Competing in the Global Economy – The Innovation Challenge

UK owned establishments. And similar productivity distributions have been found in
other OECD countries. This suggests that the UK does not have an especially ‘long tail
of under-performing firms’ that lowers the UK average relative to other countries 5 .
Some of the difference between the UK and European countries is probably due to
differences in labour market structures and costs. Comparatively the UK labour market
is lightly regulated. Excessively strict or complicated labour market regulations can
discourage employment and raise unemployment. Attempts to artificially reduce the
supply of labour – for example the use of early retirement programmes or forced
reductions in hours worked – might lead to increases in average productivity in the
short-term. But these differences are not an adequate explanation for the productivity
gap that exists with the US, which is considered to have one of the most flexible labour
markets in the OECD area and integrates a slightly larger share of its workforce into
employment than the UK.
Fig 7. Indices of hourly compensation costs
for production workers in manufacturing, 2001
120
100
80
60
40
20
0
100
96
United States Japan European Union United Kingdom
Source: US Department of Labor.
Higher labour costs in Europe 6 (Fig 7) may create incentives to substitute capital goods
for labour, raising output per person employed although these differences in labour
costs also reflect differences in levels of human capital 7 . But a number of European
countries have also been able to combine high labour productivity with high
employment rates (Fig 8).
5 The USA for example has a wider productivity spread than the UK. The ratio of labour productivity of the fourth quartile to the first
quartile in the US is 4.86, compared to 3.97 in Great Britain. OECD Firm Level Productivity Project.
6 International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing 1975-2001, US Department of
Labor, Bureau of Labor Statistics (2002).
7 They also provide one explanation why UK businesses competing in internationally tradable markets have often in the past been able
to achieve satisfactory financial returns.
90
79
6