Scotland business

The challenge of productivity

Tired office worker Image copyright Thinkstock

If you work, do you produce more - or add more value for your employer or clients - than you did, say, 18 years ago?

If so, it ought to be the basis for being better off than you were back then.

There are other factors also determine your pay. And not many of us are in the same job as we were back then.

But as a country, it's by producing more per hour, or per job, that we improve our level of prosperity.

So it matters a lot that productivity continues to improve, and that it does so at a comparable rate to other countries - with which we compete for business, or with which we trade.

Productivity is not one of the United Kingdom's strong points. In a group of 32 similar developed countries, the UK is below the mid-point. And Scotland is just below that.

Statistics just released by the Scottish government (independent of ministerial pressure) show that there has been modest improvement.

The figures are for 2014 (they take a while to compile) and show a rise of 1.4% in output per hour worked. That follows a decline of 0.4% in 2013.

Compared with the UK, the gap is closing. That headline indicator of productivity is 97.6% of the figure for the whole of the UK - the highest level on record.

Before the great financial crunch, Scotland was around 6% to 7% below the UK level.

That deep recession shook up productivity, as jobs were lost, hours were cut, training cut back, as order books emptied and investment in new, more efficient, productive equipment was curtailed.

This vital measure of the nations' economic health has a long way to go to get back on track. Scotland's productivity is now 4.4% higher than in 2007.

Yet in the years before the recession, it was growing at a faster trend pace.

The above chart should help explain. The lighter solid line shows what was happening to total output from the Scottish economy, when compared with the output in 2007 (which is marked on the left hand scale as 100).

It shows that, nine years before, it was 80% of the 2007 level. But during the seven years after recession struck, growth fell and recovery has been slow. It is now barely above its 2007 level.

The darker solid line, which is mostly above that total economic output line, shows Scottish productivity growth, also when compared with 2007.

It was 15% lower in 1998, when the data began. Growth in productivity since the start of the recession has been slower and more bumpy - falling in 2008, 2011 and 2013.

The dotted line shows how volatile the number of weekly hours worked can be. It fell from 81 million hours to 75 million in only two years, and has since risen to nearly 79 million hours.

That happens in a downturn when people are put out of work, or move onto short-time working.

And the trends in the labour market have been towards more part-time employment, meaning the average number of hours worked has fallen.

That explains why the productivity per job has grown more slowly - at 0.9% in 2014 - than the more common measure of productivity, by output per hour.

This leaves Scotland quite a long way short of the target set in the Scottish government's economic strategy. Of those 32 countries, the aim is to get into the top eight, with the best productivity, by 2017.

As the above Scottish government chart shows, that target has been getting more distant in recent years. Not only has productivity growth in Scotland and the UK become more sluggish, but also competitor countries have been at work on their own productivity.

So the target keeps moving. And in 2014, Scotland was 24% short of Denmark, most recently the country in that slot that the Scottish government is targeting.

If that gap is to be closed, there's work to do.

How to do it? In short: more private investment in plant and equipment, more public investment in infrastructure, improved skill levels, better management of those skilled people, and more innovation with clever thinking about improved efficiency.