After the coronavirus pandemic, here's how the UK can solve its looming productivity crisis

The coronavirus pandemic came in the midst of a 15-year-long global productivity growth slowdown. The UK in particular has a poor track record in this area, with 2019 reports indicating that UK productivity is more than 30 per cent behind that of the US and up to 15 per cent behind Germany. The latest data from the Office for National Statistics reveals the worrying impact that Covid-19 is already having, with output per worker down by over 3 per cent year on year, in the first quarter of 2020.

Understandably, Covid-19 has pushed the issue far down the agenda of most governments and policy makers. But, without taking steps to address the problems now, the UK risks sleepwalking its way into a further productivity slide in the midst of an economic crisis.

Solving the issue is no mean feat but there are several things policy makers need to bear in mind as they consider these decisions.

The first are intangible inputs which, as the name suggests, are the things that cannot be clearly seen or measured. Whether it is trust between buyer and supplier or long-standing industry relationships, research suggests that the preservation of these inputs is important for productivity.

Crucially in the context of Covid-19, many intangible factors are related to the employees of a firm. Employees foster and manage client relationships, know their preferences and idiosyncrasies. This is why job retention schemes, such as furloughing in the UK, can aid in maintaining productivity in the long run.

Linked to this is knowledge capital, or the value of an organisation based on its know-how, learned experiences and procedures. While operating during the pandemic has obviously been difficult, there is hope that firms have learned ways to work smarter. This might push productivity in a positive direction, given research showing a positive correlation between knowledge capital and productivity.

However, programmes such as small business loans and furloughing have placed a huge fiscal and monetary burden upon the UK government. It seems likely that higher taxes and higher inflation will be the eventual result. This could weigh on firms’ capital accumulation and reduce future productivity growth in turn.

Another area that policy makers need to address is the increased friction of doing cross-border business that will be a likely outcome of the pandemic.

Higher transaction costs for the movement of goods and labour across borders will threaten any productivity gains achieved through the development and gradual streamlining of multinational supply chains. Yet, many governments are making moves towards a more protectionist approach. While these shifts may protect firms in the event of future disruptions, the immediate effect is likely to be a reduction in output and decrease in productivity. Firms may also have more difficulties in finding the labour skill sets they desire because of curtailed cross-border labour mobility, even among neighbouring countries that used to have freedom of movement for workers.

Productivity policy should also reflect the fact that some businesses are inherently better positioned to deal with the crisis and its impact on their productivity. This means that, when it comes to encouraging productivity in a post Covid-19 world, government support needs to be allocated in a nuanced way. An unintended consequence of government support to date has been the creation of zombie firms – those that would have naturally gone out of business because of poor performance. The existence of these zombie firms risks limiting the ability of new, higher-productivity businesses to enter the market. Productivity outcomes in the long run will depend in part on the capacity of the financial system to effectively channel credit to worthy projects.

So, what could the future of productivity in the UK look like?

The joint project between the Treasury and the Department for Business, Energy and Industrial Strategy to tackle the UK’s productivity problem, last year laid out 10 actions to support greater productivity in Britain’s businesses. Many of the project’s outlined actions remain important. Partnerships and mentor schemes between large, highly productive multinational firms in sectors like tech and professional services with smaller businesses will be invaluable. But a huge amount has changed in the eight months since the initiative was announced. Its actions must evolve to reflect and tackle these changes.

While it is understandable that the focus of policymakers has shifted to controlling Covid-19 and the reopening of the economy, it’s vital that the government recognises the crucial medium and long-term effects of productivity growth on economic performance and citizens’ wellbeing.

Chad Syverson is professor of economics at the University of Chicago’s Booth School of Business.