Britain’s staggering productivity crisis explains so many of our woes

By Matt Ridley.

"How is it possible that the public sector is no more productive today than it was in 1996, before the internet took off?

Britain has a chronic productivity problem. As the American economy marches upwards in output per person, Britain limps behind. As Ben Southwood, Samuel Hughes and Sam Bowman have calculated, if GDP per hour worked here had continued growing at the rate it grew between 1979 and 2008, we would now be 25 per cent richer and annual tax revenues would be £274 billion higher.

The biggest culprit is the public sector. Private sector productivity is around 50 per cent higher today than it was 30 years ago, which is good but not great. The output per person in the public sector, however, is about the same as it was in 1996. In nearly 30 years the average public-sector worker has not improved the amount of work they can complete in a given time.

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How can this possibly be? The more you think about it the more incredible it is. Those 30 years have seen the emergence of e-commerce, mobile data, sat-nav, LED lighting and so much in the way of labour-saving, cost-saving technology. Is it really believable that when the employee of a quango sits down at their desk today to send an email instead of faxing a printed memo, or to look something up online, rather than by leafing through the index of a book, that he or she can get no more tasks done in the same time?

Yes, alas, yes. A Northern Rail executive recently admitted that he cannot get rid of fax machines without union agreement because “we have an agreement to use the processes that we have”. In general, 30 years ago there was far less unnecessary bureaucracy. I see this at first hand as a customer of the public sector, and I saw it in my career as a parliamentarian and (briefly) quangocrat. Process trumps product. The time freed up by new technology is squandered in meetings, consultations, reviews and delays. Work expands to fill the time available, as C. Northcote Parkinson famously pointed out.

In the 1960s the economist William Baumol spotted one part of the problem. Beethoven’s string quartet number 14 takes four people 40 minutes to perform today, as it did in 1826. But the wages of the performers are higher, because elsewhere in the economy people have invented labour-saving devices that make some people more productive, which competitively raises the pay of violinists – and nurses and teachers – too. As a result, less productive work tends to grow as a proportion of the economy, while more productive work tends to shrink unless you invent new kinds of the latter. Why should teachers and nurses not use tech to improve their own productivity and raise the wages of factory workers and insurance brokers, rather than vice versa? Because there is no reward, as there is in the private sector, not to fritter away the fruits of innovation in extra process. You get paid anyway, and there is a risk that if you work too efficiently next year’s budget will be cut.

Professor Karol Sikora pointed out this week the NHS is advertising for an ‘Equality, Diversity and Inclusion Champion’ to be paid up to £139,882 per year. Such a person is more likely to lower than to raise productivity by requiring frontline staff to spend time on meetings and form filling. But I bet that did not even feature in the decision to create the post.

The most worrying feature of Britain’s economic stagnation is the declining consumption of electricity. We are using 23% less than in 2005 – despite a rising population and an increase in the use of electricity for cars and heating. A small amount of this is down to efficiency improvements, such as the replacement of incandescent lights with LEDs, which generate around 10 times as much light per watt. But lighting is such a small part of our electricity consumption. Much of the explanation is disinvestment, driven by the high price of electricity. The sector of the economy that drives up productivity atrophies while the sector that does not is growing.

One of Sir Keir’s first acts after the election was to award train drivers more pay for no more productivity, sending a message through the entire system: to heck with public-sector productivity."