Gap in labour output is a mirage, says IoD

BUSINESS leaders are challenging the Government's accusation that British industry lags too far behind its competitors in terms of productivity.

In a report published today, ahead of the launch of the Competitiveness White Paper on Wednesday, the Institute of Directors argues that the productivity gap is largely a mirage.

Graeme Leach, the chief economist at the IoD, says the charges of poor performance levelled at industry are intended to deflect attention away from the faltering economy. He argues that there is only a small productivity gap between the UK and other countries.

"The White Paper will address some very important issues. But the central point is that there is a need for a much clearer diagnosis before we can make prescriptions for the future," said Mr Leach.

The Pre-Budget Report last month pointed to a 40 per cent shortfall between British and US productivity levels, and a 20 per cent shortfall compared with France and Germany.

But the IoD report says these raw figures for output per capita need adjusting for the size of the workforce and the amount of part-time versus full-time employment. Comparisons on the basis of output per worker hour close much of the gap with the US as Americans work many more hours per year.

In addition, the Government's measures ignore the productivity of capital as opposed to labour, according to Mr Leach. Combining the two in a measure known as "total factor productivity" puts the UK 26 per cent behind the US and 14 per cent behind Germany, and shows the gap narrowing over time.

Much of this remaining difference could be explained by the difficulty of measuring productivity levels in an increasingly "weightless" economy, he says - a point acknowledged in the Pre-Budget Report.

The IoD concludes that British business is not performing significantly worse than its competition. The success of the UK in attracting inward investment proves this.

The report goes on to say that the combination of lower labour productivity and more efficient use of capital has allowed the UK to have lower unemployment. "Less flexible labour markets work to push up total labour productivity but the underperformers are then manifested in unemployment, as opposed to lower wages in the UK."

It concludes that Government policies such as the minimum wage and the 48-hour week could undermine the benefits of a flexible labour market.