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Study notes

Policies to Improve Labour Productivity

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Productivity is a measure of the efficiency of factors of production. This note will focus on measures to improve labour productivity as measured by output per person employed and output per person hour. Labour productivity is defined as the quantity of goods and services produced per unit of labour input.

Some of the factors thought to affect labour productivity

In 2013, based on GDP per hour, the UK came sixth of the G7 countries, with the USA top and Japan bottom. UK productivity was 17 percentage points lower than the average for the rest of the G7, the widest productivity gap since 1992

Research Paper from the UK Parliament

Examples of policies

  1. Increased government and private sector investment on infrastructure e.g. improve telecommunications (broadband) and transport networks to speed movement of people and goods and lower the cost of doing business
  2. Expand the size of the capital stock and reduce the average age of capital by encouraging a higher level of business investment (inward and/or domestic) - for example through lower corporation tax or a sustained period of lower interest rates
  3. Tax and welfare reforms to improve work incentives and increase the incomes from people working more productively
  4. Improving the quality and affordability of education and training will increase its effectiveness at raising productivity - for example an expanded programme of apprenticeship schemes, better management quality, investment in STEM subjects
  5. Improve access to and quality of health care to reduce sickness and absence which should increase output per worker
  6. Facilitating inward migration of skilled labour to improve the quality of the labour force
  7. Deregulation of markets to encourage stronger competition leading to greater efficiency e.g. increased competition in financial services, retailing
  8. Measures to boost business start-ups and research and innovation which could all lead to higher productivity in the long run
  9. Tax breaks on the use of new technologies and low carbon, energy efficient products
  10. Government measures to increase bank lending to further increase investment and productivity e.g. the Funding for Lending scheme introduced by the Bank of England
  11. Encourage the uptake of the living wage or raise the national minimum wage - there is plenty of evidence that paying workers a better hourly wage improves their morale and can lead to improvements in output per hour worked.
  12. Investment in making housing more affordable, this would improve the geographical mobility of labour and help transfer workers from one industry to another over time as the pattern of employment changes

Evaluation arguments

  1. Productivity is determined by a mix of supply and demand side factors
  2. Most productivity gains come from the private sector of the economy - the focus of policies should be on making businesses and markets more competitive
  3. Productivity tends to rise as an economy recovers - so effective demand-side policies needed to sustain a higher level of aggregate demand to keep the level of capacity utilisation high
  4. UK has found it more difficult to raise productivity in service industries - a lack of intense competition may have held the economy back + there are well-known skills gaps in many industries
  5. The UK economy suffers from a low level of capital investment (as a share of GDP) and low research and development spending - this can hold back innovations and technological progress which might boost productivity in future years
  6. A combination of policies may be more effective (e.g. fiscal incentives and supply side interventions)
  7. Inevitable time lags and implementation lags - raising UK productivity closer to rivals will take more than one economic cycle
  8. Possible short run conflict with other macro objectives e.g. capital investment to raise productivity might lead to some lost jobs and perhaps some extra structural unemployment
  9. Real wages have been falling in the UK in recent years - has this been a factor limiting productivity? It might have affected morale of workers and it may have provided an incentive to businesses to use more labour-intensive forms of production.

In a 30 mark question - 2 or 3 convincing policies explained and analysed with at least two evaluative points (an evaluation point is worth up to a maximum of 6 marks) required to get to level 4 (25-30 marks). Look to include at least one analysis diagram for example a rise in aggregate demand, causing an expansion of real GDP and higher cyclical productivity.

“Boosting productivity is essential to making this recovery durable and to ensuring that the benefits are shared by all. This requires further efforts to improve infrastructure, enhance access to finance for sound businesses and promote skills.”

OECD report on the UK economy, February 2015


Guardian: Britain's productivity gap with other G7 nations widens to largest since 1992

Bank of England: The UK productivity puzzle

Linda Yueh (BBC, Feb 2015) Explaining the productivity puzzle

A new report from the Centre for Economic Performance (CEP) – the latest in a series of background briefings on key policy issues in the May 2015 UK general election – explains the fundamental problem of low productivity, probably the greatest challenge facing the UK economy, and analyses how the parties propose to make UK businesses more innovative and more productive.

Supply Side Policies and Productivity - revision video

Supply side policies explained - revision video

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