Our greatest economic challenge: Low productivity

Keynote Address by Dr Esmond Birnie to Vodafone’s Productivity Nation Conference (25 January, Titanic Drawing Rooms)

   25 January 2018

Our greatest economic challenge is neither Brexit or austerity- important though both of these things are. Long before either were thought of the Northern Ireland economy had a big productivity shortfall compared to Great Britain and compared to many other parts of the world. This is the main reason why wages and living standards continue to lag behind the rest of the UK and, increasingly, the Republic of Ireland too.

In 2015 the UK national productivity plan published by HM Treasury said, “Productivity is the challenge or our time, it is what makes nations stronger and families richer”.

The focus here is on output per worker or per hour worked. To get higher productivity we need to work more effectively rather than simply work harder.

We know certain things about productivity in Northern Ireland:

  • The UK has a problem of relatively low productivity levels and growth rates compared to most other Western economies and Northern Ireland even more so.
  • The Northern Ireland economy has had a productivity shortfall relative to GB since the 1920s. We are meeting here in the former Titanic drawing rooms but the early 20th century success of the shipyard (and linen) masked a lot of weaknesses in the Northern Ireland economy and in particular the failure for many decades to develop new industrial sectors. The productivity gap was also there in the 1970s and 1980s and has persisted since the 1990s.
  • Most individual sectors have lower levels of output per worker than their counterparts in GB. Notably, private sector services, financial services, ICT and agriculture. Admittedly, comparing the position now with the 1980s we see that productivity in Northern Ireland manufacturing has caught up with the UK average. However, this happened during a period when the employment size of that sector roughly halved (since low productivity firms and sectors were being knocked out, the two processes- contraction and comparative productivity gains- were probably connected: see Note to Editors 1).
  • In 2016 the average German worker produced 70% more output per hour worked than his/her counterpart in Northern Ireland. Many other Western economies have considerably higher productivity compared to Northern Ireland- Canada, Denmark, Switzerland, France, Japan, US and the Republic of Ireland.

We can also say a certain amount about why Northern Ireland’s productivity tends to lag so far behind the international leaders:

  • A greater representation of those sectors which generally have low productivity levels.
  • Lower skills levels whether intermediary (A Level, apprenticeships, HNCs or HNDs) or graduate.
  • Less use of management techniques.
  • Less effective innovation activity.

Obviously and very importantly, government and the rest of us need to recognise this is a priority. This has implications for the types of targets to be included in the next Programme for Government and, indeed, the Industrial Strategy. However, all this is difficult to do in a “no government” scenario.

Skills improvement at the intermediary level and above: One of the major policy instruments has been “imported” into Northern Ireland from Whitehall- the Apprenticeship Levy- and may not be fit for purpose. There may be a nudge to higher productivity if Brexit cuts off low cost labour supplies from Europe.

We need a much clearer picture of what are the gaps in the capabilities and capacities of management- as in GB it would be very helpful if the firms which are at the frontiers of good practice could mentor those which lag behind.

Innovation- as in the UK Industrial Strategy- need to very clearly identify the opportunities, strengths and threats and then act on these (an essential part of this is placing the funding of our universities on a secure long-term basis). The promotion of good clusters and supply chains is very important.

A final, personal observation. Getting to a position where we have higher productivity really matters from the point of view of everybody in Northern Ireland. The 2016 draft Programme for Government emphasized outcomes including those which go beyond the economy and Gross Domestic Product and that is all very welcome. However, unless we have a higher productivity economy we are unlikely to hit those various social objectives- almost the only thing I’d agree with Karl Marx on is the need to have an adequate economic base on which to place the “superstructure” of social development.

It is not as though we really have a choice of more employment with lower productivity versus less employment but with higher productivity. In the longer term many jobs will not be sustainable unless we improve the productivity of those jobs. I began my research on Northern Ireland’s comparative productivity 32 years ago and at that time there were many low productivity clothing and textile firms. Today these have all gone. That is a warning.

Dr Esmond Birnie

Senior Economist (Economic Research)

Department of Acc, Finance & Economics

Areas of expertise Economic policy, competitiveness, economic growth and productivity.