If you’ve been paying attention to the news in recent years, you’ll know that Britain has a productivity ‘problem’.
August posts like Financial Timesand The Economist I will tell you that Britain’s “low productivity” is “holding us back” as a nation on the world stage.
Institutions from London School of Economics, Economic Observatory and National Institute of Economic and Social Research I attribute this to a “lack of investment.”
And if you look at the latest Office for National Statistics numbers You can see it in black and white.
For every hour we work in the UK we earn £46.92, while in the US they earn £58.88, Germany £55.83 and France £55.50. If only we could work harder and more efficiently, they lament.
But what if we looked at the same statistics as a customer. Suddenly the UK looks like the best value. All things being equal, customers can buy a watch in the UK for less than in some of our G7 neighbours.
When customers suddenly become global, “poor productivity” is not a defect, it is an advantage. The UK looks cheap.
Now some may argue that I’m simplifying too much; Economists also use a second measure of productivity, gross value added (GVA). Simply put, it is the difference between the raw product and the output after a worker turns it into something.
This procedure works really well in manufacturing. All you have to do is take the final price of the car, minus the cost of the raw materials used in manufacturing that car and then divide the remainder by the hours worked. If the factory becomes more productive and they produce cars in less time, productivity will rise.
But here lies the problem with using this procedure in the UK. Our economy is 81 percent services! Our services sector makes up an unusually high percentage of our economy. In France, 70% and in Germany, 62%.
Now the thing about services is that human labor hours are generally the product. The price people can charge for those hours changes according to the market.
If the raw materials for a car rise, the total price of all cars will rise so that companies can make a profit.
But in the services sector, companies can cut back even further if the economy is doing poorly, because hours are the only thing they really sell.
So you can see what I’m talking about let’s look at an example.
I run a professional services firm. One of the things my company offers its clients is public relations services. Broken down in very simple terms, we might say to a client that we can create four high-quality pieces of cover for £X per month. For simplicity’s sake, I calculated that it would take my team 50 work hours per month to achieve this.
Now this client has become a global client and also needs to achieve the same in the US. Their agency takes the same amount of time and achieves the same result but charges twice as much.
According to the economist, which company is the most productive? That’s right, if you’ve been following you’ll know that the US agency charged double its time even though the output for the end consumer was the same.
I’m not an economist but I understand value and I know that all things being equal by half is better value.
But it’s not just us finding out, our customers do. Although my company is only a 15-person agency, about a third of our clients are headquartered overseas. We don’t market ourselves outside of the UK – they just know they get better bang for their buck.
This is also why, after seven years in the UK, we are looking to expand into North America. We already have interest in establishing an office in Toronto.
I’m going on an exploratory trip next month. And guess what, I’m taking two of my “unproductive” British workers with me.