December 8th: the productivity puzzle is not about sector mix

Sure, the UK’s industrial structure is a little different from other countries (less manufacturing than Germany). Sure, some sectors have higher productivity (oil and gas, pharmaceuticals), or productivity growth (advanced manufacturing, financial services), than others. And sure, some higher-productivity sectors have declined as a proportion of the economy (most manufacturing) and some lower-productivity sectors have grown (hospitality, entertainment, admin services).

All of these factors will have played a role in the UK’s productivity puzzle. And it is quite hard to distil them into a single chart. [Belive me, I’ve tried!] The best single (#dataisbeautiful) chart I have come up with — that I know doesn’t tell the full story — is the one above, showing the productivity level (gross value added per hour worked, Y-axis), by sub-sector (X-axis), in the UK (blue diamonds) and Germany (black crosses) in 2018 (latest data available from OECD). The size of the markers indicates total hours of work in each sub-sector, to give an idea of their employment impact.

The main message to take away is this: UK’s productivity is lower in almost all sub-sectors. The exceptions are oil, gas, mining and pharmaceuticals (all very small employers relative to the economy); textiles and food manufacturing (somewhat larger employers) and financial services (relatively large, but still only 4% of total hours worked). In all the other sectors, including the large, lower-productivity sectors (towards bottom right of the chart), German productivity appears higher. [There are undoubtedly a lot of issues in these comparisons; for one, I did them originally to look at competitiveness, so they use market exchange rates rather than PPP. But I’ve done a similar comparison in the past using PPP numbers with the same conclusion.]

So, while it might also be the case that the UK has a slight “disadvantage” on sector mix (less manufacturing, more lower-value-added services), that clearly can’t explain the lower productivity within each individual sub-sector and, hence, across the whole economy. [And, by the way, a similar chart looking at productivity growth provides a similar, if slightly less stark, picture — on a comparative basis to Germany, the UK’s laggard status is primarily not due to sector mix, but to a lower productivity growth rate across a large swathe of sectors.]