Labour productivity

Over the five years through 2025-26, the labour productivity index is forecast to increase at a compound annual rate of 0.1%, to average 98.9 points. Sustained labour productivity increases over the aforementioned period were driven by developments which have enabled workers across a plethora of sectors to produce more, including new capital investment and technological advancements to support and enhance the efficiency of manual labour. However, disproportionate growth between traditionally lower and traditionally higher productivity jobs across the UK economy meant that expansion in the UK's average productivity across the labour market overall, was relatively modest. Meanwhile, a near-record national employment rate in the pre-pandemic years, twinned with a low unemployment rate, resulted in somewhat of an output gap – that is, the labour market was approaching a point where each additional job added did not create enough productivity to cover its cost, in effect making every successive job after said point inefficient, or otherwise adding limited benefit.

In 2020-21, a year in which public health restrictions mandated to contain the spread of COVID-19 were their most stringent in the UK economy, the labour productivity index actually increased by 2.1% year-on-year. At the onset of the pandemic, in particular over Q2 (April-June) 2020, full lockdown measures led to a significant contraction in output across several key sectors, notably services, manufacturing, and industrial production. The challenges and costs that the pandemic placed on business operations, in addition to prevalent furloughing as firms leveraged temporary stimulus support, naturally meant many industries experienced a decline in output per hour worked. Post-Q2 2020, however, the unwinding of some restrictions which allowed certain sectors like construction, industrial production, some retail and some hospitality to resume activity, in either a limited or other greater capacity, led to an increase in hours worked relative to the Q2 2020 dip, steering labour productivity back towards positive growth.

However, in 2021-22, labour productivity declined for the first time since 2012-13. The labour productivity index increased by 0.1% year-on-year as the supply chain issues meant output growth was slowed over the year. This, combined with the phasing out of the Coronavirus Job Retention Scheme caused an increase in hours worked for those not subsequently made redundant. Meanwhile, even though the unemployment rate had risen to above 5% in mid-2020, for the first time since early-2016, recruitment efforts were stepped up heading into 2021-22 as the economy reopened. In this respect, many of the additional jobs added post-pandemic did not add enough productivity to cover the cost of employment which, in turn, has raised output per hour worked. In 2022-23, the labour productivity index is projected to remain flat.