The UK’s Flatlining Productivity

Surprising new research shows Britain’s productivity has fallen to its worst level in two centuries. Why leaders need to respond.

The world may think we are all long past the financial crisis of 2008. But new research suggests that in the United Kingdom, and perhaps elsewhere, the harm to the workforce has been much more lasting—and still needs correcting.

According to new data that only makes the timing of Brexit more worrisome, during the decade after the crisis, the UK’s economic efficiency fell to its worst level in 250 years. Productivity growth, or the annual increase in output per worker, fell to an average of less than 0.2% per year over the decade, compared to a normal trend line increase of between 1% and 3% a year, the research shows. More recent figures suggest little improvement last year.

As a rule, productivity data falls under the radar because it bounces around so much from one year to the next. But the slump this century has been dubbed as “unprecedented” by the authors of a recent paper in the UK-based National Institute of Economic and Social Research. They looked at data as far back as the dawn of industrialization in the 1700s.

According to experts, workers need to take note, because in such environments, firms rarely boost pay—choosing instead to wait until productivity rises. In turn, leaders need to assess if they are providing enough capital, machinery, and training to guide more efficient working levels, experts say.

Indeed, part of the efficiency slump—which is occurring in the United States, Germany, and Japan as well—is the result of a managerial misunderstanding about what makes companies more efficient, says Yannick Binvel, president of Korn Ferry’s Global Industrial Market practice. He says some companies are focusing too much on quick financial wins, such as eliminating costly but highly skilled workers. “Many companies think about lean manufacturing but talk about cost-cutting,” he says.

The best leaders fight the trend by embracing a culture dedicated to improvement, Binvel says. That can be as simple as quick and regular shop floor meetings to discuss production problems or an exchange of ideas between employees on better ways to work. “My experience is that the most efficient companies were dedicating five to 15 minutes per week to get the people together,” he says. That also has the knock-on effect of empowering workers to seek out improvements in production processes. “This cultural approach makes you effective,” he says.

Over the past few years, the companies that supply carmakers have embraced the approach to streamlining processes and maintaining a culture of improvement, Binvel says. That has resulted in huge improvements in quality, he says. In turn, that has led to a boost for key profit measures across the industry. “The mindset is for people to review what they are doing continuously,” he says.

Another issue closely related to the productivity slump is a lack of investment in training and improved labor-saving devices, says Mark Thompson, a Korn Ferry senior client partner. Focused retraining and better equipment tend to help increase output per worker. But the business climate was gloomy for much of the decade following the financial crisis, which would have made executives more cautious than usual about spending. “There was a certain risk aversion,” he says.

Globally, pay raises have nudged up recently, but the lack of productivity growth can make such regular pay raises tricky, Thompson says. If a company raises wages but gets the same output from its workers, then profits will tend to slide. That may be doable for short periods, but it’s unsustainable in the long term. Pay raises are sustainable so long as output per worker increases broadly at the same rate. “Without that boost in productivity, then things collapse in a heap,” he says.