Britain’s Productivity Trap: Why a Dysfunctional Policy Framework is the Real Puzzle
For over fifteen years, Britain’s stagnant productivity growth has been the subject of intense debate, yet the country remains stuck in a low growth trap that threatens living standards and leaves the economy vulnerable to shocks. The causes of this malaise are not a mystery. As a wealth of research from The Productivity Institute and the Financial Times makes clear, there is no real productivity puzzle. Instead, the UK suffers from a dysfunctional, overly centralised, and short-termist policy framework that has failed to address a series of well-understood, chronic problems.
The challenge can be understood through three interconnected pillars: people, firms, and places. Coordinated action is required across all three, yet for decades, a lack of joined up policy and persistent institutional fragmentation has held Britain back.
Firms: An Engine Room Running on Fumes
The UK business landscape is one of stark contrasts. At the top sit a small number of world class, highly productive frontier firms. At the bottom is a long tail of less productive firms, a feature more pronounced than in many peer countries. However, the most surprising finding is where the productivity slowdown has been concentrated. It is not the laggards, nor the frontier firms, that are the primary cause. Rather, it is the firms in the middle, those with above median productivity, that were once catching up. These firms have accounted for the lion's share of the slowdown since the financial crisis.
Figure 1: More than half of the growth in mean labour productivity between 1998 and 2019 was due to the top 10% of workers by labour productivity.
(Source: ONS, 2023)
This points to a catastrophic failure in the diffusion of innovation. New technologies, management best practices, and efficiencies are simply not spreading from the best to the rest. This is driven by two core factors:
Chronic Underinvestment: The most direct cause of low productivity is a decades long failure to invest. Since the financial deregulation of the 1980s, the UK economy has been skewed towards consumption over long term investment. As a result, British workers have significantly less capital, such as machinery, technology, and infrastructure, to work with. As Tera Allas, a senior adviser to McKinsey, states, "UK workers have to make do with a third less capital per hour than their counterparts in higher productivity peer countries." This applies to both tangible assets and the intangible capital that drives a modern economy, including assets like software and R&D.
A Hostile Investment Climate: This historic underinvestment has been exacerbated by a decade of extreme policy generated uncertainty. Constant changes to the corporate tax regime, political instability, and years of Brexit related ambiguity have created a hostile environment for long term business planning, further deterring investment.
Chronic Underinvestment: The most direct cause of low productivity is a decades long failure to invest. Since the financial deregulation of the 1980s, the UK economy has been skewed towards consumption over long term investment. As a result, British workers have significantly less capital, such as machinery, technology, and infrastructure, to work with. As Tera Allas, a senior adviser to McKinsey, states, "UK workers have to make do with a third less capital per hour than their counterparts in higher productivity peer countries." This applies to both tangible assets and the intangible capital that drives a modern economy, including assets like software and R&D.
A Hostile Investment Climate: This historic underinvestment has been exacerbated by a decade of extreme policy generated uncertainty. Constant changes to the corporate tax regime, political instability, and years of Brexit related ambiguity have created a hostile environment for long term business planning, further deterring investment.
People: A Low Skill, Low Wage Equilibrium
The second pillar of the crisis is people. Many UK firms are trapped in a low skill, low wage, low productivity mode. This creates a vicious cycle: once the demand for high level skills evaporates in a region, so does the incentive for individuals and the state to supply them through education and training.
This manifests in several ways:
A Severe Skills Mismatch: England is the worst among rich nations at matching workers to jobs with the appropriate qualifications. This results in huge skills shortages, with over a third of vacancies being attributed to this mismatch, leaving the workforce deeply inefficient.
A Fragmented Training System: The UK’s vocational and adult training system is notoriously complex, under resourced, and subject to constant policy churn. The Institute for Government has noted that since the 1980s, there have been 28 major pieces of skills legislation and 48 Secretaries of State with relevant responsibilities. This instability means nobody has confidence that a qualification will be valued by employers or even exist in a few years' time.
A Severe Skills Mismatch: England is the worst among rich nations at matching workers to jobs with the appropriate qualifications. This results in huge skills shortages, with over a third of vacancies being attributed to this mismatch, leaving the workforce deeply inefficient.
A Fragmented Training System: The UK’s vocational and adult training system is notoriously complex, under resourced, and subject to constant policy churn. The Institute for Government has noted that since the 1980s, there have been 28 major pieces of skills legislation and 48 Secretaries of State with relevant responsibilities. This instability means nobody has confidence that a qualification will be valued by employers or even exist in a few years' time.
Place: A Nation Flying on a Single Engine
Nowhere are these failures more apparent than in the geography of the UK economy. The productivity crisis is fundamentally a story of extreme and widening regional inequality. The UK is unique among major economies in its dependency on a single economic hub. London is a global powerhouse with productivity levels far above the national average, but other major cities lag far behind.
Underperforming Second Tier Cities: Major cities like Birmingham, Manchester, and Glasgow show large and persistent productivity gaps not only relative to London, but also well below those of peer cities in Europe like Lyon, Hamburg, and Rotterdam. Crucially, these cities display almost no urban scale related productivity advantages, the process by which larger cities naturally become more productive, which is a central driver of growth in virtually every other developed country.
Centralisation and Neglect: This underperformance is a direct consequence of a hyper centralised governance model that has starved the regions of power and resources. Whitehall dictates policy on transport, innovation, and planning with little coordination or local knowledge. The lack of a stable regional government structure across England, with bodies like Regional Development Agencies and Local Enterprise Partnerships being created and then abolished, means there is no effective local policy to translate national goals. Infrastructure investment has been chronically neglected, leaving cities like Manchester and Leeds poorly connected, unable to form the powerful economic clusters seen in other countries.
Underperforming Second Tier Cities: Major cities like Birmingham, Manchester, and Glasgow show large and persistent productivity gaps not only relative to London, but also well below those of peer cities in Europe like Lyon, Hamburg, and Rotterdam. Crucially, these cities display almost no urban scale related productivity advantages, the process by which larger cities naturally become more productive, which is a central driver of growth in virtually every other developed country.
Centralisation and Neglect: This underperformance is a direct consequence of a hyper centralised governance model that has starved the regions of power and resources. Whitehall dictates policy on transport, innovation, and planning with little coordination or local knowledge. The lack of a stable regional government structure across England, with bodies like Regional Development Agencies and Local Enterprise Partnerships being created and then abolished, means there is no effective local policy to translate national goals. Infrastructure investment has been chronically neglected, leaving cities like Manchester and Leeds poorly connected, unable to form the powerful economic clusters seen in other countries.