Business Collaborations

Productivity measures outputs divided by inputs and can be viewed at a micro (firm), local area, regional, or national level. Productivity demonstrates how well inputs are managed to generate a given level of output. At a national, macro level productivity is calculated using metrics such as Gross Domestic Product per worker or per capita. If an economy generates more output from the same level of input (or proportionately greater increases in output than the increase in inputs) - then it becomes richer as a whole. Although productivity does not directly determine wage growth, without productivity increases, employers cannot easily increase wages. Therefore, our improvement in living standards is dependent on productivity growth.

The sluggish productivity growth in the UK economy since the 2007 recession is often referred to as the 'Productivity Puzzle', partly because economists and other commentators have struggled to find reasons for the lower performance of the UK in comparison with other economies. As a result, the issue of business productivity is a key focus of policy discussion and debate and has been for some time. There are two aspects of debate within the 'Productivity Puzzle', in the UK, the first is the 'Productivity Gap', referring to the lower productivity in most regions when compared to London and the Southeast. The second feature is the long tail of relatively unproductive companies in the UK, particularly amongst SMEs, which are thought to act as a drag on the UK's overall productivity. These businesses are sometimes referred to as productivity 'laggards'.

Barriers to Productivity - Macro and Structural

The Productivity Institute, the government-funded research organisation examining productivity and its impact across businesses, workers, and communities, has highlighted several challenges thatneed to be addressed to improve productivity in the UK.

These include:

• Chronic under-investment in the economy
• Inadequate diffusion of productivity-enhancing practices between firms and places
• Institutional fragmentation

These macro and structural factors are important since they shape the economic conditions in which businesses operate.

The new government has come to power with ambitious targets to grow the economy to improve living standards and identified addressing the comparatively weaker productivity performance growth nationally since the last financial crisis as central to this. Shortly before the Autumn Budget 2024, the government published a Green Paper to consult on their initial thinking for an Industrial Strategy, which is central to their growth mission. The Green Paper sets out a plan to focus on eight key economic sectors and related clusters that the government believes will drive economic productivity and output growth. This strategic focus will be supported by 10-year regional growth plans led by devolved authorities and a statutory, independent Industrial Strategy Council to advise on industrial policy direction.

Barriers to Productivity - Firm Level

SMEs account for 99.9% of the business population in the UK, three-fifths of the employment, and around half of the turnover in the UK private sector. It follows that macroeconomic interventions to move the dial on productivity need to be complemented by support that grows firm-level productivity in a scaled volume of SMEs.