The productivity myth

The UK economy has been showing gradual signs of improvement over a 50-year period,
suggesting that productivity is not as bad as is generally reported. But a
greater focus on delivering the goods has also led to a higher rate of
individual stress. Jane Lewis reports

One of the most unsettling aspects of today’s economy is that the big
picture bears so little resemblance to the small picture of everyday life. We
may think of modern economic cycles in terms of boom and bust, but the reality
is very different.

A graph tracing economic growth in the UK over the past 50 years would show
a gentle upward slope – very different to the jagged spikes and troughs of the
pre-war economy. Economists are still arguing about why this has happened. But
one commonly-cited reason is the switch from an industrial, asset-based economy
to one powered by people – a far more flexible resource than factories. Because
companies can now react quickly to the first hint of weaker demand by cutting
jobs, we enjoy a smoother economic ride.

But the Faustian pact we have struck for this greater collective security,
is greater individual insecurity. Down on the ground, life seems increasingly
fractured, volatile and frenetic.

Some economists saw this coming. In 1930, when John Maynard Keynes published
his essay Economic Possibilities for our Grandchildren, he argued that within a
century, this process of steady growth would result in a living standard
"between four and eight times as high as it is today" in
"progressive" [developed] countries – thereby satisfying most
material wants and effectively solving "the economic problem". With
capital accumulation no longer a priority, argued Keynes, social values would
shift: people would be able to take advantage of "freedom from pressing
economic cares… to live wisely, agreeably and well".

His predictions for economic growth were spot on. Yet, the post-industrial
paradise he painted seems as remote as ever. Higher incomes have not generated
the stress-free lifestyle he envisaged; on the contrary, survey after survey
shows that anxiety levels in the UK have risen disproportionately in recent
years. Unions have taken up ‘the long-hours culture’ with a passion they once
reserved for pay disputes, stress claims are soaring, and the HSE – fresh from
placing its first stress ‘improvement order’ on a Dorset NHS trust – is now
calling for laws to protect staff from overly-stressful environments.

Perhaps we are in the grip of the difficult transition away from a culture
in pursuit of growth which Keynes predicted. He anticipated "with
dread" the possible effects of changing "the habits and instincts of
ordinary man, bred into him for countless generations". The result, he
said, could be "a general nervous breakdown".

Or perhaps, as some commentators suggest, Keynes simply underestimated the
human capacity to want more – our tendency to care not just about absolute
living standards, but our standards relative to those of others. It might be
argued that this addiction to what psychologists call the ‘hedonistic
treadmill’ is inherent to capitalism; and so too, consequently, is stress.

Higher stress levels might be a price worth paying if the results were
reflected in improved productivity. But the gulf between the UK’s collective
performance and our individual experience is stark. In terms of the general
level of prosperity (measured by output per head of population), Britain has
largely drawn level with France and Germany. Indeed, since the 1990s, we have
been steadily outpacing our European competitors with an annual growth rate of
2.3 per cent, compared with 1.9 per cent in France, 1.5 per cent in Italy and
1.3 per cent in Germany.

But in terms of actual productivity (output per hour worked), the UK’s
performance is atrocious. With productivity levels some 20 per cent lower than
those of Germany and France and way below the European average, we are ranked
12th out of 15 measured EU members. Only Portugal, Greece and Spain are worse.
The only reason Britain has kept pace at all is because we work the longest
hours in Europe (on average, 10 per cent more than French staff), and more of
us work (72 per cent of those aged 15-64, compared with 63 per cent in France).

In short, we are having to work harder and longer to maintain our position
in the pack; less inspiration means more perspiration. Research shows the UK’s
blue- collar employees are working three more hours a week than they were 30
years ago. Managers are also working harder: according to professor Cary Cooper
of the University of Manchester’s Institute of Technology, 10 per cent of
managers were working more than 61 hours a week in 2001, 40 per cent were
working more than 50 hours, and a third "frequently had to work
weekends".

By US standards, of course, the UK’s much-vaunted long-hours culture is
anything but. The average American works 10 per cent more hours per week than
the average Briton, and 22 per cent more than the average German. Proponents of
this Gradgrind culture argue the results justify the effort: US performance far
outstrips that of any other country, both in terms of overall wealth generated
and productivity per worker per hour. A recent study by American economist
Robert Gordon, suggested that a large part of the wealth gap per head between
Europeans and Americans could be explained by the European preference for
longer holidays.

The picture in Japan, once considered a paradigm of efficient production, is
mixed, thanks to the yawning productivity gap between various sectors of the
Japanese economy. The outward-looking manufacturing sector, especially the car
industry, consumer electronics, steel and machine sectors, is still world class
(far outstripping even the Americans in terms of labour productivity). But
these sectors only account for 10 per cent of Japanese GDP and employment, and
in all other sectors its labour force is one of the most unproductive in the
industrial world.

Is stress really a factor behind these poor productivity figures? The HSE
certainly believes so: it estimates that 13.4 million working days were lost to
stress in the UK in 2001, at a cost of around £3.8bn (some estimates put the
figure as high as £11bn). The condition has now overtaken back pain as the
leading cause of absence in white-collar industries, and is running a close
second among blue-collar workers.

But, as Dr Sayeed Khan, chief medical adviser of the Engineering Employers’
Federation, points out: "It is difficult to do ’cause and effect’ with
stress" because there has been so little research into its effect on
performance. "Nobody’s looked at productivity and whether mental
ill-health has a bearing on it," he says.

Nonetheless, in terms of the UK’s overall productivity gap, John Philpott,
chief economist at the Chartered Institute of Personnel and Development, says:
"Stress is not that important relative to other factors." Employers’
groups agree. A CBI spokesman says: "We did a big report with the TUC on
productivity a year ago at the behest of Gordon Brown, and stress does not
feature in it at all."

Commonly agreed causes of the UK’s poor productivity generally echo the
conclusions of professor Michael Porter’s recent study for the Department of
Trade and Industry, which cited low levels of capital investment, the skills
gap and declining innovation as major factors. To these, the TUC adds
‘short-termist’ management thinking, while the CBI homes in on what it sees as
a growing burden of higher taxes, red tape and regulation.

Establishing the link between the pressures of work and rising stress levels
is equally problematic. A recent research paper from the Royal College of
Psychologists found a suicide rate that was six-times higher among the
unemployed than those in work. And psychologists continue to list the five
leading causes of stress – death of a close relative, marital breakdown, debt,
imprisonment and personal injury or illness – as non work-related.

"Stress is hard to define in abstract, which makes it very difficult to
measure and legislate against," says Philpott. "Stress only becomes
stress at the point where the individual isn’t able to handle it."

So personality counts for a lot. A situation that might cause intolerable
strain to one person could produce a positive adrenaline rush in another.

Yet there is little doubt that the impact of long hours is a genuine
concern. TUC policy officer Paul Sellers, says: "What irritates me [about
the long hours debate], is that it’s like we are having to reinvent the wheel.
We seem to have forgotten the research literature on time and motion that goes
back 100 years."

How can UK plc boost productivity?

Personnel Today asks some of the UK’s
leading industry figures for their opinions on British productivity, and
suggestions for the way forward

Tim Yeo MP, Shadow Secretary of State
for Trade & Industry

It is no surprise that productivity has grown just over half as
quickly in the first six years of Labour Government as it did in the last six
years of the previous Conservative Government.

Labour simply is not listening to the concerns of business.
There isn’t a group of business people I have met that haven’t told me how
their businesses are damaged by red tape. The British Chamber of Commerce now
estimates that business has paid more than £22bn in meeting the cost of
regulation since Labour came to power. Burdensome regulations raise the
marginal costs of employment, reduce investment and stifle productivity.

Alongside the problem of over-regulation is the burden of
taxation, which has grown substantially in the past five years. Cuts in
corporation tax are of little value to businesses struggling to make a profit
in the face of higher national insurance contributions introduced last April.
This is nothing more than a tax on jobs, which hits bosses, workers and
productivity.

Compared to 1997, the average businessman now spends three
times as many hours a week dealing with employment legislation at an additional
cost of £9,000 a year. And business as a whole has paid a staggering £47bn in
new business taxes. So it is sadly no surprise that forecasts predict 471 firms
a week will be going bust in the UK in the next three years. Falling business
investment and declining productivity are the legacy of Labour’s over-taxing
and over-regulating approach to business.

Will Hutton Chief Executive, The Work
Foundation

Productivity is essentially a macro-economic indicator, which
is probably why businesses prefer to talk about performance and
competitiveness. It is this understanding of the business case that has driven
the Work Foundation’s year-long study of what makes a high-performing firm –
the Work and Enterprise Panel of Inquiry (due to report on 5 November).

Our recipe for improving performance suggests that the UK can
only build sustainable businesses and public services by thinking beyond the
next quarter’s results. We need to build and share a compelling vision or
‘reason to be’ with which the workforce can identify, and promote a shared
accountability for delivering that vision. Much of this, therefore, is about
sound husbandry of our intangible assets – something which UK organisations
have been slow to grasp.

A really clear lesson from our data is that working the longest
hours in the EU will make no difference to the UK’s output per head unless we
think laterally about the ways we organise work, motivate the workforce and
nurture risk-taking and creativity.

One of the worrying by-products of the ‘work harder’ approach
is that it is taking its toll on large swathes of the workforce. The incidence
of mental ill-health among UK employees has increased by almost half since
1996, and 3,000 British workers leave to draw incapacity benefit every week.
This by itself must be putting a large dent in our national productivity,
leaving aside the human cost.

Digby Jones Director-General, CBI

The gap between UK productivity and that of the US and our main
European competitors has been a serious problem for decades. There are no easy
answers.

Certainly business needs to do more for itself; for example, by
improving management skills, adopting smarter working practices and being more
innovative. But Government has a major role to play too.

Economic stability alone has not encouraged companies to
invest. In fact, the downward trend has accelerated. UK business investment
declined by nearly 13 per cent over the past two years. It’s no coincidence
that this has happened at the same time as relentless Government increases in
business taxation and erosion of labour market flexibility.

The Chancellor has rightly highlighted the need for
productivity gains, but actions must follow words. The UK must be able to
attract and retain the best firms, who can pioneer productivity gains.

Public infrastructure improvements produce returns across the
economy and can influence the future investment decisions of multi-nationals.
The Government must deliver real progress. The objectives of the 10-year
transport plan must not be abandoned.

Also crucial is full support for innovation and skills. The
Government has made a positive start with tax credits for research and
development, but too many youngsters are leaving education with few or no
qualifications. The basic skills problems of individuals must be tackled more
vigorously. Business must do its bit by tackling adult illiteracy at work.

And let’s not forget that the public sector represents 40 per
cent of the UK economy, or that productivity is much lower there than in the
private sector.

Government procurement is a key driver of private sector
productivity. The UK does not benefit from the skewed procurement environment
of the US or France.

We are fully exposed to competition, but so often the
beneficiary is the overseas company assisted by protection from competition in
its home market. A level playing field, pursued firmly by the British
Government, would be one of the best routes to enhanced productivity at home.

David Coats Head of Economic and Social
Policy, TUC

Addressing the productivity gap is a major undertaking as so
many factors have to be addressed simultaneously. The UK’s capital stock is
lower, so there is less investment, and there is a skills gap and a lower level
of innovation. The ability of UK firms to adopt new management practices and
technologies is questionable too.

There are also particular problems with the UK business
environment. Too many companies think of themselves as a portfolio of assets,
rather than long- term businesses, so there is a relentless pressure to
maximise the shareholder value, and that leads to short-term thinking. We call
this the ‘low road’ business model: characterised by low pay, low productivity
and a low spec on products and services.

It’s an unsustainable approach to managing. The UK – as
professor Michael  Porter pointed out
[in his recent report for the DTI on productivity] – needs to start competing
on quality, not cost.

It is a mistake to think that low regulation and low taxation
are the [prerequisites] of strong productivity – which is all the CBI talks
about.

The Porter prescription for the future is the right one: he
makes clear that what the CBI says is utter nonsense. He notes in his report
that "low taxes, less regulation and an even smaller role for Government
no longer give Britain a competitive advantage".

The CBI argument is just economically illiterate. The only
reason why UK business cannot cope with more regulation, is because UK business
is pretty useless.

If the CBI is correct, then how is it that the Dutch, Danes and
Swedes – whose labour markets are at least twice as regulated as ours – are
richer than us by GDP per head, more productive and have lower unemployment?

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