Lessons on a Plate are designed
to help teachers cover topics
related to the work of the Bank
of England on the new A-level
economics syllabus.
Teachers can cut and paste
slides for their own lessons in
class. The linked Excel
spreadsheet contains key data
and charts for classroom
exercises and homework.
This Lesson covers the causes of
the prolonged weakness in
productivity since 2008.
Please send your feedback to
lessons@bankofengland.co.uk
Learning Objective: Using this
Lesson, students should be able
to:
 Define labour productivity
 Explain why productivity is an
important influence on
inflation and monetary policy
decisions
 Explain the main causes of
the slowdown in productivity
growth
CONTENTS
Productivity is a measure of the amount of output
produced by a unit of labour input
 It is calculated by dividing output by the number of hours
worked. This is called “output per hour”.
 If productivity rises, it takes fewer hours of work for the
economy to produce the same amount of output. That allows
firms to increase pay, leading to higher standards of living.
Indices, 2011=100
109
Hours worked
Output
Output per hour
107
105
 But Chart 1 shows that output per hour fell across the whole
economy (purple line) in 2008 because the number of hours
worked (blue line) did not fall as sharply as output (green line)
during the financial crisis.
103
101
99
97
95
Question: Output per hour peaked at 102.3 in 2008 (quarter 1)
and fell to a low point of 96.2 in 2009 (quarter 1). What was the
percentage fall in output per hour between these two dates?
Link to dataset
3
CONTENTS
Measures of productivity are available for sectors
of the economy like services and manufacturing
 Before the financial crisis, productivity increased rapidly in
most parts for the economy.
Output per hour, indices, 2011=100
105
 Productivity in services increased by over 15% between 2000
and 2008, but grew by less than 1% between 2008 and 2015.
100
95
 Like services, manufacturing productivity increased rapidly
up to 2008, and slowed thereafter.
90
85
80
Manufacturing
Services
75
70
65
Link to dataset
4
CONTENTS
Productivity measures are available for each part of
the UK
 Chart 3 compares output per hour in England, Wales, Scotland
and Northern Ireland with the whole of the UK(=100).
 A country above 100 is more productive than the UK, and a
country below 100 is less productive.
Output per hour, index UK=100, 2013
105
101.7
100
 For example, in 2013 Northern Ireland produced 17.8% less
output per hour than the UK.
95
96.8
90
85
83.4
82.2
80
75
70
Question: Relative to the UK, how much more output per hour
in percentage terms did England produce in 2013?
Link to dataset
5
Productivity matters to Bank of England policymakers
CONTENTS
 It’s a key influence on decisions taken by the Bank’s Monetary Policy Committee (MPC)
because it governs how fast the economy can grow before it starts to push up inflation.
 With strong productivity growth, businesses are able to produce more output with
fewer hours of work. There is less need to recruit new staff which limits the upward
pressure on pay and prices as the economy grows.
 Without productivity growth, more and more labour is required to produce higher
levels of output. Increasing demand for labour pushes up wage costs, putting upward
pressure on inflation.
Question: If productivity growth is weak while the economy is growing rapidly, would you
expect inflation to rise or fall?
6
Economists believe there are four key drivers of increases in productivity
CONTENTS
 Increases in the amount of capital per worker. For example, do workers in a firm have to
share a laptop, or does each one have their own?
 Improvements in the way a business combines its labour and capital. For example, how
well has a firm trained its workers to use the machines in its factory?
 How hard a firm works its labour and capital relative to their full capacity. This is a
measure of the amount of spare capacity (or “slack”) in the firm. Less slack means higher
productivity.
 New ideas and new technologies. New inventions like 3D printing can boost worker
productivity in ways that weren’t previously possible.
Question: (1) Think of a local business where you live. Suggest ways it could increase
its productivity. (2) Can you think of an invention that has boosted productivity?
7
CONTENTS
The prolonged weakness of productivity since the
financial crisis in 2008 is called the “productivity
puzzle”
 Most forecasters – including the Bank of England – have been
surprised by the scale and duration of the slowdown in
productivity.
Index, 2011=100
120
115
Pre-crisis trend in output per hour
110
 Before the crisis, the growth of productivity averaged 2.2% per
year (see red line in Chart 4).
105
100
 Since 2008 productivity has moved broadly sideways
(see blue line).
 In 2015 productivity is around 15% below the level implied by a
continuation of its pre-crisis trend (see the dotted black line).
Question: The index of productivity in 2015 (quarter 1) is 99.4.
Calculate the level of productivity if it were 15% higher.
95
Output per hour (post-crisis)
Output per hour (pre-crisis)
90
85
80
Link to dataset
8
CONTENTS
Productivity varies around the world
 Chart 5 compares productivity in the G7 countries. The G7 is
a group of the seven largest economies in the world.
Output per hour in 2013, index UK=100
 Productivity in each country is set here to UK=100. A
country above 100 is more productive than the UK and a
country below 100 is less productive.
140
127
 Chart 5 shows that the United States, for every hour worked,
produced 31% more output relative to the UK in 2013.
117
109
 The G7 countries as a whole (excluding the UK) were on
average 17% more productive than the UK.
130
120
110
101
100
 Japan, for every hour worked, produced 15% less output
than the UK.
90
85
Question: For every hour worked, how much more output did
Germany produce relative to the UK in 2013?
128
131
80
Link to dataset
9
Economists have suggested five main causes of the puzzle
CONTENTS
 Firms hoarded workers: Despite the big fall in output in 2008, businesses held onto workers.
This helped firms to avoid the cost of re-hiring staff when the economy picked up.
 Weaker investment cut the amount of capital per worker: The sharp downturn in 2008 made businesses more
cautious about investing in new technologies and skills. And a weaker banking system was less willing to lend money
for new investments.
 Composition of the workforce: Many of the new jobs created during the economic recovery have been in low skilled
and low productivity occupations.
 Capital and labour got stuck in weak businesses with low productivity: Since the financial crisis, banks have been less
successful in making loans to the most productive businesses. And official interest rates were cut to a record low of ½%
in March 2009. This helped to prop up demand in a weak economy, but it also allowed weak firms with low productivity
to continue trading.
 Official data on output or working hours may be incorrect: If output turns out to be higher, or the number of hours
worked weaker, than first estimated by the ONS, this will boost measured productivity.
Question: Can productivity in the UK pick up to grow again at pre-crisis levels?
10
Click on the
icon to follow the link
CONTENTS
Data on productivity
The latest data on labour productivity from the Office for
National Statistics (ONS).
“The UK productivity puzzle”
An article giving a detailed summary of the Bank’s thinking on
causes of the productivity slowdown.
“Pay and productivity: the next phase”
A speech by Sir Jon Cunliffe on the causes of the slowdown and
the outlook for productivity in 2015 and beyond.
“Lemons help Pizza Express tackle the productivity puzzle”
A BBC News article looking at some of the causes of the puzzle.
11