Briefing Note (BN42)

The UK productivity gap and the importance of the service sectors

Date: 02 December 2003
DOI: 10.1920/bn.ifs.2003.0042

The UK's poor productivity performance relative to the US has been a focus for government policy and analysis in recent Budgets and Pre-Budget Reports. US business sector labour productivity (value-added per worker) was just over 40% higher than the UK level in 2001, about the same as it was at the beginning of the 1990s. The labour productivity gap fell over the early 1990s, when the UK experienced relatively faster growth in business sector labour productivity than the US, but it has since increased again as productivity growth slowed in the UK and accelerated in the US.

This aggregate picture hides considerable variation at the industry level. In some industries the gap has narrowed substantially over the past decade, while in others it has widened. As a result, although the total size of the productivity gap did not change very much over the 1990s, the industries that account for the majority of the gap have changed considerably. An understanding of where the productivity gap arises is essential to be able to target policy effectively. Yet to date most work has considered the aggregate performance of the UK, or has focussed on the manufacturing sector despite the fact that most employment is in the service sectors.

In this briefing note we document changes in the gap over the 1990s and variations within the productivity gap in 2001.

After documenting these facts we consider some of the reasons that might explain this relatively poor performance. We then outline some of the areas that we plan to investigate over the next three years under the AIM programme. Among other issues, we plan to look at: whether the dispersion in productivity within sectors is unusually high in the UK; how productivity vary across UK regions; whether rates of entry and exit in the UK are lower than in other countries; whether outsourcing has been a significant driver of productivity growth; what the joint impact of management practices and public policies have on productivity.