In this chapter, we discuss the importance of the UK's productivity problem to low pay and poor job quality. Pay rates arise from an interaction between productivity and worker power and both can contribute to improving wages. However, productivity debates have been bedevilled by a series of assumptions that have led policymakers astray. Firstly, for too long, economists have used a simplified “human capital” model of productivity that assumes that, in the short term, very little can be done about the productivity of an individual worker. What follows from this is the idea expressed by Lord Freud opening this chapter: that the challenge is to set wages at a level low enough that it is still economic to employ that worker. The second error is the obsession with the shiny and new. New inventions can improve national productivity, but often only after their usage is spread across the economy. If this was better understood, perhaps ministers would spend less time posing for photos in front of the National Graphene Institute and more time pounding the high streets of the UK's everyday economy where much of the country's productivity problem actually lies. Finally, for too long, the UK’s poor management skills have been an open secret and ignored in economic conversation, having been shut away in the “too difficult” box.

THE UK'S PRODUCTIVITY PROBLEM

Productivity is the amount of output for any given level of input and it can be measured at the level of an individual business or a country as a whole. At the national level, it is normally measured by looking at total economic activity (GDP) per hour worked.