Professional services at heart of UK productivity problem

Lawyers, accountants and management consultants lie at the heart of the UK’s productivity problem, explaining almost a quarter of a shortfall since 2008.

Financial Times research shows that the stagnation of productivity since the crisis is largely explained by just four sectors — professional services, telecommunications and computing, banking and finance and manufacturing.

The sectors, which played an important role in improving national output per worker before the financial crisis, have lost their sparkle in productivity growth.

Output per worker is measured using the quantity of goods and services produced after adjusting for inflation. In professional services, it is measured by the turnover of companies adjusted for average wage rises in the sector.

The drop in productivity growth is the most pressing deep problem in the global economy, the International Monetary Fund said last week, but is deeper in Britain than any other member of the Group of Seven leading economies.

The Office for National Statistics said this month that the absence of productivity growth in the seven years since 2007 was unprecedented in the postwar period. Ed Miliband has sought to make the problem an election issue with the Labour leader saying that Britain’s productivity gap with fellow G7 countries is his party’s “biggest economic challenge”.

Productivity in professional services has stalled for many reasons including corporate reluctance to fire staff even as business dried up in the recession and subsequent new hires taking time to become more productive.

The lack of productivity growth since 2008 explains a decent performance by the UK on jobs and unemployment but also the weakness in living standards, since productivity growth is the ultimate driver of higher incomes.

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For many decades before the financial crisis of 2008-09, Britain’s productivity tended to grow at a stable pace, whether measured by output per worker, output per hour worked or the efficiency of both labour and capital used. The annual growth of output per worker averaged 1.75 per cent.

Since the crisis, productivity has been flat at a level slightly below the 2008 peak, confounding forecasters in the Bank of England and Office for Budget Responsibility who have repeatedly forecast growth would resume in the following year.

The FT’s research found that before the crisis, Britain relied heavily on just five sectors for productivity growth: professional services, manufacturing, banking, retail, and information and communication.

The recorded annual productivity growth of professional services — lawyers, accountants and management consultants which account for just 7 per cent of output — stood at 3.8 per cent between 1997 and 2008. Since then, it has fallen by less than 1 per cent a year.

In UK manufacturing, productivity was improving rapidly before the crisis, but when the crisis hit, companies cut back on investment in better, more efficient machines. Experts say that has slowed the sector’s productivity growth.

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“We’re now looking at some of the consequences of delayed investment, and while that’s now coming on stream, there was a period when not a lot was going on really,” said Lee Hopley, chief economist at the EEF manufacturers’ association.

Stephen Denyer, head of City and International at the Law Society, said staff in law firms were spending more time than before on activities that were not “billable hours”, such as business development and compliance.

“You have to work harder to win each mandate, and a lot of time on compliance, the requirements not only of our regulator but also in relation to money laundering, sanctions, particularly for people doing international work.”

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Letters in response to this report:

Concept of productivity is being oversimplified / From Charles Tilley

A flaw in the metrics / From Keith Wallace