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Friday, October 23, 1998 Published at 07:43 GMT 08:43 UK

Business: The Economy

Productivity: Mind the gap!

The most productive workers in Europe ... Nissan at Sunderland

The workforce of Rover Motor Cars has been told to improve its productivity or face job cuts. Their German colleagues at BMW assembly lines for example, are 30% more productive.

But what is productivity - and why does Britain lag behind?

Edward Roberts of Heath Springs and Bob Snell of Executives on Assignment: lack of vision and leadership in British management
Productivity refers to how efficiently a company makes its products. It is usually measured as output per worker. In the long run, the growth of productivity is the most important factor in raising living standards and driving economic growth.

By this measure Britain is well behind its continental rivals. According to government figures, British workers in the manufacturing sector produced on average around 30,000 of output, as compared to over 40,000 per worker in France, Germany, and Italy.

[ image: Britain has both, the most  and least productive plants]
Britain has both, the most and least productive plants
But one of the problems faced by Britain is the big variation in efficiency between different companies in the same industry.

In car production, for example, Britain has both the most efficient plant in Europe - Nissan, Sunderland, and one of the least efficient - Rover's Longbridge plant.

It is this "long tail" of underperforming companies that has been particularly concerning the government. It has been urging firms to copy the best practice in their industry, and to spur them on it has been publishing comparisons.

Investment the key

But it is difficult for companies to improve productivity in the short-term.

One of the main factors that affects productivity is the level of capital investment in new plants and equipment.

Britain's Japanese-owned car plants, built on greenfield sites, have the latest technology and have agreed flexible working practices with their employees.

[ image: BMW wants more efficient workers]
BMW wants more efficient workers
The situation at Rover is very different, despite the substantial new investment made by BMW during the last four years.

In the short run, productivity can only increase if there is new investment and increased sales. But with a vast over-capacity in the European auto industry, sales growth will be difficult.

So more job cuts may be necessary if the company is to achieve its productivity targets.

The British problem

Over the last decades British industry has invested less in capital equipment than rival companies in the US and Germany - leading to a gap which will take years to close.

And it is also thought that the structure of British industry - dominated by a few large firms in many sectors - has inhibited competition and investment.

Long-term prospects

John Nell: Lower productivity due to lack of investment
Productivity is good for you: More productive firms are more profitable and pay their workers more.

At the start of the industrial revolution Britain led the world in manufacturing productivity.

But Britain lost its advantage in manufacturing industry nearly 100 years ago, as more efficient US and German firms came to dominate.

They made better use of technology, spending more on research and development. They employed a more educated workforce, and they used more modern management techniques. And their higher sales and profits allowed them to increase investment even more.

The UK is still trying to catch up on these long-run supply side weaknesses. The government is committed to boosting spending on education and research and has given tax breaks to encourage investment.

In recent years the productivity gap between the UK and Germany has begun to narrow. But it will take a long time before Britain can change the institutions and mentality which have contributed to its slow-growth economy.

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