briton works 1,680 hours a year, while the French and Germans work just under 1,400 hours. German output per worker is similar to Britain’s, but the Germans work a lot less hard (at least in terms of number of hours). The Americans both work longer and have higher productivity, hence their marked lead in per capita income.

These striking differences show up in a different way in relative unemployment rates. Britain’s unemployment rate is only around half that of France or Germany. Britain has recently been much better at getting people into jobs than most continental European countries. The proportion of working age people in jobs is 73% in the UK, compared with 65% in Germany and 61% in France.

These facts are well understood by economists and policy-makers. To some extent they reflect deliberate choices, whether in the generosity of welfare benefits or employment law. The more interesting question is why these productivity differentials exist, and persist, in a world of low trade barriers and high capital mobility. Furthermore, it is intriguing that there is little sign of the gaps disappearing. Britain has caught up a little on France and Germany over the past few years, indeed it has almost rivalled America from a productivity growth point of view, but the US continues to set the pace.

The LSE’s (London School of Economics’) Centre for Economic Performance, in partnership with McKinsey & Co, is carrying out an extensive and intensive programme of research to try to explain the drivers of labour productivity. The results of this analysis are beginning to emerge. They will pose quite a challenge for both business managers and public policy-makers.

Some of the explanations of productivity differences are relatively straightforward. The largest influence, not surprisingly, is capital investment. Giving employees more and better equipment enables them to produce more output for every hour worked. Indeed, capital investment per head is significantly higher in France and Germany than it is in Britain. This has been understood for some time, but is difficult to correct. There is a chicken-and-egg problem: while labour productivity remains low, firms are unwilling to invest more.

The second key factor is the quality of the workforce. On average, British workers are still less well educated and less well trained than their continental counterparts (though the comparison with America is less clear). Probably 80% of our output gap with the rest of Europe can be explained by a combination of these two “input” measures. (Note that the capital and skills gaps are largely attributable to low government investment, especially in the transport infrastructure and education.)

But the rest cannot be explained in this way. And compared with America, even if British skill levels and capital investment were the same, that would make up only half the productivity gap. There must be another explanation.

Signs of management failings
Our hypothesis is that the answer is probably in the skills and performance of management, rather than the workforce. The evidence strongly suggests that US companies (and German and French ones to a lesser extent) are able, through superior work organization, to extract more output per hour worked, even controlling for differences in capital and skills.

One suggestive piece of evidence is that foreign-owned manufacturing plants located in Britain appear to achieve higher productivity than domestic competitors in the same industry – even if they are using similar equipment. Presumably, at least part of this difference is that these foreign firms have imported superior managers and managerial practices. That seems the most likely explanation for the productivity difference.

But we need to go beneath these high-level results and find out what it is that they do differently. Do foreign managers just work longer hours? Or are they more aggressive and better trained? Are family-friendly firms more productive than the average, or less so? Do financial incentives make a difference? Are higher-paid managers, with large bonuses, noticeably more efficient? In our joint venture with McKinsey we are investigating these questions by means of a large-scale survey of practices in medium-sized firms in America, Britain, France and Germany, and expect to produce detailed results in the next few months. Our initial results suggest that the spread of managerial best practices in British companies has been slower than in other countries, especially America.

The image most British people have of managers now comes from David Brent, the nightmare regional manager of the fictional company Wernham Hogg, portrayed in the TV series The Office. This comedy goes down well in America, too, which does little for the reputation of British executives abroad. The LSE’s results will soon show just how many David Brents there are among us. They could make uncomfortable reading.

Howard Davies
Sir Howard Davies is director of the London School of Economics and Political Science.