While the recent Summer Budget said little of note about science and innovation, George Osborne confirmed the Government’s focus on the hot topic of the day in economics: productivity.
The Chancellor and the Secretary of State for Business, Sajid Javid, published their plan for improving productivity in the UK, ‘Fixing the Foundations‘ and it’s clear that they will be focussing their energy in this area for the foreseeable future. So, it seems timely to consider what they mean by productivity, why it matters, and what role science might have to play.
What is productivity, and why does it matter?
Productivity measures how much output we get for what we put in. Increasing productivity is one way for developed countries to pursue economic growth, particularly in countries like the UK where employment is high and we can’t easily just put more workers to work.
Improving productivity is about working smarter, not working harder; finding innovative and efficient ways to get more output for your input.
The UK’s Office for National Statistics measures productivity at the national level, by dividing total GDP by the total number of hours worked.
Why is everyone talking about it?
Developed countries around the world recognise that improving productivity will be important for their future. It is hoped that increasing productivity will grow the economy, and in the long run increase wages and improve living standards.
Productivity in the UK stalled when the financial crisis hit (see Figure below), and even as the economy and employment have started to grow, UK productivity has not recovered.
In 2013, an hour’s work in Germany produced 28% more output than an hour’s work in the UK. In the United States, an hour’s work produced 31% more output and it France, 27% more.
This is the crux of what’s been dubbed the UK’s ‘Productivity Puzzle’ – why is our economy so unproductive?
Solving the Productivity puzzle
It’s not really clear why British productivity is so low. While there is no silver bullet, improving infrastructure and the skills base, as well as developing and applying new ideas, are generally thought to be good places to start.
The Government’s new report ‘Fixing the Foundations’ was trailed as the UK’s Productivity Plan, and it focusses on two pillars: ‘encouraging long term investment’ and ‘promoting a dynamic economy’.
The fifteen-point plan includes a number of financial measures aimed at supporting business, an apprenticeships levy to develop skills, and a number of infrastructure investments. It notes that ‘high quality science and innovation’ are important, but makes no commitment to increase support in the future.
Hot on the heels of the UK plan, the OECD has just published its report on ‘The Future of Productivity‘, which looks at the issue in a more global context, setting out a number of recommendations for how countries can improve their productivity.
They recommend increasing investment in basic research, improving relations between businesses and universities to support knowledge diffusion and better allocating skills to jobs.
What role does science play?
Research creates new knowledge and technological innovations, which can improve productivity by supporting the development of new processes and approaches in all kinds of industries.
As we noted in our cross-Academy statement ‘Building a Stronger Future‘, 51% of productivity growth between 2000 and 2008 was due to innovation, with 32% attributable to changes in technology resulting from science and innovation. Firms that consistently invest in R&D are also 13% more productive than firms that don’t invest in R&D.
The OECD’s report is clear that investment in research and knowledge diffusion are crucial to improving productivity.
With the big decisions about UK science spending not expected until the Autumn Spending Review—which will report on 25 November—it is little wonder that the UK Government’s approach doesn’t yet include a major commitment to invest in science.
However, if they are serious about improving UK productivity, increasing investment in science to keep pace with our competitor nations is a fundamental piece of the puzzle.