How has the pandemic affected Britain’s productivity?

UK productivity rebounded in the third quarter of last year, after dropping in both the first and second quarters amid stringent lockdown restrictions.

On the basis of output per hour worked, productivity rose by 5.6 per cent between July and September, compared to the previous quarter, the Office for National Statistics said.

Year-on-year output per hour increased by 4 per cent over the period, marking the biggest annual jump since the final quarter of 2005.

But, Howard Archer, chief economist at the EY Item Club, said the figures should be treated with caution and do not change a ‘weak underlying productivity trend.’

Quarterly jump: UK productivity rebounded in the third quarter of last year, the ONS said.

Data: Out per hour rose 4% year-on-year in the third quarter, the ONS said

He added: ‘The UK’s productivity performance has recently been significantly affected by COVID-19, and the flat overall productivity performance over 2019 after an underwhelming 2018 extends the UK’s overall poor productivity record since the 2008/9 recession.’

The EY Item Club said there remains a risk that ‘the effects of Covid-19 on the UK economy over 2020 have a lasting negative impact on productivity and growth potential.’

On the working from home boom, Mr Archer said: ‘Increased working at home may well be having mixed implications for productivity.

‘On the positive side, the time saved commuting may be lifting output for many workers. On the negative side, productivity may be affected by reduced social interaction and the building-up of experience from people being in the office.’

Output per worker fell by nearly 8 per cent year-on-year in the third quarter, the latest ONS figures show.

This was the second biggest drop since records began in 1959 and, according to the ONS, ‘reflects the fact that the Coronavirus Job Retention Scheme has reduced hours worked, but preserved workers’ employment statuses.’

Quarter-on-quarter, output per worker increased by 16.6 per cent, the ONS said.

Across the public sector, the ONS said it thinks productivity fell by 22.4 per cent in the third quarter compared to a year ago.

‘This reflects increased expenditure on healthcare and social protection and reduced education and healthcare services provided as a consequence of the coronavirus pandemic’, the ONS claimed.

Hours: Average working week hours per job seasonally adjusted since Q3 2008

Furlough impact: A chart showing the estimated impact of furloughing on output per job

Output: Sector by sector output per hour figures in the third quarter year-on-year

Variations: Changes in hours worked and output per hour, according to the ONS

Total output per hour worked across all sectors grew 3 per cent year-on-year in the third quarter, while gross value added fell at a reduced rate of 9.5 per cent and hours worked were down 12.1 per cent.

The increase in output per hour was, according to the ONS, ‘driven by a decrease in hours in less productive industries, creating a positive ‘allocation’ effect as more productive industries now represent a larger share of the economy.’

But, the number of hours worked over the third quarter was down 12.1 per cent compared to the same period a year earlier. Only the second quarter of last year saw a bugger drop in total hours worked since ONS records began in 1971.

In the third quarter of 2019, the average working week per job was 31.1 hours, but by the end of September last year, the average working week had fallen to 27.5 hours. ‘This reduction is due to furloughed employees not working any hours’, the ONS said.

During the third quarter of 2020, total hours worked dropped in every industry except the finance and services industry when compared with the same quarter the previous year.

On the jobs front, the ONS said the number of people employed was down 0.8 per cent in the third quarter year-on-year.

Looking ahead, Mr Archer said: ‘The hope is that the successful roll-out of the Covid-19 vaccines over the coming months fuels a significant boost to business confidence and willingness to invest, with favourable implications for productivity.’

Detailed view: What’s been holding back Britain’s productivity?
Howard Archer, chief economist of the EY Item Club, said: ‘Part of the UK’s ‘productivity puzzle’ has undoubtedly been that low wage growth has increased the attractiveness of employment for companies. This helped employment to hold up well during the 2008/9 downturn and to pick up as growth returned.

‘It also appears that, given the uncertain economic and political outlook in recent years, many companies took on labour rather than committing to costly and difficult-to-reverse investment. The low cost and flexibility of labour relative to capital has certainly supported employment over investment.

‘Extended uncertainties over the future of the UK-EU trading relationship caused companies to limit their investment with implications for productivity.’

He added: ‘There are a number of structural factors that may have negatively affected productivity.

‘Many of the new jobs that have been created in recent years are in less-skilled, low-paid sectors where productivity is limited.

‘A report by the NIESR and the Joseph Rowntree Foundation in 2018 concluded that productivity is particularly poor in low-paid jobs in the UK compared with other major economies, lagging up to 20-30% behind similar roles in Germany, France and the US.

‘Similarly, ONS analysis has concluded that much of the slowdown in UK productivity has been due to the changing composition of the UK economy with workers moving from more (such as mining) to less efficient sectors (food & catering).

‘The Bank of England’s chief economist has also argued that the UK’s productivity problem has been influenced by an unusually wide gap between Britain’s most productive firms and the much longer tail of its least productive companies.

‘He has suggested this is a consequence of a ‘diffusion’ problem with the UK relatively poor at transferring technology and know-how.

‘In addition, there has been concern about the impact of so-called ‘zombie’ companies that have been helped to keep going through very low interest rates.’