UK productivity: the 'Harry Potter' and 'Wal-Mart' effects

Today's Daily Telegraph alerts me to a recent speech by OECD chief economist Jean-Philippe Cotis to UK government economists in Nottingham. According to the piece, Poorly educated workforce is drag on UK productivity, the "dismal standard [their words] of literacy and education" is one reason for the UK’s plummeting efficiency in recent years. Here is what Cotis actually said in his speech/PowerPoint presentation on Economic Growth and Productivity (PDF):

...perhaps the major weakness in the UK is the very high share of the workforce having little or no formal qualifications beyond compulsory schooling: 30% of the 25-34 year-olds are low-skilled, a considerably larger share than in most other OECD countries (Figure 20). And many adults lack the most basic literacy skills. There is therefore a clear need to expand education and training at the intermediate level. In this regard, it may take some time before the ongoing efforts to improve education pay off.

Cotis' presentation discussed a vital issue: the UK productivity paradox. Or as he put it:

Why on earth isn’t UK productivity catching-up faster, given economic theory, good UK policies and comparatively low productivity levels to start with?

Poor qualifications and literacy are part of the story. So too is innovation. He notes that "by most standards, UK innovation performance looks rather poor". But there are some caveats:

The UK has a low share of firms applying for a patent, but it has the highest proportion of firms using some form of protection across the EU. A large number of firms use other forms of protection than patents, including trademarks, copyrights or secrecy.

This is consistent with the UK being mainly a services economy, for which patents may be less relevant for protecting innovations. For example, creative industries such as fashion, leisure software, movies, books and music are flourishing in the UK. This might be labelled the “Harry Potter” effect. But while commercial exploitation of new ideas is an integral part of such creative activities, it is typically not reflected in conventional measures of innovation.

Cotis lists several other possible factors: the existence of lags, measurement problems, the UK not being a major ICT producer. He also makes this interesting observation:

..we know by now that a sizeable portion of the US productivity surge stems from multifactor productivity acceleration in the wholesale and retail sectors. ...By comparison, productivity growth in retail has been twice as small in the UK as in the US over the past few years, despite similar ICT take-up.

To be sure, there is arguably more space in the US than there is in the UK for Wal-Mart operations. Still, there is also a presumption that strict zoning laws are impairing the good functioning of the UK retail sector.

I am sure lower retail competition is a contributor to Britain's less than stellar productivity growth (and to higher prices).

One factor, however, is missing from this diagnosis: the poor quality of British management. This was highlighted in the 2003 report by Michael Porter to the UK government, UK competitiveness: Moving to the next stage (PDF). A recent paper by Nick Bloom and John Van Reenan, Measuring and explaining management practices across firms and countries, found that while German managers were almost as effective as those in the US, British (and French) managers lagged well behind.

Comments

[Tom Geraghty]

This seems a little harsh, as (according to numbers I've seen) UK productivity (level) is only a few percent lower than Germany's (with all those great managers), and productivity growth was about as fast as in the US between 1995 and 2003.

According to the World Economic Forum's global competitveness report,

The United Kingdom (13th) . . . occup[ies] [a] relatively privileged positions in the overall rankings. . . . world-class public institutions . . .particularly strong scores on such variables as spending on R&D, collaboration between academia and the business community, and a broad range of variables which capture the use of various new technologies.

Sure the UK should do all it can to improve, but, really, is "plummeting efficiency" really justified?

[New Economist]

Tom, I agree - plummeting was the Telegraph's words, not mine (I should have made that clear in the post).

I would describe the UK's productivity performance as fair to lacklustre - levels are still well below France and the US, and growth has been no faster in recent years than it was a decade ago. Given all the good things about the UK economy, which Cotis readily acknowledged in his speech, one might have hoped for more.