The UK productivity puzzle: is the answer in consumers’ hands?
Rising inflation has led employers to seek productivity improvements to offset cost-of-living pay increases. Yet productivity improvements have slowed down in the last decade. Could part of the explanation for the “productivity puzzle” lie in changing consumer behaviour? Professor Adrian Palmer explores.
Inflation in the UK has climbed again, reaching 11.1% in October 2022, when measured by the Consumer Prices Index (CPI). This has led many workers to demand pay increases to compensate for the increased cost of living. Employers have often seen such demands as an opportunity to see through productivity improvements, to partially offset wage increases.
Over the long term, productivity growth and average real wage increases have moved closely together. According to Office for National Statistics (ONS) data, wage increases and productivity, starting from a base measure of 100 in 2000, tracked each other quite closely until 2021 when the index of both had reached 120.
So, there is a lot of truth in the statement that real terms wage increases (wages adjusted for inflation) must be earned by productivity improvements. But despite this simple claim, we need to look beneath the surface to understand more about how wages, inflation and consumers’ purchasing behaviour are linked. In particular, do changes in consumer behaviour have an effect on productivity?