Four reasons why the UK lags behind its rivals on productivity

This article was first published on The Conversation on 1 September 2025.

  <p>Many people in the UK feel they are working harder than ever. A higher cost of living and more precarious work arrangements push many households to take on longer hours and multiple jobs. Data back this feeling: from 2010 to 2024, the UK had the largest increase in hours worked per person among <a href="https://data-explorer.oecd.org/vis?df%5Bds%5D=DisseminateFinalDMZ&df%5Bid%5D=DSD_HW%40DF_AVG_ANN_HRS_WKD&df%5Bag%5D=OECD.ELS.SAE&dq=AUS%2BAUT%2BBEL%2BCAN%2BCHL%2BCOL%2BCRI%2BCZE%2BDNK%2BEST%2BFIN%2BFRA%2BDEU%2BGRC%2BHUN%2BISL%2BIRL%2BISR%2BITA%2BJPN%2BKOR%2BLVA%2BLTU%2BLUX%2BMEX%2BNLD%2BNZL%2BNOR%2BPOL%2BPRT%2BSVK%2BSVN%2BESP%2BSWE%2BCHE%2BTUR%2BGBR%2BUSA%2BOECD........_T....&pd=2010%2C&to%5BTIME_PERIOD%5D=false&vw=tb">OECD countries</a>. </p>

<p><a href="https://uk.finance.yahoo.com/news/uk-productivity-workers-us-resolution-foundation-050015192.html">Yet headlines</a> keep telling us that UK productivity is stagnating. So if everyone is working more, why isn’t the economy growing faster? Unfortunately, there’s a lot more in play than just how many hours we put in each week. </p>

<p>Labour productivity, measured as the total GDP produced per hour worked, is <a href="https://economy2030.resolutionfoundation.org/reports/minding-the-productivity-and-income-gaps/">lower for the UK</a> than for many of its peers, such as France, Germany and the USA. Yet from 2000 to 2010, <a href="https://data-explorer.oecd.org/vis?pg=0&fs%5B0%5D=Topic%2C1%7CEconomy%23ECO%23%7CProductivity%23ECO_PRO%23&fc=Measure&bp=true&snb=7&vw=tb&df%5Bds%5D=dsDisseminateFinalDMZ&df%5Bid%5D=DSD_PDB%40DF_PDB&df%5Bag%5D=OECD.SDD.TPS&df%5Bvs%5D=2.0&dq=GBR%2BDEU%2BFRA.A.GVAHRS._T.XDC_H..N..&pd=1990%2C&to%5BTIME_PERIOD%5D=false">UK labour productivity</a> increased by 11%, more than France and Germany, where gains were 10.6% and 10.2% respectively.</p>

<p>Since then, though, the UK has faced a series of circumstances that have harmed the economy. From 2010 to 2024, fortunes shifted. <a href="https://data-explorer.oecd.org/vis?pg=0&fs%5B0%5D=Topic%2C1%7CEconomy%23ECO%23%7CProductivity%23ECO_PRO%23&fc=Measure&bp=true&snb=7&vw=tb&df%5Bds%5D=dsDisseminateFinalDMZ&df%5Bid%5D=DSD_PDB%40DF_PDB&df%5Bag%5D=OECD.SDD.TPS&df%5Bvs%5D=2.0&dq=GBR%2BDEU%2BFRA.A.GVAHRS._T.XDC_H..N..&pd=1990%2C&to%5BTIME_PERIOD%5D=false">While productivity</a> in the euro area increased by about 10% and almost 15% in the US, the increase in the UK was only 6.2%.</p>

<p>So what happened to the UK during this time to damage its productivity, growth and earnings? Four forces stand out.</p>

<h2>1. A prolonged dose of austerity</h2>

<p>Beginning in 2010, the UK embarked on cuts to departmental spending and public investment at the same time as raising taxes. Austerity suppresses demand in the short run. More importantly, though, it reduces public investment and spending on things like infrastructure, skills, research and development, and public services that private firms need to expand and modernise. </p>

<p>The result is a slower diffusion of technology that would enhance productivity. My research has uncovered <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/obes.12646">persistent “scarring” effects</a> on output, employment and investment more than a decade after austerity.</p>

<h2>2. Political uncertainty – Brexit and beyond</h2>

<p>Uncertainty rose markedly from the early 2010s and spiked around the Brexit referendum and negotiations, as reflected in news-based uncertainty indices and <a href="https://www.shawbrook.co.uk/business/news-case-studies/news/political-uncertainty-emerges-as-top-concern-for-uk-smes/#:%7E:text=At%20a%20glance,exacerbated%20in%20the%20last%20year.">business surveys</a>. When <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-6419.00107?casa_token=JUUq3jqErGgAAAAA%3AQRAn-Js_G4dNkS2ioK21dAZ8fwqCmEmv94OcWFJmLP9J3btXt5zAAAV57MahUVenY0RJ_C3uGXctyQRs">uncertainty is high</a>, firms delay or cancel investment. That is especially damaging for long-term projects (building factories, buying equipment, investing in training) and for intangible investment (spending on things like software and employee training, for example) that underpins productivity growth.</p>

<p><strong>Economic uncertainty in Europe and the UK:</strong></p>

<p>This leads to chronic under-investment. The UK has had the <a href="https://www.ippr.org/media-office/revealed-investment-in-uk-is-lowest-in-g7-for-third-year-in-a-row-new-data-shows#:%7E:text=Looking%20beyond%20just%20private%20capital,of%20the%20last%2030%20years">lowest level</a> of investment among G7 countries for almost every year since 1990. And research has shown this to be the <a href="https://cep.lse.ac.uk/pubs/download/special/cepsp41.pdf">single most</a> important element in the stagnation of UK productivity.</p>

<h2>3. Weak industrial strategy</h2>

<p>Across the OECD there has been a revival of <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4198209">modern industrial policy</a> – multi-year programmes targeting green technologies, semiconductors, advanced manufacturing and their supply chains. </p>

<p>The UK published an <a href="https://theconversation.com/the-uk-has-published-a-ten-year-industrial-strategy-to-boost-key-sectors-of-the-economy-heres-what-the-experts-think-259741">industrial strategy</a> earlier this year, but <a href="https://www.gov.uk/government/publications/industrial-policies-new-evidence-for-the-uk/industrial-policies-new-evidence-for-the-uk#executive-summary">the mix</a> has been comparatively light on direct public investment and specific sectors. Comparing industrial policy strategies is tricky, but <a href="https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/quantifying-industrial-strategies/QuIS-United-Kingdom.pdf">evidence suggests</a> that the UK’s approach has been smaller in scale, less predictable and less focused than that of its peers.</p>

<h2>4. An economy tilted towards finance</h2>

<p>A final aspect that helps explain general productivity in the UK is its economic structure – in particular, its concentration in finance. Around 8.7% of the <a href="https://researchbriefings.files.parliament.uk/documents/SN06193/SN06193.pdf">UK’s GDP</a> is in the financial and insurance activities, much more than that of the EU (4.6%) and <a href="https://data-explorer.oecd.org/vis?fs%5B0%5D=Topic%2C1%7CEconomy%23ECO%23%7CNational%20accounts%23ECO_NAD%23&fs%5B1%5D=Topic%2C3%7CEconomy%23ECO%23%7CNational%20accounts%23ECO_NAD%23%7CGDP%20and%20non-financial%20accounts%23ECO_NAD_GNF%23%7CNational%20Accounts%20at%20a%20Glance%23ECO_NAD_GNF_NAT%23&pg=0&fc=Topic&snb=12&df%5Bds%5D=dsDisseminateFinalDMZ&df%5Bid%5D=DSD_NAAG_IV%40DF_NAAG_IV&df%5Bag%5D=OECD.SDD.NAD&dq=A.EU%2BEA%2BDEU%2BFRA%2BGBR.B1G.K%2B_T.PT_B1G.&pd=2010%2C&to%5BTIME_PERIOD%5D=false&vw=tb&lb=bt">more than double</a> that of countries like Germany and France. </p>

<p>On the other hand, the share of manufacturing in the UK economy <a href="https://commonslibrary.parliament.uk/research-briefings/sn05206/#:%7E:text=In%20April%20to%20June%202025,">is 8.9%</a>, <a href="https://data-explorer.oecd.org/vis?fs%5B0%5D=Topic%2C1%7CEconomy%23ECO%23%7CNational%20accounts%23ECO_NAD%23&fs%5B1%5D=Topic%2C3%7CEconomy%23ECO%23%7CNational%20accounts%23ECO_NAD%23%7CGDP%20and%20non-financial%20accounts%23ECO_NAD_GNF%23%7CNational%20Accounts%20at%20a%20Glance%23ECO_NAD_GNF_NAT%23&pg=0&fc=Topic&snb=12&df%5Bds%5D=dsDisseminateFinalDMZ&df%5Bid%5D=DSD_NAAG_IV%40DF_NAAG_IV&df%5Bag%5D=OECD.SDD.NAD&dq=A.EU%2BDEU%2BFRA.B1G.C.PT_B1G.&pd=2010%2C&to%5BTIME_PERIOD%5D=false&vw=tb&lb=bt">compared to</a> 15.7% in the EU, 10.7% in France, and 19.9% in Germany. This matters because sectors differ systematically in productivity levels and growth rates. Over the past three decades, sectors like machinery and equipment, chemicals and pharmaceuticals, and information and communications have shown much stronger productivity growth than finance.</p>

<p><strong>Productivity growth in the UK:</strong></p>

<p>De-industrialisation is not unique to the UK, and some of it reflects automation and reorganisation of global supply chains. But advanced economies that retained and upgraded segments of manufacturing – particularly those closest to the technology frontier – have tended to enjoy stronger productivity growth and more innovation in their service sectors. </p>

<p>Taken together, these forces interact and compound. Austerity removed public investment and corresponding benefits just when firms needed them, while uncertainty raised barriers and encouraged firms to wait rather than invest. </p>

<p>In that environment, the absence of coordinated industrial policy meant there were no clear signals or platforms for scaling new technologies. And the UK’s finance-heavy structure channelled talent and savings into financial assets rather than into projects that could expand capacity and accelerate innovation. Ultimately, this results in a chronic shortfall of productive investment. </p>

<p>A route out is straightforward, if politically demanding. Commit to a multi-year public investment programme that also attracts interest from the private sector. And adopt a stronger and more focused industrial strategy around the green, tech and science sectors (matched with planning and skills reform).</p>

<p>If these levers are pulled together – and sustained – UK productivity, and with it real wages, need not remain stuck.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img src="https://counter.theconversation.com/content/264149/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important" referrerpolicy="no-referrer-when-downgrade" /><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https://theconversation.com/republishing-guidelines --></p>

  <p><span><a href="https://theconversation.com/profiles/guilherme-klein-martins-2323570">Guilherme Klein Martins</a>, Lecturer in Economics, <em><a href="https://theconversation.com/institutions/university-of-leeds-1122">University of Leeds</a></em></span></p>

  <p>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/four-reasons-why-the-uk-lags-behind-its-rivals-on-productivity-264149">original article</a>.</p>
</div>