Labour productivity, UK: October to December 2014

• UK labour productivity as measured by output per hour fell by 0.2% in the fourth quarter of 2014 compared with the previous quarter. In 2014 as a whole, labour productivity was little changed from 2013, and slightly lower than in 2007, prior to the economic downturn.
• This edition contains revised historical estimates of labour productivity back to 1948, consistent with revisions to National Accounts introduced in Blue Book 2014. These estimates show that the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period.
• Despite weak productivity growth, unit labour costs have increased only modestly, by less than 1% per year on average over the last five years. This reflects low growth in labour costs per hour worked.
• Notwithstanding a fall in manufacturing output per hour in the final quarter of 2014, there was a broad-based and robust recovery in productivity across manufacturing in 2014 as a whole. Productivity also grew in 2014 across the construction industry.
• Productivity across all service industries grew a little in the final quarter of 2014 and in 2014 as a whole. But productivity performance was more varied between different service industries: output per hour fell in six service industries and rose in five.

This release reports labour productivity estimates for the fourth quarter of 2014 for the whole economy and a range of sub-industries, together with selected estimates of unit labour costs. Labour productivity measures the amount of real (inflation-adjusted) economic output that is produced by a unit of labour input (measured in this release in terms of workers, jobs and hours worked) and is an important indicator of economic performance.

Labour costs make up around two-thirds of the overall cost of production of UK economic output. Unit labour costs are therefore a closely watched indicator of inflationary pressures in the economy.

Output statistics in this release are consistent with the latest Quarterly National Accounts published on 31 March 2015. Labour input measures are consistent with the latest Labour Market Statistics as described further in the 'General commentary' and 'Notes on sources' sections below.

Whole economy output (gross value added - GVA) increased by 0.6% in the fourth quarter of 2014, while the Labour Force Survey (LFS) shows that the number of workers, jobs and hours increased by 0.3%, 0.3% and 0.8% respectively over this period¹. Since growth of labour productivity can be decomposed as growth of GVA minus growth of labour input, this combination of movements in outputs and labour inputs implies that labour productivity across the whole economy increased a little in terms of output per worker and output per job but decreased a little in terms of output per hour.

Differences between growth of output per worker and output per job reflect changes in the ratio of jobs to workers. This ratio fell slightly in Q4, reflecting a small decrease in the estimated number of workers with second jobs. Differences between these measures and output per hour reflect movements in average hours which, though typically not large from quarter to quarter, can be material over a period of time. For example, a shift towards part-time employment will tend to reduce average hours. For this reason, output per hour is a more comprehensive indicator of labour productivity and is the main focus of the commentary in this release.

Unit labour costs (ULCs) reflect the full labour costs, including social security and employers’ pension contributions, incurred in the production of a unit of economic output, while unit wage costs (UWCs) are a narrower measure, excluding non-wage labour costs. Growth rates of these series can be decomposed as growth of labour costs per unit of labour input minus growth of labour productivity. For example, the increase in whole economy ULCs of 0.5% in Q4 can be decomposed into a fall of 0.2% in output per hour and an implied increase of 0.3% in labour costs per hour. In the manufacturing sector, the combination of an increase in UWCs of 0.9% and a fall in output per hour of 1.3% implies that wage costs per hour in manufacturing fell by 0.4% in Q4².

Most of the series in this release are designated as National Statistics, meaning their production has been subject to rigorous quality assurance and methodological scrutiny. However, some service industry estimates use component series from the Index of Services (IOS) which are designated as experimental statistics (that is, not yet accredited as National Statistics, for example because the methodology is under development or reflecting concerns over data sources). Labour productivity estimates that use these series as their numerators are also labelled as experimental statistics. Market sector productivity estimates are also experimental series. More information on the experimental IOS series is available on the Guidance and methodology section of the ONS website.

Notes for interpreting these statistics

1. Growth rates for whole economy workers, jobs and hours shown in Table 10 of this release may differ slightly from growth rates based on LFS aggregate estimates due to different methods of seasonal adjustment.
2. ONS also publishes estimates of Indices of Labour Costs per Hour (ILCH). ILCH uses different sources to those used in this release, and estimates may differ at the whole economy and component level.

Productivity estimates for Q4 2014 provide an opportunity to consider trends in productivity over a number of calendar years. At the whole economy level, output per hour was virtually unchanged between 2013 and 2014, and the level in 2014 was close to that in 2007, prior to the economic downturn. As shown in Figure 1, taken from the historical estimates (115.5 Kb Excel sheet) component of this release, such a prolonged period of essentially flat productivity is unprecedented in the post-war era.

Figure 1 also shows that, up to 2007, output per hour grew a little faster than output per job and output per worker (which are indistinguishable from one another). This reflects a trend decline in average hours worked, perhaps reflecting workers' preference for increased leisure time as their standards of living increased. This pattern, too, has not been maintained in recent years, as average hours worked have nudged upwards.

Figure 2, also taken from the historical estimates (115.5 Kb Excel sheet) component, shows that growth of unit wage costs over the period 2007-14 is not so dissimilar to the post-war period as a whole, with the period of high inflation in the 1970s standing out. Taking figures 1 and 2 together provides some support for the existence of a relationship between productivity and earnings growth, as the plateauing of productivity since 2007 has been reflected in a reduction in the rate of earnings growth across the economy as a whole.

Figure 3 presents a breakdown of annual movements in whole economy output per hour in terms of the main industry components. Unsurprisingly given the weight of services in overall economic activity, the services components are prominent in most years, albeit less so in recent years. The financial services industry was an important contributor to productivity growth (especially relative to its weight) in the period prior to the economic downturn, but is yet to make a material positive contribution since the downturn. By contrast, manufacturing and construction productivity contributions turned positive in 2014 and there are some signs that the structural issues affecting productivity in the extractive industries (an important element of ABDE) may be coming to an end.

Figure 4 shows whole economy output per hour in terms of index levels and percentage changes, and Figure 5 provides a breakdown of the components of labour productivity since 2008. It is clear from Figure 5 that hours worked have increased faster than jobs since 2011, implying that average hours per job have also increased. This is consistent with the weaker path of output per hour compared with output per job.

More information is available in Reference Table LPROD01 (357 Kb Excel sheet) and in the tables at the end of the PDF version of this statistical bulletin.

Figure 6 shows whole economy ULCs in terms of index levels and percentage changes. A set of industry-level ULCs based on a consistent methodology ('Sectional unit labour costs') is published as a component (239.5 Kb Excel sheet) of this release. At the whole economy level the two sets of estimates are identical apart from the method of seasonal adjustment.

Manufacturing unit wages costs (Figure 7) increased by 0.9% in the fourth quarter and were 0.8% lower than a year earlier. As well as being a narrower measure than unit labour costs, the manufacturing unit wage cost series currently uses average weekly earnings in manufacturing (an estimate of employee earnings) to proxy the earnings of self-employed workers in manufacturing.

This approach is inconsistent with other ONS data on incomes from self-employment, such as those embodied in the income presentation of GDP. As noted above, a set of industry-level ULCs based on a consistent methodology ('Sectional unit labour costs') is published as a component (239.5 Kb Excel sheet) of this release. Estimates of manufacturing ULCs display broadly similar time series properties to those of the published UWC series (identifier DIX4).

More information on unit labour costs and unit wage costs is available in Table 2 in Reference Table LPROD01 (357 Kb Excel sheet) .

Productivity jobs estimates in manufacturing increased by 0.5% for Q4 2014, while GVA increased by 0.2%. These data led to a fall in manufacturing output per job of 0.3% for the quarter, as shown in Reference Table LPROD01 (357 Kb Excel sheet) (Table 1).

Manufacturing output per hour fell by a much larger 1.3% on the quarter, reversing four quarters of positive changes. Output per hour remains 1.8% higher than in Q4 2013 and it is close to its 2011 level. The larger fall in output per hour reflects hours growing at a faster rate than jobs in manufacturing, as shown in Figure 8.

Despite recent falls in output per job and output per hour, manufacturing is more productive in Q4 2014 than it was a year ago. Output per job is 2.4% higher than in Q4 2013 and output per hour is 1.8% higher.

Figure 9 shows the contribution of different industry groups to changes in output per hour for manufacturing from 1998 to 2014. For much of the period, every manufacturing industry had positive contributions to overall manufacturing output per hour. From 2008, those contributions have been less uniform, though every industry contributed negative growth to output per hour for at least one year.

In particular, output per hour in the pharmaceutical industry (20-21) has been weak for several years, though its contribution to total manufacturing output per hour did turn positive in 2014.

Another striking feature of Figure 9 is the sharp recovery in manufacturing output per hour in 2010, before a further downturn in 2012. The increase in manufacturing productivity in 2014 is not as large as that of 2010, but it is notable that 2014 is the first year since 2007 where the contribution of each of these industry groups to total manufacturing output per hour is positive.

More information on the labour productivity of sub-divisions of manufacturing is available in Reference Table LPROD01 (357 Kb Excel sheet) (Tables 3 and 4), and in the tables at the end of the PDF version of this statistical bulletin. Care should be taken in interpreting quarter on quarter movements in productivity estimates for individual sub-divisions, as small sample sizes of the source data can cause volatility.

Tables 3 and 4 include annual estimates for the level of productivity in £ terms for the National Accounts base year of 2011. These are estimates of GVA per unit of labour input and are not necessarily related to pay rates. Output per job (Table 3) varied from £39.3k in Wood and paper products (divisions 16-18) to £134.4k in Chemicals & Pharmaceuticals (divisions 20-21). The average for the whole of manufacturing was £57.5k and the average for the whole economy was £47.2k in 2011.

Chemicals & Pharmaceuticals was also top of the distribution for output per hour in 2011 (£75.2), with Wood, paper products, & printing (divisions 16-18) and Basic metals & metal products (divisions 24-25) at the bottom of the distribution. On this basis the average for manufacturing as a whole was £31.1 and the average for the whole economy was £30.0 per hour.

Output per job estimates for services continued to grow in Q4 2014, climbing 0.7% on the quarter and 1.3% on the year, as shown in Reference Table LPROD01 (357 Kb Excel sheet) (Table 1). The growth in output per hour for services was more subdued, returning a 0.2% increase on the quarter and a 0.7% increase on the year.

The difference in growth rates for the two measures reflects hours worked growing faster in service-based companies than the number of jobs. Output per hour for services was 0.3% higher in Q4 2014 than the average level for 2011, compared to 2.5% higher for output per job.

Figure 10 illustrates these trends with hours growing at a similar rate to output since mid-2011, while services jobs have grown at a slightly lower rate. Both measures seem to be following a steady trend after some fluctuations following the financial crisis.

Figure 11 shows each services industry’s contribution to total services output per hour since 1998.

As with manufacturing, services industry contributions to output per hour growth were broadly positive for much of the period. There was a sharp downturn in these contributions in 2008 and 2009 and the performance of many industries since then has been mixed.

It is notable that the contribution from the Finance and Insurance industry to total services output per hour has been negative since 2010. This contrasts with the positive contributions from this industry for most years prior to 2010.

The Real Estate industry also stands out because its contributions to total services output per hour have been positive every year since 1998. However, Real Estate productivity is affected by the National Accounts concept of output from owner-occupied housing, which adds to the numerator but without a corresponding component in the denominator. As such, users should approach productivity estimates for the real estate industry with some caution.

More information on labour productivity of services industries is available in Tables 5 and 6 of Reference Table LPROD01 (357 Kb Excel sheet) and in the tables at the end of the PDF version of this statistical bulletin.

In general, the dispersion of labour productivity growth rates across service industries is less pronounced than within manufacturing. But the dispersion of productivity levels is more pronounced. Excluding the Real Estate industry (for reasons noted above), output per job in 2011 varied from £21.6k in Accommodation & food services (section I) to £106.2k in Finance & insurance (section K). These industries were also at the bottom and top of the productivity distribution in terms of output per hour (Table 6).

Market sector output per hour fell slightly faster than that of the whole economy in Q4 over Q3 2014. Since 2010 output growth has been a little faster on average in the market sector than in the economy as a whole, but hours worked have grown to a faster degree, such that growth of market sector output per hour has lagged a little behind the whole economy trend.

In this release the time series for market sector output per hour has been extended back to Q2 1992. This longer time series is available in Table 7 in Reference Table LPROD01 (357 Kb Excel sheet) .