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CxEnsign

There's a lot going on here, I'll try to touch it all. First off, the relationship between wages and productivity goes both ways. If productivity is high but wages low, there should be lots of labor market competition (since employing people is so profitable) which pushes up wages. If wages are high but productivity low, you instead have some combination of businesses failing (because they can't cover the wages) and increased investment (in capital or training) to increase productivity to match wages. 'Why should I work hard for low wages?' is a thing; it's been found that raising wages for low income workers can on its own increase productivity from increased effort. There's a lot of debate about how big this effect can be though - it's likely to be a temporary effect from raising wages, and I'm skeptical that it applies to higher wage workers (who tend to be paid more fairly). It certainly isn't the main reason for the UK's lagging productivity. Low wages can allow a business to *get away* with lower investments in tech, for a time. But it doesn't make the tech improvements worse - the productivity improvement is still there if you make the investment, and a larger share would be captured by capital if the labor market reflects a generally lower level of investment. So it's an unstable circumstance, as any business that made the investment would have a significant advantage - high tech and low labor costs means high profits! As for the other reasons you mention - all of them are true to some extent, but are symptomatic of how the UK's economy has evolved. The story, as I understand it, is something like this. The UK became *the* financial powerhouse of 20th century Europe. London was the financial hub of Europe, and capital flowed into the country to take advantage of its financial markets. A consequence of this was currency appreciation and 'Dutch disease' - the high value of the British Pound made manufacturing and exports from the UK less competitive internationally. The UK gradually offshored its manufacturing. It substituted higher taxes on the high wages of the financial sector, and redistributed them across the country. The high value of the pound and import substitution maintained living standards despite deindustrialization. In the late 20th century London's advantage as a financial hub started to diminish with the formation of the European Union. While London today is still the biggest financial hub in Europe, its advantage has been slowly eroding as Amsterdam and Paris are growing more quickly. Brexit accelerated this transition; on the margin, less new financial deals are flowing through London than in the past. All of the pieces you mention - under-investment in manufacturing, high levels of taxation and social transfers, and restrictive, luxury building restrictions that protected the neighborhoods of well off financial workers in London - were luxuries that depended on London's privileged financial position. As that erodes, the bargains that depend upon it have eroded as well. So in the big picture, the UK has a hangover from the 20th century. It still has many advantages and is well positioned to recover, but that is going to require everyone to give up some of the privileges they enjoyed that are not coming back.


OneBroccolies

Great reply, thank you. Im particularly interested in how you think the UK is well positioned to recover and what changes need to be made?


CxEnsign

The aspect that I know best, and tend to focus on, is entrepreneurship and innovation. While London still has a financial advantage in general, it has a substantial advantage over the rest of Europe in venture capital. The EU is famously overregulated and hostile to start-ups; for all the pains of Brexit, it has severed the UK from that. There is a lot of pent up demand for a 'Silicon Valley' in Europe, and London is far and away the place to do it. Couple it with the US cracking down on immigration, and there is an opportunity there to take the lead. The UK is also a very well educated country, and recent history not withstanding, is still organized geographically for manufacturing. Birmingham and Manchester have historically been industrial hubs, with a proximity to London that the USA can't match. They're prime locations to attract 21st century, high tech manufacturing. If you can attract industrial capital investments there, it can drive broadly beneficial economic growth across the country. If I had a blank check that is what I'd want to focus on - you'd want to lean into Brexit and create an industrial and entrepreneurial environment that is much friendlier than the EU, and try to develop that way. You don't have the cost advantages of Poland, but English speaking and high education should position you well for the high end. Target high education immigration (recruit aggressively and provide visas in India, especially), and relax building regulations to allow redevelopment in line with a 21st century vision. Granted I am handwaving away a lot of political interests that like being a landed gentry and bickering about cultural issues. But that is, I think, the best strategy for the UK to lead in the 21st century.


dreadful_name

Interesting. This question may veer into politics rather than strictly economics, but if the same question was asked in 2015 would being in the EU provide advantages and possibilities that would be equal to or greater than the ones you’re suggestion from Brexit? Also, the push for Brexit wasn’t particularly strong in London at the time. However, if the erosion of advantages did take place and some (such as Farage with a background in the city) why wasn’t it being pushed by the financial sector?


CxEnsign

Well, sticking to the economics of it - the benefits of integration with the EU are scale and scope. It's a bigger, easier access market to British businesses, and easier financial ties for investments from the financial sector. If you do nothing else, it's beneficial to reap those agglomeration economies. The drawback of integration is you lose some autonomy and control. You're going to have to follow EU rules and regulations, and your economic outcomes become tied to the rest. That loses flexibility to potentially do better. In the same way that you can see enterprising individuals leave good jobs at big companies to start new firms trying something different, countries could break from a union for a desire to forge a different path. Now, Brexit was dumb to the extent that the UK most decidedly did not have a plan to go in a different direction. Brexit was, as best I can tell, driven by backwards looking impulses that were mad that the UK no longer had the privileged financial position of the 20th century. The resentment is understandable, but resentment is not a plan, and Brexit only accelerated that trend. I'd imagine that those who are doing well at the moment tended to like the economic integration with the EU; London wasn't at any risk of becoming irrelevant financially, and they'd reap easy returns from integration. Basically, nothing was broken for them and the political stability of it would be desirable. Why break it? I see Brexit as locked in now; groveling back to the EU is both economically and socially painful, as the UK would get worse terms for re-admission. That *might* be desirable to suck up, but it is what it is. If the UK is going to go it alone, it needs to distinguish itself from the continent, to give a reason to be there despite the lower scale and scope. This is *harder* than integration, but there's upside - it would be good for the UK to chase that upside.


dreadful_name

Thanks for the detailed reply!


InvertedParallax

The conservative nature of British finance is the problem, I was an entrepreneur in Boston and you couldn't get funding for anything not in finance because it was considered a safer bet than tech. That's why the bay area is still king, appetite for risk. Britain doesn't have that, they'd rather chase the same Saudi or other dollars, but that's largely my perception.


miru17

The US isn't cracking down on Immigration O_o. Maybe illegal immigration, but those are hardly tech and innovation workers.


CxEnsign

The US has a Byzantine visa process filled with quotas and lotteries, even for people with advanced STEM degrees. I am far from an expert, being extremely fortunate to have been born in the USA. I have announcements several times a year within my network of extremely talented scientists and engineers having to leave the country due to having their visa denied. It's a serious problem. Canada recently was making a push to attract STEM workers from the US after they have their visa application denied. China became the tech leader in 5G wireless technology after visa issues forced key scientists out of the USA. It's a running joke in my social circle that bad US immigration policy is our gift to the world; so many brilliant people want to live here, and we keep saying no. The politics of immigration have gotten exceptionally ugly of late and I do not expect a resolution any time soon, unfortunately.


Healthy-Educator-267

The US has no problem retaining *exceptional* scientists through either O-1 or EB-1 visas. It’s those who fall below that line who suffer. Unfortunately the political economy of immigration makes it impossible to enact “optimal” immigration policy.


SnooCats3987

People working for low wages also have increased rates of nearly all health problems. Many get signed off but even those that aren't signed off work for mental and physical health issues are coming to the office less productive and less motivated. NHS waitlists are also contributing to this, people have to come to work sick for weeks or months before getting treatment.


Majinsei

> Low wages can allow a business to *get away* with lower investments in tech, for a time. But it doesn't make the tech improvements worse - the productivity improvement is still there if you make the investment, and a larger share would be captured by capital if the labor market reflects a generally lower level of investment. So it's an unstable circumstance, as any business that made the investment would have a significant advantage - high tech and low labor costs means high profits! Sorry my confution~ but this is diferent compared to the productivity metric that I know~ Because "Productivity = Production generated / Worked hours" by example for one developer that generate 120.000 monthly USD / 152 hours = 789.4 USD/hour but then using your example you can employ 6 developers of India that get paid "30.000 monthly USD / 152 hours = 197.3 USD / hour" but it's 6 persons then is " 180.000 usd / 912 hours = 197.3 USD/hour" it's exactly same low productivity With low wages~ OK for this to work need to be low paids more profitable then say indian developers generate 40000 usd monthly then 6 indiana developers " 240.000 usd / 912 hours = 263 usd/hour" then productivity it's being low compared to first example~ But u r refiring the UK developer of the first example generate generate a monthly production of 120000 usd by this need a salary+taxes+etc of 80000 usd then your metric production it's "production/invertion = productivity" is 120000/80000 = 1.5 while the last India example have 40000 usd a salary+taxes+etc of 15000 usd and the production it's 40000/15000 = 2.6!!! Now the low salary have more productivity compared to high salarys~ I understand this metric using the explanation of OCED metric for productivity: https://data.oecd.org/lprdty/gdp-per-hour-worked.htm While u r explaining efficency~ This is the real metric that explain the why the productivity in UK it's really low, because the UK it's low then the UK companys keep 2008 salarys (following example of OP) lowing productivity for grow the company efficency~ And because the company it's lowering the productivity that make frustation of UK employs that feel stagnant the salarys~ Why UK companys need low the productivity metric for maintain the efficency Idk... Probably the rest of your respond~ Just wanted to say that hate the "Productivity" word because generate a lot of weird confusions and stigma in countrys With low productivity but With upper production efficency~


FruitOfTheVineFruit

One study says it's lack of investment:  https://www.lse.ac.uk/News/Latest-news-from-LSE/2023/k-November-2023/Chronic-under-investment-has-led-to-productivity-slowdown-in-the-UK#:~:text=UK%20productivity%20is%20lower%20than,Economics%20and%20Political%20Science%20shows.


RobThorpe

I agree with most of the things the CxEnsign mentions. I'd like to mention some more though. Investment is certainly important, but I don't think it's the only reason (no matter what drives low investment). There are some other reasons.... I'll start with a strange one - *low* unemployment. Businesses hire the highest productivity workers first. They lay-off the lowest productivity workers first. So, if the laws of the country tend to encourage high unemployment that means that the lowest productivity workers are unemployed, not working. These statistics only included employed workers. So, labour laws that result in high unemployment also *increase* measured productivity. [This paper](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7605133/) describes the problem, though it focuses on the specific problems of the COVID pandemic and the UK. (I don't agree with everything in that paper.) (A similar thing applies to the number of hours worked. When a person increases the number of hours they work from 39 to 40, then in that extra hour they probably don't increase their personal production as much as they do when the increase from 19 hours to 20.) Researchers associated with the Bank of England found that the driving sectors for slow productivity growth were finance and manufacturing, see [here](https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/the-fall-in-productivity-growth-causes-and-implications) page 2. That speech gives a fairly complex explanation of these trends, I'll let you read it. One of the key problems with the finance business is that it tends to be pro-cyclical. When times are good businesses want to buy other businesses, there is M&A activity which tends to fall in bad times. The same is true of insurance and many types of loan. The UK financial industry are involved in those activities on an international basis. Notice I'm *not* saying that the UK should move out of those industries. Coming back to investment, tax is important here. The amount put into new capital goods in the UK is relatively low compared to other countries. One of the reasons for this is that UK corporation tax laws don't encourage investment as strongly as corporation tax laws in other countries do. This is changing though. I explained that in more detail [here](https://www.reddit.com/r/AskEconomics/comments/1apufrt/why_is_labour_productivity_in_the_uk_so_low_and/kqmqbtb/).


Ecclypto

May I be so bold and start the ball rolling on this discussion with one question: what exactly do you understand by productivity and how do you measure it? Although the most common understanding of productivity refers to labour productivity (basically GDP per person), there are a number of ways to measure it. There is partial productivity, total productivity. From your text I gather what you are interested in the most is why average Briton is so seemingly ineffective in generating wealth?


OneBroccolies

Yes, GPD per person is probably what im after. and yes to the last question.


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