Q&A: What is the productivity gap?

The productivity gap is a phrase to describe a sustained difference in measured output per worker (or GDP per person employed) between one country and another.

Productivity is a measure of the efficiency of factor inputs such as labour and capital.

In recent years the UK economy has achieved a sustained rise in productivity although the growth iof output per worker has been less than that of many emerging economies and below that of the United States,

Improved productivity has many root causes - among them:

1. Higher business capital investment
2. Impact of foreign direct investment – e.g. where new production plants operating on a large scale drive efficiency higher
3. Improvements in management
4. Strong economic growth – high demand means that capacity it used more fully

Labour productivity still lags the USA and Germany by more than 15% and there are signs that output per person employed will fall in 2009.

The level of GDP per worker and GDP per hour worked in the UK is well below that of the United States, France and Germany. This is known as the productivity gap. Some progress has been made in closing the gap but there is still much work to do. Despite these recent improvements, research from the London School of Economics has found that output per hour worked in the UK is still about 13% lower than Germany’s, 18% below the US level and 20% below France.

Explanations for the productivity gap:

No one factor on its own is sufficient to explain the differences in efficiency. Some of the more widely quoted reasons are summarized below:

(1) Relatively low rates of capital investment - i.e. the failure of the economy to invest and thereby to raise the stock of physical capital available to the workforce

(2) Low rates of spending on research and development – The UK now devotes much less of GDP to research spending than other nations and this impacts on the pace of innovation and the speed with which new technology is incorporated into production

(3) Skills of the labour force – there are long-standing concerns about the educational skills of the UK labour force including basic literacy and the quality of job specific training. Britain still has one of the highest rates of functional illiteracy among adults, together with fewer workers with higher skills (at degree level or above) compared to the United States and fewer workers with intermediate and vocational skills compared to Germany and Japan.

(4) Over-regulation of industry and commerce and a lack of competition in some markets