1. Main points

  • UK labour productivity, as measured by output per hour, is estimated to have fallen by 0.5% from Quarter 4 (Oct to Dec) 2016 to Quarter 1 (Jan to Mar) 2017; over a longer time-period, labour productivity growth has been lower on average than prior to the economic downturn.

  • Labour productivity fell in services but rose in the manufacturing industries; services productivity fell by 0.6% on the previous quarter, while manufacturing productivity grew by 0.2% on the previous quarter.

  • Earnings and other labour costs growth outpaced productivity growth, resulting in unit labour cost (ULC) growth of 2.1% in the year to Quarter 1 2017.

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2. Things you need to know about this release

This release reports labour productivity estimates for Quarter 1 (Jan to Mar) 2017 for the whole economy and a range of industries, together with estimates of unit labour costs. Productivity is important as it is considered to be a driver of long-run changes in average living standards.

This edition forms part of our quarterly productivity bulletin, which also includes an overarching commentary, quarterly estimates of public service productivity, and articles on productivity-related topics and data.

Labour productivity is calculated by dividing output by labour input. Output refers to gross value added (GVA), which is an estimate of the volume of goods and services produced by an industry, and in aggregate for the UK as a whole. Labour inputs in this release are measured in terms of workers, jobs (“productivity jobs”) and hours worked (“productivity hours”).

Alongside this release, we have published experimental estimates of labour productivity at a more detailed level, as well as experimental estimates of labour productivity on an industry by region basis. Details of the methodology that supports these outputs and some high-level analysis can be found in accompanying articles. Subject to user feedback, these will be published regularly each quarter in the tables accompanying the labour productivity bulletin.

This release also reports estimates of unit labour costs (ULCs), which capture the full labour costs – including social security and employers’ pension contributions – incurred in the production of a unit of economic output. Labour costs make up around two-thirds of the overall cost of production of UK economic output. Changes in labour costs are therefore a large factor in overall changes in the cost of production. If increases in labour costs are not reflected in the volume of output, this can put upwards pressure on the prices of goods and services – sometimes referred to as “inflationary pressure”. ULCs are therefore a closely watched indicator of inflationary pressure in the economy.

The equations for labour productivity and ULCs can be found in the “Quality and methodology” section of this release.

The output statistics in this release are consistent with the latest Quarterly National Accounts published on 30 June 2017. Note that productivity in this release does not refer to gross domestic product (GDP) per person, which is a measure that includes people who are not in employment.

The labour input measures used in this release are consistent with the latest labour market statistics as described further in the “Quality and methodology” section of this bulletin. Measures of jobs and hours worked in this release are affected by revisions from a recent reweighting of the Labour Force Survey. These affect the industry splits of jobs and hours worked, as well as the whole-economy estimates for these two measures.

Unless otherwise stated all figures are seasonally adjusted.

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3. Labour productivity down for first time since Quarter 4 (Oct to Dec) 2015

Productivity – as measured by our main measure, output per hour – fell by 0.5% in Quarter 1 (Jan to Mar) 2017. A fall of 0.5% takes productivity Quarter 1 2017 back below the peak achieved in Quarter 4 (Oct to Dec) 2007, which was broadly matched in Quarter 4 2016. Productivity is now 0.4% below the pre-downturn peak and 0.4% below the post-downturn peak.

A fall of 0.5% is also below the 1994 to 2007 labour productivity growth average, which – even in the light of recent stronger quarters – provides little sign of an end to the UK's “productivity puzzle”. This term refers to the relative stagnation of labour productivity since the recent economic downturn. This is in contrast with patterns following previous UK economic downturns where productivity initially fell, but subsequently bounced back to the previous trend rate of growth. There is wide and varied economic debate regarding the causes of this puzzle and further analysis of recent UK productivity trends can be found in the January 2016, May 2016 and June 2016 Economic Reviews, as well as in several standalone articles including: What is the productivity puzzle?, The productivity conundrum, explanations and preliminary analysis, and The productivity conundrum, interpreting the recent behaviour of the economy.

This puzzle is shown in Figure 1, which presents two alternative measures of productivity – output per hour and output per worker – alongside their projected 1994 to 2007 trends. Following years of steady growth, each measure peaked in Quarter 4 2007 and fell during the economic downturn. However, due to a strong labour market performance accompanying a relatively weak recovery in output growth, productivity has not returned to the pre-downturn trend. Productivity in Quarter 1 2017, as measured by output per hour, stood 16.8% below its pre-downturn trend – or, equivalently, productivity would have been 20.2% higher had it followed this pre-downturn trend1.

Figure 2 breaks down the growth in productivity between Quarter 1 2008 and Quarter 1 2017 into contributions from different industry groupings and an “allocation effect” due to changes in the share of output and labour in each grouping. All else being equal, stronger (weaker) productivity growth in any given industry, or a movement of output and labour towards (away from) higher productivity industries will tend to raise (reduce) aggregate productivity growth. Non-financial services are the main positive contributor to productivity growth over this period, partly offset by negative contributions from non-manufacturing production and finance. The negative allocation effect – suggesting that output and labour have been moving away from higher to lower productivity industries in recent years – partly captures the falling share of output in mining and quarrying, which has among the highest levels of productivity of UK industry; partially a result of the falling reserves of oil and gas in the North Sea. Although negative for the period as a whole, the allocation effect was initially positive following the downturn, but turned negative in recent years.

Notes for: Labour productivity down for first time since Quarter 4 (Oct to Dec) 2015

  1. Differences between these two measures are due to differences in the denominator used in the calculation. Using the actual output per hour series as the denominator, rather than the trend series, results in a higher percentage gap. This is due to the actual series being lower than the trend series post-downturn.
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4. Output per hour down in services but up in manufacturing

Services output per hour fell by 0.6% in Quarter 1 (Jan to Mar) 2017, reflecting hours growth outpacing output growth. In contrast, output grew faster than hours in manufacturing, resulting in positive labour productivity growth of 0.2%.

Figures 3a and 3b examine longer-term trends, showing output per hour and its components since Quarter 1 2008. Services are represented in the first panel, while manufacturing is represented in the second. Manufacturing output per hour has been more volatile than services in recent years. This reflects a divergence of manufacturing gross value added (GVA) and hours, most pronounced in 2009 and 2011 to 2012, whereas GVA and hours for services follow fairly similar trends. However, in recent years services GVA grew faster than hours, potentially marking a break from this trend.

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5. Unit labour costs grow for the eighth consecutive quarter

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. Changes in labour costs are a large factor in overall changes in the cost of production. If increased costs are not reflected in increased output, for instance, this can put upward pressure on the prices of goods and services – sometimes referred to as “inflationary pressure”. ULCs grew by 2.1% in the year to Quarter 1 (Jan to Mar) 2017, reflecting a larger percentage increase in labour costs per hour than output per hour.

Figure 4 shows changes in ULCs since Quarter 1 2008 on a quarter on same quarter a year earlier basis. The bars represent the contribution to changes in ULCs from changes in labour costs per hour and changes in output per hour. Holding other factors constant, increasing output per hour reduces ULCs – as total labour costs remain constant while output rises. As a result, output per hour has its sign reversed in Figure 4. In this presentation, positive (negative) output per hour growth has a negative (positive) effect on ULC growth.

While growth in ULCs has been broadly positive since the onset of the economic downturn, averaging around 1.5% since Quarter 1 2008, there has been substantial variation during this period. During the recent economic downturn, ULCs began to grow at a relatively high rate, reaching a peak of 6.8% by the end of the downturn in Quarter 2 (Apr to June) 2009 and remaining elevated until Quarter 1 2010. Figure 4 shows that the initial increase in ULC growth during the downturn was driven by falling output per hour, but from Quarter 2 2009 onwards, increasing labour costs per hour were the driving factor. Following the downturn, growth in ULCs began to slow, eventually becoming negative in Quarter 4 (Oct to Dec) 2010.

Since then, ULC growth has been either low or negative, reflecting both low growth in hourly labour costs and productivity. The most recent quarterly observations are at the higher end of the range observed since 2011 – and are notably stronger than 3 years earlier – but have been relatively stable. This increase broadly reflects higher hourly labour cost growth, with little offsetting output per hour growth.

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8. What’s changed in this release?

This release includes standard revisions resulting from quarterly national accounts (which affect Quarter 1 (Jan to Mar) 2017) and seasonal adjustment (which affect all periods). Figures are also affected by a reweighting of the Labour Force Survey, which affects Quarter 2 (Apr to June) 2012 onward.

In addition, following consultation with users, figures in this release have been produced using a new system. The opportunity has been taken to make a number of small methodological improvements, including:

  • the removal of some rounding during processing
  • an improvement to bring the chain-linking methodology for the gross value added (GVA) of industries CE-CF, CI-CJ, CD-CM and S-U in line with national accounts
  • improved use of Short-Term Employment Survey data to estimate productivity jobs data for industry T in 1996
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9. Quality and methodology

The measure of output used in these statistics is the chain volume (real) measure of gross value added (GVA) at basic prices, with the exception of the regional analysis in Table 9, where the output measure is nominal GVA (NGVA). These measures differ because NGVA is not adjusted to account for price changes; this means that if prices were to rise more quickly in one region than the others, then this would be reflected in apparent improved measured productivity performance in that region relative to the others.

Labour input measures used in this bulletin are known as “productivity jobs” and “productivity hours”. Productivity jobs differ from the workforce jobs (WFJ) estimates, published in Table 6 of our labour market statistical bulletin, in three ways:

  • to achieve consistency with the measurement of GVA, the employee component of productivity jobs is derived on a reporting unit (RU) basis, whereas the employee component of the WFJ estimates is on a local unit (LU) basis
  • productivity jobs are scaled so industries sum to total Labour Force Survey (LFS) jobs – note that this constraint is applied in non-seasonally adjusted terms; the nature of the seasonal adjustment process means that the sum of seasonally adjusted productivity jobs and hours by industry can differ slightly from the seasonally adjusted LFS totals
  • productivity jobs are calendar quarter average estimates, whereas WFJ estimates are provided for the last month of each quarter

Productivity hours are derived by multiplying employee and self-employed jobs at an industry level (before seasonal adjustment) by average actual hours worked from the LFS at an industry level. Results are scaled so industries sum to total unadjusted LFS hours, and then seasonally adjusted. Labour productivity is then derived using growth rates for GVA and labour inputs in line with the following equation:

Industry estimates of average hours derived in this process differ from published estimates (found in Table HOUR03 in the labour market statistics release) as the HOUR03 estimates are calculated by allocating all hours worked to the industry of main employment, whereas the productivity hours system takes account of hours worked in first and second jobs by industry.

Whole-economy unit labour costs (ULCs) are calculated as the ratio of total labour costs (that is, the product of labour input and costs per unit of labour) to GVA. Further detail on the methodology can be found in Revised methodology for unit wage costs and unit labour costs: explanation and impact.

The equation for growth of ULCs can be calculated as:

Manufacturing unit wage costs are calculated as the ratio of manufacturing average weekly earnings to manufacturing output per filled job. On 28 November 2012 we published Productivity measures: sectional unit labour costs, describing new measures of ULCs below the whole-economy level, and proposing to replace the currently published series for manufacturing unit wage costs with a broader and more consistent measure of ULCs.

A research note, Sources of revisions to labour productivity estimates, is available and further commentary on the nature and sources of the revisions introduced in this quarter is available in the UK Productivity Bulletin – Introduction.

The Labour Productivity Quality and Methodology Information report contains important information on:

  • the strengths and limitations of the data and how it compares with related data
  • uses and users of the data
  • how the output was created
  • the quality of the output including accuracy of the data
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Contact details for this Statistical bulletin

Ciaren Taylor
productivity@ons.gsi.gov.uk
Telephone: +44 (0)1633 455619

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