How to Solve a Problem Like Productivity
British productivity has been stagnating for years. But what if the solution lies in empowering workers — and making people happy and healthy — rather than in narrow economic fixes?
Bush Fair play area, Harlow, Essex, 1970s. (Credit: Professor JR James Via Flickr.)
For more than a decade, economists have been scratching their heads over the productivity puzzle afflicting western economies. The issue has been particularly severe in the UK, where productivity stagnated for over a decade following the financial crisis. Now, we have new data showing that productivity levels have fallen to below pre-COVID levels.
Productivity is the amount of output produced per hour worked. More productive economies can produce more with less, and this is ultimately what underpins economic growth over the long run. When productivity stagnates, growth tends to stagnate too.
Economists have been debating the causes of slower productivity in the rich world since the financial crisis. Some argue there has been a slowdown in the rate of technological change, while others claim that the benefits of technological change have just become harder to measure. The situation is worse in the UK than it is in other advanced economies, meaning other elements are likely at play too. Economists have attributed this to factors like Brexit, low levels of public and private investment, and even poor management styles.
Each of these factors likely play some role in the UK’s productivity crisis. But I would argue that the primary cause is much simpler. In his book Smart Machines and Service Work: Automation in an Age of Stagnation, Jason E Smith provides a Marxist analysis of the productivity problem. He observes that modern wealthy economies are dominated by service sector jobs, in which productivity growth is slower than in manufacturing because service jobs are harder to automate. Low-wage services sector jobs are particularly resistant to automation because the labour is so cheap that companies have no incentive to invest in new technology.
This explanation also indicates why the problem is so much worse in the UK than other economies. The UK economy is dominated by services. Around 80 percent of our GDP comes from the service sector, and the vast majority of jobs are in services — from finance and insurance to education, health, and social care. Manufacturing, once the backbone of British capitalism, now accounts for less than 10 percent of output, and even fewer jobs.
The difference between pre- and post-crisis productivity rates is also more pronounced in the UK because of the astonishing growth of the finance sector in the run up to 2008. Before the financial crisis, low productivity growth was disguised by a bubble in financial services that made output seem higher than it really was. The finance, insurance, and real estate sectors sucked talent and investment into London, preventing other sectors and places from competing. When the bubble collapsed, these imbalances became much more obvious.
Eroding Workers’ Rights
The fact that our economy is so dominated by service sector employment undoubtedly makes raising productivity harder. But successive governments have actually made the problem worse.
First, they have eroded workers’ rights, which has made it much harder for workers to fight for better pay and conditions. Firms have responded by cutting pay, increasing hours, or worsening working conditions.
Economists tend to argue that wages reflect productivity, so if workers are being paid less it’s because they’re less productive. But the issue with this theory is that it doesn’t account for bargaining power. In the US, for example, real wages have stagnated while productivity has risen, meaning bosses are keeping all the gains from higher productivity leaving workers relatively worse off.
There is a competing explanation for the relationship between wages and productivity: efficiency wage theory. According to this theory, higher wages can actually boost productivity, while low wages can reduce it. As firms have cut wages and undermined conditions, workers have responded by matching the effort they put into the jobs to the rewards provided. What’s more, as Smith would argue, low-wage service-sector employment is also more resistant to automation as firms have no incentive to invest in new tech when labour is so cheap.
Secondly, austerity has resulted in cuts to essential services that support the ‘social reproduction of labour’. At least since the Second World War, the government has taken on the responsibility for training and caring for workers exploited by capitalist firms. When people have been worn out by intense work, they’ve been able to rely on public services to put them back together.
But successive governments have imposed stark cuts to these essential services. The effects of these cuts have been made clear in the crisis in the NHS, our social services, and local government. Our education institutions are so stretched that outcomes have been compromised, university is expensive, and slashes to further education have made it harder to access practical training post-school.
Engines of Prosperity
Productivity doesn’t emerge from nowhere. It depends on the strength, health, and education of the workforce — the people who actually produce value in the economy. When you underfund the schools that educate them, the hospitals that treat them, and the transport systems that get them to work, you are undermining the very conditions that allow the economy to grow.
The clearest example is the UK’s chronic underinvestment in childcare. Affordable, high-quality childcare is essential for enabling parents — especially women — to participate fully in the labour market. But in the UK, childcare is extortionate, underfunded, and increasingly inaccessible.
The same is true in healthcare. Life expectancy has stalled and even declined for some groups. Economic inactivity due to long-term illness is at record highs. Millions are out of the labour force because they are too sick to work. And the NHS, still reeling from years of austerity and privatisation, can’t cope.
The productivity crisis isn’t some abstract economic anomaly. It’s the result of decades of political choices — choices to prioritise asset inflation over wages, corporate profits over social investment, and private wealth over public wellbeing.
We can’t expect to fix Britain’s economic malaise without taking better care of the people who make the economy run. What we need is a radical programme of investment in the social infrastructure that underpins productivity: universal childcare, health and social care, housing, education and training, and high-quality public transport. It means treating public services as the engines of long-term prosperity.
The real wealth of a nation is its people — and right now, Britain is failing them. Until we build an economy that works for them, we won’t solve the productivity crisis. The real puzzle isn’t why growth is so slow: it’s why anyone still expects it to speed up when we refuse to invest in the people who make it possible.