The Nobel Prize-winning economist, Paul Krugman, famously said that “productivity isn’t everything, but in the long run it is almost everything”. If so, we have a problem — and that problem is particularly acute in the public sector.
In simple terms, “productivity” is the amount of output divided by the inputs required to produce that output. Usually, economists focus on output per hour worked, which is a measure of “labour productivity”. We also look at a “total productivity”, which takes account of other inputs, such as machinery, land and commodities.
Productivity gains allow economies to grow without using more resources
Increasing productivity is important in many ways. If workers are more productive, they are worth more to their employer. They can command higher wages, or work fewer hours for the same pay.
Productivity gains allow economies to grow without using more resources. It may even be possible to do more with less. This raises living standards, increases tax revenues and allows for better public services, whilst still protecting the planet.
Unfortunately, the improvements in productivity across the whole UK economy have stalled since the Global Financial Crisis of 2008–09. Output per hour worked (and hence real incomes) would now be more than 20 per cent higher if productivity had remained on its pre-2008 trend.
That is bad enough, but the problem is even worse in the public sector. Productivity has at least continued to increase in the rest of the economy, albeit at a slower rate. As a result, output per hour worked in the “market sector” (where businesses sell goods and services in competition with each other) is now about 40 per cent higher than it was in 1997.
In contrast, output per hour worked in public services has been drifting down over almost all this period. It has failed to recover from a relatively large fall during the pandemic. The upshot is that this measure of productivity is now about 10 per cent lower than it was in 1997.
The NHS in particular is now treating fewer patients than it was before the pandemic, despite a huge injection of cash and many more doctors and nurses.
There are some important caveats. For a start, it is relatively hard to quantify the output of public services and to adjust for improvements (or deteriorations) in quality compared to, say, manufacturing.
What’s more, output per hour worked is a measure of “labour productivity”. The data for “total productivity” (taking account of all inputs, not just labour) suggest the gaps between the private and public sectors are narrower, but still large.
Digging deeper, the biggest drags seem to be in health and education, which can partly be explained by the nature of these activities. They are inherently labour intensive and require lots of personal contact.
For example, it is hard to raise the productivity of an individual teacher, given the constraints on class size, or for a surgeon to perform many more operations in the same time. Helpful analogies here include hairdressers and musicians.
Above all, low productivity is rarely the fault of public sector workers themselves. That was certainly the case during the pandemic, when lockdowns and infection precautions made it so much harder for teachers and medics to do their jobs as normal.
Productivity has improved in services mainly delivered by the private sector
Indeed, labour productivity depends on far more than the personal abilities of workers or how hard they are working. It also reflects many other factors, including the quality of the kit they are working with and the management they work for.
Nonetheless, productivity has improved in many areas where services are mainly delivered by the private sector, so it can be done. For example, output per hour worked has increased since 1997 by more than 10 per cent (and sometimes by much more) in retail, distribution, professional services and office support.
The reasons for the shortfalls in the public sector are not entirely clear. It may be tempting to blame new developments like the increasing trend towards civil servants “working from home”. These changes do not explain the problems in healthcare or education, however, or the fact that public sector productivity was lagging behind well before Covid struck.
Instead, I would focus on four factors.
First, a lack of competition. It is no coincidence that sectors where market pressures are strongest also tend to be those where productivity gains are greater.
Second, the reliance on the Treasury for much needed capital spending. We can debate the appropriate amount of public investment in new hospitals or school buildings, but any business model that depends on political choices will always be vulnerable to under-funding (or wasteful spending).
Third, and more controversially, higher rates of trade union membership (and more militant unions). This is reflected in the increased number of strikes in the public sector and greater resistance to change, even though higher productivity is the best way to justify bigger pay rises.
Fourth, and probably related to all the first three, slower adoption of new technology. The scope for AI to transform the provision of public services is surely huge.
In short, our public services are hamstrung by low productivity. Jeremy Hunt is at least on the case, and these issues will doubtless feature in the Autumn Statement — but there is an awful lot of catching up to be done.
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