By Paul Mason, Partner and Head of Corporate Finance at Chiene + Tait
THE phenomenon of low productivity growth has affected Scotland, the wider UK as well as many other western nations since 2008’s Global Financial Crisis (GFC). It is often referred to as the “productivity problem” or, less critically, the “puzzle”.
Many enlightened commentators, including a trio from the Bank of England: Andy Haldane, Silvana Tenreyro and Patrick Schneider, have each expressed their opinions on the issue over the last year or so but reveal quite differing views on both how it is manifesting itself and the probable causes of ongoing stagnation.
Identifying fundamental causes – and therefore potential remedies – to flat-lining productivity is also a key issue being considered by a joint academic and industry-focused body of which I’m a member, the Royal Society of Edinburgh’s Business and Innovation Forum.
What we do know is that UK productivity was rising steadily until 2008. The Office for National Statistics calculated that had that pre-GFC trend continued, productivity would now be around 20 per cent higher than it actually is. They state the key reasons for the lack of productivity growth over the past decade include a decline in bank lending to new businesses, lower levels of business investment and, in an extended period of little or no wage rises, companies being better placed to maintain workers. These other changes may well correlate with depressed productivity growth, but it is not obvious they are the actual factors causing it.
My personal view is that anaemic productivity growth at a UK level is correctly labelled a “bad thing”, but is itself the measurable outcome of millions of decisions within individual UK businesses which include a need for business agility; preservation of operational flexibility; and a shift in our working styles. Perfectly rational decisions taken within companies may result in a depressed economic effect for the UK as a whole. Speaking regularly with business leaders, I find these rational strategic and tactical decisions are the result of sustained market volatility and economic uncertainty, including Brexit, as well as significant growth in the gig economy. This latter point is part-driven by individual lifestyle choice and a desire for greater freedom and flexibility amongst many in the UK workforce, with 4.4 per cent or 2.8 million people within the UK doing at least some of this type of work in 2017. Beneficially, it can also offer a means of re-entry to work for those not seeking conventional working patterns, such as return-to-work parents, the retired and students pursuing occasional work.
Growth in this style of work does typically depress overall economic productivity, but it should not automatically be seen as a bad thing for businesses and/or workers. Whilst some bad practices certainly do adversely impact workers, for many others the gig economy and other forms of self-employment offer a suitable lifestyle choice and are actively sought by those wishing to devote more time to family life or pursue other interests.
We have experienced sustained economic volatility through massive shifts in the global economic landscape and through UK-specific factors such as Brexit and the Scottish independence debate. This climate has led SMEs, in particular, to seek greater agility and maintain flexibility, even if that comes at the cost of reduced investment in productivity improvements.
Rather than viewing this decade of productivity stagnation as a problem to be fixed, we need to value the other side of the equation properly: increased agility which can confer competitive advantage during times of uncertainty. In the longer-term, UK businesses will return to productive investment when stability and clarity permit them to do so.
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