1. Economics Business Statistics User Group 8 September 2003 UK Productivity Christopher Moir Director, Industry, Economics and Statistics Department of Trade and Industry

2. Economics UK Productivity Why productivity matters The UK productivity ‘gap’ The drivers of productivity The policy response Conclusions

3. Economics Breakdown of UK Growth Source: ONS

4. Economics Long-standing productivity gap

5. Economics Latest Gap Per WorkerPer Hour Source: HMT / ONS

6. Economics UK manufacturing productivity Selected sectors, UK = 100

7. Economics UK services productivity Selected sectors, UK = 100

8. Economics Accounting for the Gap by Sector (UK/US Comparison) Source: NIESR (1999 data)

9. Economics UK Productivity by Sector Source: ONS (2000 data)

10. Economics Recent productivity performance Growth in Labour Productivity by sector (1995-1999)

11. Economics Accounting for the Gap by Factor Source: Porter and Ketels (2003)

12. Economics What Drives Productivity? The Government has identified five drivers of productivity: Innovation Enterprise Skills Investment Competition

13. Economics Michael Porter on the UK Source: Porter and Ketels (2003)

14. Economics Weak R&D Source: OECD

15. Economics The UK Skills Problem Some problems on supply side But failing on the demand side: Interaction of low value added product strategy with low demand for skills Reduces individual incentives to acquire new skills Undermines business’ ability to deploy skills –24% of firms have a training plan –17% have a training budget –15% have a HR strategy looking at their own future skills needs Low skills equilibrium

16. Economics Investment

17. Economics Business Investment per Worker Source: OECD

18. Economics Capital Stock by Sector Relative Capital per hour worked (UK = 100) Source: NIESR

19. Economics Competitive Markets: Business Environment 1998-02 2003-07 Netherlands21 Canada32 USA13 UK44 Germany1513 France1616 Italy2323 Japan2726 EIU Competitiveness Ranking November 2002 Business Perceptions of How Government Supports Competitiveness Source: IMDSource: EIU

20. Economics Competitive Markets: FDI Source: UN World Investment Report, 2000

21. Economics Innovation Review – Business Suggestions to Government Government should champion innovation. Ensure UK not disadvantaged by over regulation. Promote best practice, benchmarking and roadmapping. Speed up and simplify government funding (linked to regional and EU funds). Ensure more quality, highly skilled people where skill gaps genuinely exist. Help with public perception of science and engineering. Actively encourage spin-out companies. Help SMEs innovate. “Let’s make it happen this time”

22. Economics Examples of other policy on productivity Investment Innovation Skills Enterprise Competition Modernising and Simplifying VAT Manufacturing strategy Myners Higgs Review Audit and Accountancy work R&D Tax Credit SR2002 £1.25bn annual increase in the science budget Lambert Review Skills Strategy Employer Training Pilots Modern Apprenticeships Higher Education White Paper Enterprise Advisers and Enterprise Promotion Fund DTI Business Support changes Competition Act 1998 Company Law work Enterprise Act 2002 Doha trade round Energy White Paper

23. Economics Conclusions Raising productivity growth vital to sustaining economic growth UK productivity gap with other countries a long- standing phenomenon Will not be solved quickly Indicators suggest UK key weaknesses in investment, skills and parts of the innovation system Effective microeconomic policy works with the grain of the market Some progress – but much still to do