Tuesday 7 January 2014

UK productivity: ‘gap’, ‘puzzle’ and the disappointing HRM narrative

Another New Year and self-help professionals are in full-swing, urging us all to get into better physical or emotional shape. Enthusiasts for Human Resource Management (HRM) are joining in too, calling upon organisations to ‘work smarter’ and engaging employees to boost labour productivity. UK HRM commentators are especially exercised about this at present in the belief that improved people management is the key to reversing the big (and still puzzling) fall in UK productivity since the start of the recession which has widened the productivity gap with other major developed economies. However, it’s important not to overhype the significance of HRM in the UK’s productivity story and also to ask what role HRM should play in promoting productivity, so a brief analytical perspective is useful.

The most recent comparative data published by the Office for National Statistics (ONS) show that in 2012 UK output per hour was 29 percentage points lower than in the United States, 24 percentage points below Germany and France, 3 percentage points below Italy, 1 percentage point below Canada, but 16 percentage points above Japan. The 16 percentage point difference between UK output per hour and the average of these countries is the ‘productivity gap.’

The consensus of studies of the causes of the gap indicate that the entire difference between productivity in the UK and the major European economies is entirely explained by the UK’s relatively low level of investment in physical and human capital. By contrast, half the productivity gap with the United States is due in addition to less effective use of physical and human capital in the UK.  This latter deficiency is in part due to deficient management in the UK, though this involves management in general not solely people management. Moreover, insofar as people management helps explain part of the United States success story on productivity this isn’t because US organisations are applying the kind of ‘high engagement’ people management strategies beloved of HRM enthusiasts. US workplace management practice is commonly very hardball by European standards, with levels of employee engagement often very low even by current UK standards, an observation that undermines the frequently asserted link between engagement and productivity. Overall therefore the role of HRM in closing the productivity gap is thus far from straightforward and not necessarily good news for workers.

As for the productivity puzzle, this refers to the unexplained absolute and relative fall in UK productivity in recent years. The productivity gap in 2012 was wider than at any time since 1994, with UK output per hour 2 percentage points below its pre-recession peak and 15 percentage points lower than if productivity had continued to grow at the average pre-recession rate.

Economists are divided on the causes of the fall in productivity. Some consider it a temporary phenomenon caused by weak demand in the economy that will disappear over time as the economy recovers. Those holding this view explain the fall in terms of workers accepting cuts in their real pay to avoid unemployment, encouraging organisations to produce any given level of output in more labour intensive ways. Eventually, falling unemployment will put upward pressure on pay, thereby encouraging organisations to become more productive so as to curb labour costs. Other economists by contrast think there has been a permanent, or at least long lasting, hit on the productive potential of the economy reflecting the damaging structural impact of the financial crisis. And there are those who combine demand and structural explanations, suggesting that real wage cuts in the wake of weak demand have acted as a disincentive to capital investment which will lower productivity growth over the longer term.

HRM probably played an integral role in the UK's recent productivity story by wisely encouraging organisations to seek alternatives to redundancy during tough economic times and persuading employees to put jobs before pay rises. Not surprisingly, however, the HR profession, which puts an awful lot of effort promoting itself as a key source of organisational performance, has been somewhat reluctant to see headlines proclaiming ‘HR achieves welcome fall in UK productivity’. As a result we instead continue to see lots of assertion that HR will drive the UK to future prosperity, although even here the message is confusing, with calls for higher investment in human capital often buttressed by apologias for bad employment practices, such as the use of zero hours contracts, that only serve to the increase the appetite for low cost, low productivity production.

The HRM narrative on UK productivity remains disappointing. The millions of people stuck in low productivity jobs with poor pay and conditions deserve more than the current diet of simplistic management consultant nostrums of engagement and empowerment which take no account of the reality of life in most organisations. In particular we need HRM models that are truly about people, for people and involve people, which in an honest way advocate improvements in pay and workplace conditions, recognise that proper engagement requires genuine employee consultation and questions deregulation as the solution to our poor productivity performance.          


  1. I've always thought that precisely because it is so expensive to hire and fire in France that companies squeeze every ounce of productivity out of every worker they've got.

    In the US higher productivity is probably because they work their staff harder, plus, as in France there are high payroll costs (in the US most employees get healthcare as part of their package) so high productivity is essential.

    The right-wing "deregulation" approach doesn't seem to make business work better it just seems to lead to lazy management,

  2. Spot on John: lack of investment in middle management skills is I think a key dimension of the lack of sustained investment you talk about as HR depts continue to crow about their success in efficiency ie cutting costs and pay restraint. And good to hear you on R4 at lunchtime, duncan

  3. > this refers to the unexplained absolute and relative fall in UK productivity in recent years

    Other studies show the middle is hollowing out as technology replaces middle-ranking skills, the lousy and lovely jobs issue. It's not surprising that productivity is falling - there isn't work to match the capabilities of an increasing number of people.

    Is the rotten HR management not perhaps a consequence of that shift. My ex-employer became increasingly bureaucratic and authoritarian as they managed to outsource and automate more of the work. It turned from being a great place ot work into a micromanagement by objectives jobbing shop, and I was glad to take a payoff and get the hell out.

    Part of the trouble is that we don't seem to have found a response as a society to the challenge identified by Keynes in 'Economic possiblilites for our grandchildren'. At school in the 1970s (but before the oil shock) they really did tell us the workign week would be less than half what it was at the time and people would be enjoying much more leisure time ;)

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