Productivity of UK workers close to bottom of the league

Official data yesterday showed that output per hour worked in Britain last year was 16 percentage points below the average of other G7 industrialised countries.

A breakdown by country shows British productivity was 29 percentage points below that of the United States, 24 percentage points below that of Germany and France, and marginally below that of Canada and Italy.

Only one nation – Japan – scored worse.

The findings highlight the unusual behaviour of the labour market since the financial crisis. In contrast to the recession of the early 1980s when firms shed workers and unemployment soared, since 2007 companies have been reluctant to reduce headcount and workers have accepted below-inflation wage rises.

This so-called ‘productivity puzzle’ has big implications for the guidance the Bank of England has given on the future path of interest rates.

The central bank has pledged not to raise borrowing costs before unemployment has fallen to 7 per cent – something it does not think is likely to happen before 2016 as it expects existing workers to become more productive before new ones are hired.

However, some economists say Britain’s productivity took a permanent hit because of the recession, and reckon unemployment will fall faster.

“The extent to which the weakness in the UK’s productivity has been structural rather than cyclical has vital implications for the economy’s growth potential and for policy,” said Howard Archer at IHS Global Insight.

Mr Archer also warned about the army of “zombie” companies being kept alive by low interest rates and banks’ reluctance to write-off loans.

“Not only are these companies generally unproductive, but there is concern that they are preventing credit and resources being reallocated to newer companies and backing new products and processes,” he said.