Outlook: The flip side of high productivity

THER IS one very simple way for the Government to bridge Britain's productivity gap with the rest of the advanced industrialised world. Introduce a national minimum wage that throws millions out of work, get the same level of output from fewer people and watch the rise in productivity go clean off the scale.

This, of course, was not the kind of discussion that Gordon Brown encouraged over croissants and coffee with the bevy of businessmen hauled into Downing Street yesterday morning to hear his plans for closing our yawning and rather alarming gap in competitiveness with the US. Nor should it have been. The Germans and French have discovered that the flip side of higher productivity based on fewer people working fewer hours tends to be longer dole queues and higher social employment costs.

This makes it a nil-sum game quite apart from demonstrating how dangerous it is to diagnose a country's economic ills solely on indices of output per capita.

The clever chaps from McKinsey, hired to provide some intellectual backbone to the Chancellor's campaign, tell us that French food retailers are 25 per cent more productive than Tesco. What they are really telling us is that the French spend more on food in bigger outlets which proves precisely nothing.

Fortunately there is more to McKinsey's analysis than that. Their report also demonstrates the ineluctable link between low levels of capital investment and low labour productivity. This cannot be explained away by structural differences between the UK and other economies. Given the same tax regime, labour force, supply base and customers, Japanese transplant factories in the US and UK achieve productivity levels on a par with those back home and way above what indigenous manufacturers can achieve.

That, in turn, begs the question of the best way to bridge the productivity gap. The glib solution is to reach for fiscal incentives and support programmes to encourage more investment and raise the skills base.

But the lesson from the Japanese car transplants is that improved productivity comes from the spur of greater competition. Nissan and Toyota have forced Ford and General Motors to raise their game in their home markets. Mr Brown would do well to bear that in mind should he be tempted to stymy competition in particular markets, starting with energy.

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