What Britain’s Productivity Debate Got Wrong

Has Britain spent 15 years arguing about the wrong “productivity puzzle”? The term entered debate in 2012, as economists struggled to explain why the amount of stuff produced per hour in Britain was growing so slowly. The belief that we were experiencing a uniquely British malaise animated Boris Johnson’s levelling-up agenda, Liz Truss’s dash for growth and Rachel Reeves’s investment-heavy “securonomics”.

Last week, however, data revisions changed the narrative. The Office for National Statistics offered a new “component approach” to calculating productivity, or output per hour worked. Rather than leaning on workers’ recollections of their hours as in the Labour Force Survey, the method drew on various datasets to account carefully for annual leave, bank holidays, sickness and overtime.

Its indicative conclusions are stark. Britons worked far fewer hours than previously estimated, meaning each hour worked was more productive than past data implied. Estimated hourly productivity growth between 2009 and 2019 has therefore been revised up from 0.7 per cent a year to 1.3 per cent — still below the pre-financial crisis rate of 2 per cent, but hardly a trivial correction.

Now, this doesn’t mean Britain is richer. As my colleague David Smith explained on Tuesday, the fundamental economic problems remain much as they were before. For real wages and the public finances, output per worker is a more relevant gauge than output per hour. Growth in that measure barely changes under the new calculations. Many reforms proposed to lift productivity would therefore still have been useful.

Productivity growth itself has also still been historically slow. Had it continued along its pre-crisis trend, output per hour in 2024 would have been 10 per cent higher by 2024. That’s better than the 18 per cent shortfall implied by the old method, but still grim. Since 2019, even the new metric for hourly productivity growth has been just 0.7 per cent.

What, then, would have been different in our politics if we’d known these revised facts earlier?

First, there would have been less anguished discussion of British exceptionalism. On comparable component-based measures, Britain now appears to have recorded hourly productivity growth of roughly 1.1 per cent a year since 2009, against 0.9 per cent in Germany and 0.4 per cent in France. America still did considerably better. But there would have been less worry about a British disease.

Second, claims that Britain’s recent productivity gap chiefly reflected an investment drought would have carried less force. Critics of the coalition’s deficit-reduction programme argued that cuts to public investment had damaged the capital stock and productivity. The revised measure leaves a much smaller hourly productivity shortfall to be explained. The picture looks less like workers losing their ability to produce and more like a sluggish recovery that drew more people into lower-hours work.

That does not make pro-growth reforms to stimulate investment redundant. Planning restrictions, unstable taxes and poor infrastructure choices still hold the economy back and remain ripe for overhaul. But there would have been less confidence that capital “shallowing” explained Britain’s supposedly unique collapse in hourly productivity, because much of that collapse didn’t occur.

Finally, the much-celebrated British jobs miracle would have faced more scrutiny. Between 2009 and 2024, filled jobs increased by about 15 per cent, but total hours worked rose by only 10 per cent, as average hours per job fell by more than 4 per cent. That should have focused attention sooner on underemployment, additional holiday and sickness absences, more part-time and flexible employment, workers choosing greater leisure and an ageing workforce.

The new figures don’t tell us how much of the hours difference reflects people’s preferences. But we would surely have spent more time asking whether minimum-wage increases, the tax and benefits system, rising inactivity and ill health were discouraging hours. In other words, we’d have put less focus on investment and more on labour markets.