The UK productivity puzzle: Can manufacturing automation be a solution?
On the human-machine sweet spot in British manufacturing
The results are out.
UK labour productivity has suffered its worst drop in five years.
According to the Office of National Statistics (ONS), labour productivity in the April to June quarter fell by 0.5% from same quarter a year ago, following two consecutive quarters of zero growth. What’s more depressing is the manufacturing situation — output per hour in manufacturing has fallen by 1.9%. Looming large over these figures is a familiar story of stagnation. The country’s output has been on a declining trend since the financial crisis of 2008, producing a most interesting “productivity puzzle.” It is the observation that the UK economy is characterised by a combination of low productivity growth and high employment. And though sluggish labour productivity growth has been a feature of many other advanced economies since the crisis, it appears to be particularly pronounced in Britain.
On the face of it, these observations may not look to be too significant. After all, the UK boasts of some of the world’s top universities and firms, and continues to attract talent and activity from around the globe. In recent years some manufacturing supply chains have even re-shored back to Britain. Yet, as Paul Krugman had commented, productivity might not be everything, but in the long run it could become almost everything.
So why does productivity matter?
It matters because achieving higher growth in productivity is the way to higher wages, improved living standards, and greater competitiveness of nations. Though there are different indicators of productivity, many commentators have focused on labour productivity, measured as the total economic output divided by total hours worked. Basically, it tells us how much and how efficiently a typical worker produces each hour. As cogently explained by the Bank of England economist Silvana Tenreyro, a UK worker in 2007 could produce twice the output as they could have 30 years before. Fast forward to 2016, the worker while still twice as productive as the 1970s, could only produce 1% more than in 2007. To get a sense of what this means in terms of cross-country comparison, the ONS estimates that labour productivity in Germany is 35% higher than the UK. So if British workers are able to reach German efficiency levels, they can probably enjoy a 3-day weekend without any fall in GDP.
So why not just arm the British worker with new technologies and skills, and make them more productive? Why not get them to derive more out of their jobs by automating mundane tasks? The Germans are doing something along those lines called Industrie 4.0, and they seem pretty confident (and psyched) about the whole thing. This sounds like a straightforward enough idea to pursue.
Only that not many companies seem to be interested in investing in new technologies.
Unproductive workers and the businesses that hold on to them
Capital investment by companies is only 5% above its pre-crisis peak, compared with a 60% increase after the 1980s recession and 30% following the 1990s slowdown. Many companies are happier substituting from capital towards greater labour in their production processes. One reason behind such measures seems to be the higher levels of uncertainty post-crisis. And with the Brexit uncertainty likely to continue, companies may have been encouraged to take on more staff — even if some of them are relatively under-trained or unproductive — rather than building capacity for advanced innovations. At the end of the day, it is always easier to hire and fire people than invest in new capital technologies.
To make matters worse, UK workers’ desire to hold on to mundane, low-skilled, poor-paying jobs as a precautionary measure further stymies labour productivity growth. More Basil Fawlty than Tony Stark, they lag behind almost all of their G7 peers, and suffer from major skill shortages. Some workers even view the importance of upgrading skills as unnecessary because they know “what they are doing and don’t need to learn new techniques.” Others may see the ongoing process of digitalisation — as exemplified by collaborative robots, cloud manufacturing, and artificial intelligence — as the harbinger of pervasive joblessness. Adoption of new digital technologies can automate a range of tasks, causing a displacement effect as capital takes over tasks previously performed by labour. History provides examples of anxiety associated with technological change. For example, early innovations of the Industrial Revolution such as the stocking frame, a machine that automated knitting tasks, led to widespread anxiety among British hand knitters, triggering the Luddite uprising in 1811.
Digital manufacturing is not all malicious
Yet, the history of technology is not only about displacement effects. If it were, we would be left with nothing but a shrinking set of old jobs. Instead, displacement of labour has been counterbalanced by technologies that create new tasks, creating a reinstatement effect. Such tasks reinstate human labour back into the production process, albeit with newer responsibilities and skills. Although digitalisation has replaced labour in some white-collar tasks, it has simultaneously created many new tasks. These include tasks related to programming, design, and implementation of technologies such as digital twins in manufacturing operations.
New technologies can also produce a productivity effect, resulting from the cost savings generated by automation, shifting labour demand to tasks that have not been automated yet. For example, an automotive manufacturer may introduce robots in its assembly lines because robots are cheaper and more efficient than humans. Doing so, the cost of producing cars may go down. As a consequence, cars become cheaper and their demand increases. Because not all automotive jobs have been automated, increased demands may lead to greater job opportunities in non-automated tasks. Furthermore, reduction in the cost of cars also means people are richer, hence they may use their savings to buy other things. In theory, all of these could translate into more and newer forms of jobs.
Transforming a sore spot into a sweet spot
Thus, substituting labour with advanced technologies does not always have a negative effect on employment and wages. However, substitution is tricky and raises a myriad of questions. What kind of strategies should be designed and implemented to reduce the impact of digitalisation and automation on non-productive labour? What measures are needed to reduce economic uncertainty? How can companies be encouraged to invest in new technologies and training? How does one go about changing the “machines out to get us” mindset of UK workers? These and many other questions will have to be urgently addressed before UK policymakers can solve the productivity puzzle, and hit that sweet spot of economic growth: a productive workforce employed in skilled jobs with the highest percentage of the population in employment.
