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How can we fix the UK productivity puzzle?

How can we fix the UK productivity puzzle?

UK productivity dipped in the first quarter of this year and continues to fall behind rates achieved before the 2008 financial crisis, figures from the Office for National Statistics (ONS) reveal.

In its latest bulletin, ONS said productivity fell by 0.4% compared to the final quarter of last year. This is the first fall in output per hour since the second quarter of 2017.

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Overall, UK productivity has struggled to bounce back to its pre-2008 level of 2% average growth per annum over the past decade. Productivity was only 0.9% higher in the first quarter compared to the same period in 2017.

Labour productivity – measured by the amount of work produced per working hour – is an important factor in determining the productive potential of the economy. Countries with strong labour productivity growth tend to benefit from high rates of growth and low inflation.

Ongoing recovering from financial crisis

However, in the UK, growth has been flat as the economy continues to recover from the financial crisis. This phenomenon has been dubbed the “productivity puzzle,” and ONS said it remains unsolved.

In particular, there was a marked fall in output from the manufacturing sector. When compared to the fourth quarter of last year, this is down 1.7%. Output per hour from the services sector over the same period also fell, though less dramatically at 0.2%.

The Association of Independent Professionals and the Self Employed (IPSE) has responded to the bulletin. They say that the self-employed will continue to play a significant role in helping to increase productivity. It has cited the construction industry as a key beneficiary, where flexible, specialised labour is in demand. Others have suggested more radical ideas such as increasing the VAT threshold.

Contractors to play a critical role

“The construction sector is not only a major part of the UK economy – accounting for 7% of GDP. It is also the largest employer of self-employed people,” Tom Purvis, IPSE’s economic and policy advisor, said. “The flexible, specialised labour they provide on a project-by-project basis reduces overall costs for businesses and increases productivity. With housebuilding top of the government’s agenda, there’s clearly a major role for the self-employed to play.”

Earlier this year, the UK’s Centre for Research on Self-Employment (CRSE) released a report confirming that freelancers play a crucial and unrivalled role in boosting economic efficiency and productivity in the construction sector.

It said that freelance sub-contractors save in the range of a 27-86% in labour costs per project as they allow businesses to avoid idle unused labour downtime.

“Without flexible labour, it’s not just house building that would slow: productivity would fall across all sectors,” Purvis added. “To help solve the productivity puzzle then, it’s clear the government must stand up and support highly skilled self-employed people in all industries.”

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