The British productivity gap

I have found that discussions of Brexit would be improved by considering the British productivity gap.  Often I hear talk that a Britain set free from EU strictures can pull ahead and overtake those countries, at least in terms of economics.  Yet a look at the historical record is sobering.

If you compare British productivity per labor hour, it is about thirty percent below the levels of France, Germany, and Ireland.  It is subpar before North Sea oil, during North Sea oil, and after North Sea oil.  It is well below par even when Germany is at or near full employment, so this is not mainly a composition effect resulting from Britain putting to work more lower-quality laborers and thus lowering their average.  It also tends to hold on a sector-by-sector basis, though of course not for finance.

In terms of productivity, Britain ranks below even Italy by these metrics, pre-crash too.  Don’t bother to ask about the Nordics.  The UK, however, does beat Japan.

You will note that this phenomenon is quite distinct from the recent, post-crash UK productivity stagnation, as it is a story about initial levels.  Before 1973, when Britain joined the then-EEC, the productivity gap was slightly larger than it is today.  In other words during its EU membership the country closed the productivity gap somewhat, though of course this may not be due to EU membership in any direct way.

There are various explanations for the British productivity gap, some of them involving education, or management, but I wonder whether these are explanations or mere restatements of the basic facts.

I’ll never forget the first time I visited the Netherlands in 1985.  I was in Dordrecht and reading through the comments of a guest book for a modest hotel.  The writer was British, and apparently was visiting the Continent for the first time.  He/she expressed shock at seeing that virtually everywhere in the Netherlands was a nice place, compared to the home country, much of which was not so clean and not so nice.  He/she lamented and apologized for this feature of Great Britain, and that is yet another way of expressing the productivity gap.

At least in some sectors, there are reasons to believe that the productivity gap dates at least as far back as the late nineteenth century, when Britain lost a good deal of ground to Germany.  The debate is murky, but it is wrong to think of this as a recent problem, try here and here.

As of late, the United Kingdom has punched far above its weight by (re)creating London as a service center and financial capital of most of Europe.  Post-Brexit, London indeed might keep this role, albeit in a probably diminished capacity, and there is some risk of London losing it altogether.  While there is a “Dutch disease” problem (sterling appreciation hurts other British exports), on net the success of London really does help pay the bills elsewhere.

In the meantime, it is not obvious that productivity miracles will be blossoming elsewhere in the British economy.

It is indeed a sobering thought — most of all for the Leave case — to contemplate the British productivity gap.