The productivity puzzle

Productivity is a conundrum. It has been exercising the minds of economists and statisticians since the financial crash in 2008. However, it may be more robust than we thought, and small and micro businesses are the key.

The ONS (Office for National Statistics which gathers our official figures in the UK) and most economists use productivity to mean how much output we get for every hour worked. It is a measure of efficiency, not effort. If a business produces more value with the same hours, productivity rises. If hours rise faster than output, productivity falls.

Measuring this stuff is important and difficult. The Resolution Foundation think tank says its figures tell a more positive story for recent years than those from the ONS. The Resolution Foundation dares to suggest that we may finally be coming out from under the shadow of 2008. That claim follows the London School of Economics saying something similar, and economists at Morgan Stanley say the UK is now in an OK place.

The micro businesses count

The big problem is counting the productivity of our millions of micro businesses. It is like nailing jelly to a wall. What is the real output of the smallest firms, the people who run several micro businesses, have adjusted to hybrid working, are digital micro‑enterprises, or indulge in informal economic activity? Their productivity has major implications for the economy, and for communities and wider society too. However, they are difficult to engage with, have no time to respond to requests for information, and so go uncounted.

Official productivity figures may be underestimating real performance

Recent ONS research shows that productivity estimates change significantly depending on the data source used.

Non‑traditional measures of productivity; the measures of value contributed beyond the standard output‑per‑hour figures, such as wellbeing, innovation, environmental impact, and social capital, give a fuller picture of how organisations create long‑term value. They show stronger performance than traditional jobs measures.

Data from individual firms show that there is a widening gap between high‑productivity and low‑productivity firms meaning averages hide strong performers.

All this adds up to a UK that is more productive than official figures suggest, especially in sectors where output is hard to measure (digital, creative, micro‑enterprise, hybrid work, owners of multiple businesses) and in terms of social value.

A stronger economy

The UK’s productivity puzzle may be partly a measurement problem, not a performance problem. This matters because productivity is the single biggest driver of long‑term living standards and that driver could be stronger than thought.

Better productivity means more resilience

Businesses, especially small ones, are adapting faster, using technology more effectively, generating more value per worker and are more resilient to shocks.

This contradicts the narrative that the UK economy is stagnant. It also supports the argument small business organisations have been making for years: the small and micro businesses are where growth lies, and where better support needs to be targeted. If the Government wants growth it needs to build from the bottom up.

Stronger local economies

If microbusinesses are more productive than the measurements suggest, there may be more local wealth creation going on than we thought. That means more stable employment, stronger high streets and more diverse business activity. That does not mean our high streets are not showing signs of decay, but that the figures are not as bad as being portrayed, and the positive impact will filter through eventually.

It also means that the social value input into local communities is likely to be higher too, as small and micro businesses are key contributors. The IoD has been looking at Business as a Force for Good for several months now and the Commission report will be published.

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