Overview
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1 UK Productivity Gap: Innovation, Management and Human Capital November 2005 Professor John Van Reenen Director, Centre for Economic Performance, LSE
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UK Productivity Gap: Innovation, Management and Human Capital November 2005 Professor John Van Reenen Director, Centre for Economic Performance, LSE. Overview. The Productivity Gap (output per hour) Why does it matter? What is it? How far is UK behind? Causes of the gap Innovation - PowerPoint PPT Presentation
Transcript of Overview
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UK Productivity Gap: Innovation, Management and Human Capital
November 2005
Professor John Van ReenenDirector, Centre for Economic Performance, LSE
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Overview• The Productivity Gap (output per hour)
– Why does it matter?– What is it?– How far is UK behind?
• Causes of the gap– Innovation– Management– Worker skills– Others
• What can be done?
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What is labour productivity?
populationxhoursx
hoursGDP
PopulationGDP workers
workers
Employment rate(Demographics)
Labourproductivity
• US has much much higher GDP per capita than EU15, ……….but similar GDP/hour (productivity)• This is mainly because there are more Americans in work, and they work very long hours
Basic “economic welfare” measure (GDP per capita)
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80
90
100
110
120
130
US France Germany
Output per Worker
Output per HourWorked
Labour Productivity lower in UK relative to Other countries (UK=100)
Source: ONS (2005)
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What are the “causes” of low UK Productivity?
1. Technological Innovation2. Management3. Human capital4. Others (infrastructure, public sector productivity,
investment, regional policy, IT, etc.)
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UK does well in elite science**More papers per head and citations per head than main competitors
Papers and citations per head (UK=100), average over 1998-2003 Source: Evidence Ltd. Thomson ISI (2004)
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But not good at translating the base into commercial innovation…
Business Enterprise R&D as a proportion of GDP
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UK major patents per person
Note: Data for 1995-1999.
Triadic patents
0
2040
6080
100120
140
160
Portug
alSpa
in
Irelan
dIta
ly UKAust
ria
France
Belgium
Denmark
Netherl
ands
German
y
Finlan
d
Sweden
Per working-age population, per million
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What are the causes of low UK productivity?
1. Technological Innovation2. Management3. Skills4. Others
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Management
• Management practices and the organisation of firms– Methodology of measuring management– First wave in four countries (UK, US, France, Germany)
Validation of methods– Findings – competition, family firms (age, regulation)– Extensions: panel, more countries, more sectors– Role of IT and other new technologies
Bad management - a UK tradition?
“Efficient management is the single most significant factor in the American productivity advantage”[Marshall Plan Anglo-American productivity mission, 1947]
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0.2
.4.6
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sity
1 2 3 4 5
0.2
.4.6
.81
1.2
Den
sity
1 2 3 4 5
0.2
.4.6
.81
1.2
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sity
1 2 3 4 5
0.2
.4.6
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1.2
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sity
1 2 3 4 5
FIRM LEVEL AVERAGE MANAGEMENT SCORESFrance n=137 n=157
n=290n=154UK US
Germany
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COUNTRY LEVEL MANAGEMENT SCORES*
3.07
3.14
3.31
3.35US
Germany
UKTypical UK managers?
* With controls for size & public/private values are 3.35, 3.27, 3.16 & 3.07 respectively. Gaps between UK/France and the US significant at the 5% level
France
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Factors which cause bad management
• Product market competition• Family management• [Skills, regulation, age]
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4% firms in tail1
1 Tail defined as a score ≤ 2. In the whole sample 6.5% of firms are in the tail.
0.2
.4.6
.81
1.2
Den
sity
1 2 3 4 5Average management score across questions and interviews - note dropping lean3
0.2
.4.6
.81
1.2
Den
sity
1 2 3 4 5Average management score across questions and interviews - note dropping lean3
8.9% score less than 21
2.7% score less than 21
MANY COMPETITORS AND NO PRIMO GENITURE FAMILY FIRMS, N=307
FEW COMPETITORS AND/OR NO PRIMO GENITURE FAMILY FIRMS, N=415
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What are the causes of low UK productivity?
1. Innovation2. Management3. Skills4. Others
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Too many people functionally illiterate in UK (% aged 16-65,
1995)
05
10152025
source HDR 1998
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UK Basic Skills Gap: Little Improvement
source IALS
% of Adults Below IALS Level 2
Numeracy Literacy
Age16-25
Age26-35
Age36-45
Age16-25
Age26-35
Age36-45
Belgium (Flanders) 7 9 17 8 12 20
Switzerland (German) 7 13 19 7 17 24
Netherlands 8 7 10 8 6 9
Sweden 5 4 7 4 5 7
Germany 4 5 6 9 12 14
Ireland 8 20 23 16 16 21
Britain 22 20 19 17 18 17
USA 26 20 18 23 20 19
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UK Skill Position: Fewer grads than US, fewer intermediate skills than EU
01020304050607080
Higher
Intermediate
Low
Source: Broadberry and O’Mahony (2005)
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Does low UK innovation matter?• Large empirical literature that suggests that innovation matters for
productivity• Also evidence of R&D “spillovers”. Firms who perform R&D are not
the only ones who benefit from subsequent innovations. Implies that free market will under-supply R&D and government needs to support research
• BUT Britain is small, why not simply “free ride” on the research of other countries such as the USA?– Some spillovers are local (helps to be geographically near
innovators in getting the benefits)– Also evidence that greater R&D helps firms/industries absorb
new ideas created elsewhere in the world
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Which innovation policies?• Supporting basic scientific research• University-business links (Lambert)• Increasing supply of skills – evidence of skill biased technical
change• R&D Tax credit system. Pros and cons
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R&D tax credits• Many other countries with R&D tax credits• UK followed many other countries and adopted in 2000,
first for small firms and now for all firms• Current cost about £430m p.a.• Good econometric evidence that R&D does react to
changes in its tax-price (Hall and Van Reenen, 2000)• But why no pick-up (even a fall in 2004)?• – takes about 10 years for most of effect to be felt
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Problems with R&D tax credit• Slow response – If price falls by 10% R&D only
increases by 1% in first year, even though long-run impact about 10% (Bloom, Griffith and Van Reenen , 2002)
• Cost - SME credit only £150m started in 2000, large firms in 2002
• Relabelling?• All R&D subsidies increase wages of (high income) R&D
workers
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Conclusions• UK productivity gap has not gone away, especially with the USA• Not a single answer
– Innovation an important difference between UK and US– Managerial practices may be important– Skills important
• Question for policy is what more should be done?– Much of policy framework in UK is “right” from economic
perspective: emphasis on skills, tough competition, openness to trade and FDI, support for R&D
– Delivery. Need for rigorous evaluation (e.g. education reforms, R&D policy)
– Are we moving in the right direction? Burden of regulation increases and this could reduce competition (comp policy only one aspect)
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2.2 UK (and USA) have high proportion of population in work
Source: OECD Labour Force Statistics.
Employment Rate, 2003
40
45
50
55
60
65
70
75
80
85
Turk
ey
Pola
nd
Italy
Hun
gary
Slov
ak R
epub
lic
Gre
ece
Bel
gium
Spai
n
Mex
ico
Fran
ce
Ger
man
y
Cze
ch R
epub
lic
Irel
and
Kor
ea
OEC
D
Finl
and
Aus
tria
Aus
tralia
Portu
gal
Can
ada
Net
herla
nds
Uni
ted
Stat
es
Japa
n
New
Zea
land
Uni
ted
Kin
gdom
Swed
en
Den
mar
k
Nor
way
Switz
erla
nd
% population
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Productivity Gap, 1990-2001, Market Economy (UK=100)
0
20
40
60
80
100
120
140
160
France Germany US
output per hour1990 output per hour1995 output per hour2001
Source: Broadberry and O’Mahony (2005)
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Business Enterprise R&D/GDP, 1981-2003
00.0020.0040.0060.008
0.010.0120.0140.016
1975 1980 1985 1990 1995 2000 2005
Source: ONS (2005)
