Macro Productivity/Labour Productivity
Labour Productivity is a measure of output per unit of labour or hours worked. Since the recession, productivity growth has been sluggish.
Macro Productivity or Labour Productivity is only really useful for policy decisions, not businesses decisions. This blog sets out why productivity is a worry for Government and the Bank of England and why policy tools won’t fundamentally solve the problem. There needs to be a culture shift in the way SMEs operate their businesses because we think improving productivity can only be done at a micro-level and not a policy level.
Labour productivity is really important for policymakers because it indicates how fast the economy can grow before it starts to push inflation up. Bank of England economists call this “slack” and the measure of this stuff influences the Bank’s decision on interest rates.
If you are into homemade lemonade, a good analogy of slack or productivity is how much juice you can squeeze out of each lemon before you increase the number of lemons.
As you can see from the chart below, labour productivity has not followed the pre-crisis trend:
Output per hour (UK), 2000-2015. Source: Bank of England
This is the UK’s biggest headache. This is one of the main reasons why interest rates have remained so low and are unlikely to change before the end of the decade.
Some reasons have been put forward by the Bank of England in their piece on the productivity puzzle. One reason is that many businesses kept their workers in 2008 to side-step any cost of rehiring when the economy picked up and the new jobs that have been created are in low skilled and low productivity areas of work.
For Mushroom, there are two stand out reasons for the UK’s current productivity problems:
- Unproductive companies are facing little pressure because interest rates are so low, so the cost of overdrafts and loans have kept weak companies afloat.
- Businesses were spending less money on investing in new skills and technologies (but this is changing).
Poor productivity is systemic.
SMEs account for 99.9% of all private sector businesses in the UK. Totaling £1.8 trillion last year, SMEs’ combined turnover was 47% of all private sector income in the UK economy yet 60% of all private sector employees were employed by SMEs.
That means that companies over £40m turnover employ roughly 40% of private sector employees and contribute 53% of private sector income.
So, poor productivity can be summarized as the following:
99.9% of all UK companies and 60% of the country’s private sector employees produce less than half of private sector income.
0.01% of all UK companies and 40% of the country’s private sector employees produce more than half of private sector income.
There are many small businesses out there, that are making a profit, but day-to-day operational cash-flows are often a daily pain. Taking growth to the next stage always seems difficult.
How do Large companies scale?
At some point, large companies got their scaling right. After starting up, running your business in preparation of this scaling is the hardest phase.
This is a problem for ambitious businesses and a problem for the Bank of England too.
Those companies that scale, generate 69% extra in income per person, per year. If more companies fall into this bracket, wages increase and living standards rise. This pushes up inflation and interest rates, creating a more stable (in price terms) economy.
We think, as accountants, SMEs should always think less about tax and more about operations. Throughout this blog series, we will go through some of the great tools and calculations you use. We are here to up-skill your management and resource planning. But for now, these are some key questions to ask yourself as an established or newly started business:
Is my spend on marketing justified for my operations?
Can I scale up my operations effectively to cope with higher demand?
How much net profit do I make per unit of goods or services?
Where/What/How/When/Why do I invest capital to improve the answers to the first three questions?
In our next blog we will look at measuring output and the four key areas we believe drive up productivity.