The UK's Productivity Problem:
Hub No Spokes
Speech given by
Andrew G Haldane
Chief Economist
Bank of England
Academy of Social Sciences Annual Lecture
28 June 2018
The views expressed here are not necessarily those of the Bank of England or the Monetary Policy
Committee. I would like to thank Sandra Batten, Shiv Chowla, Gabor Pinter, Patrick Schneider,
Brad Speigner and Pawel Smietanka for their help in preparing the text. I would like to thank
Tera Allas, Ben Broadbent, Caroline Butler, Jeremy Franklin, Colm Manning, Richard Sherrington,
Silvana Tenreyro, Ryland Thomas and Jan Vlieghe for their comments and contributions.
This work contains statistical data from ONS which is Crown Copyright. The use of the ONS
statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation
or analysis of the statistical data. This work uses research datasets which may not exactly reproduce
National Statistics aggregates.
Introduction
I am delighted to be giving this year's Annual Lecture of the Academy of Social Sciences and
honoured to be
a Fellow of the Academy. I thought I would use the occasion to discuss an issue of pressing public policy
concern, an issue that affects the living standards of each and every one of us and has, as best we can tell,
since the dawn of time: productivity.
It is a terrible word, as it leaves most people dazed and confused. Few are those who can define it and
fewer still those who can measure it. Yet it has entered the popular lexicon and with good reason: the one
thing we do know is that productivity is crucial to our pay and living standards over the longer run.
Productivity is what pays for pay rises. And productivity is what puts the life into living standards.
History, distant and recent, makes this only too clear. It is no coincidence that productivity, pay and living
-
standards have moved in lock-step over the past millennium flat-lining for the first three-quarters before
sky-rocketing in the final quarter - as each new industrial revolution has dawned (Chart 1). Pay and living
standards have increased over fifteen-fold since 1750. Productivity explains why.
More recent experience has been more painful. Since 2008, productivity in the UK has essentially flat-lined.
the modern era, a "lost decade" and counting. And it has been mirrored, as
This is almost unprecedented in
in the past, in a lost decade for pay too (Chart 2). Inflation-adjusted pay has stood still since the crisis,
something also almost unprecedented in the modern era.
This prolonged pause has become known as the productivity problem.1 In the UK, the problem is a big one
by any historical standard. And it is cold comfort that the UK shares this problem with much of the Western
Cold comfort because the UK's productivity
World and a decent chunk of the emerging market world.
slowdown appears to have been larger than in almost any other country.
Given its seriousness, it is no surprise there has been no shortage of words written, and proposals made, on
2
how to understand and solve the productivity problem. If productivity was measured by words written and
spoken on the subject, it would have long-since been solved. The UK government has issued its own green
3
and white papers, setting out an industrial strategy. These policy proposals hold, I believe, real promise.
I thought I would begin by providing some diagnostic evidence on the UK's productivity problem,
For today,
focusing on the long and lengthening tail of lower-productivity firms.4 This is not the only lens through which
to view the UK's productivity problem. Looking at the problem by sector, by region or by city all have merit
1
Recent references to the 'UK productivity problem' include Macpherson (2018) and
Wren-Lewis (2017).
2
For example, Aghion et al (2017), Jones (2016), Jacobs et al (2017).
3
HM Government (2017) and Department for Business, Energy & Industrial Strategy (2017).
4
Haldane (2017), Berlingieri et al (2017), Andrews, Criscuolo and Gal (2015), Andrews, Criscuolo and Gal (2016).
of the UK's -
too.5 But I find the distributional lens a useful one for identifying the source "productivity gaps"
its gap with competitor countries and its gaps with its own past performance.
It also leads naturally to a discussion of why those gaps have emerged between the best and the rest of UK
companies and what might be done to close them. Can ways be found to accelerate the rate of
technological diffusion to the long tail? I will argue an improved diffusion infrastructure, using as a base
the UK's innovation
existing institutions and strengths, could help to close those productivity gaps.
The Model
"Hub-No-Spokes"
of the UK's productivity problem starts with three simple stylised facts
My diagnosis about productivity gaps.
The first two gaps are well-known, the third much less so. Fact one is that UK productivity has flat-lined for a
decade. This means UK productivity is running almost 20% below its level had it continued along its pre-
crisis trend (Chart 3). This is a big productivity gap, even if you believed the pre-crisis productivity trend may
have been somewhat over-inflated.6 It is a gap it is unclear will ever be closed.
- -
Fact two is that there is a second gap perhaps as much as a third between levels of productivity in the
UK and in our main competitors, the US, Germany and France (Chart 4). This is an even-larger gap, even if
you believed productivity was differently (mis-)measured across countries. It is the source of the oft-quoted
quip that the average French worker achieves by Thursday lunchtime what the average British worker
achieves only by close of business on a Friday.
Fact three is that the productivity gap between the top- and bottom-performing companies is materially larger
in the UK than in France, Germany or the US. In the services sector, the gap between the top- and bottom-
performing 10% of companies is 80% larger in the UK than in our international competitors (Chart 5).7 This
productivity gap has also widened by far more since the crisis - around 2-3 times more - in the UK than
elsewhere (Chart 6).8
This third gap is interesting, in part, because it is striking and less well-known. But, more fundamentally, it is
interesting because it can help in explaining the first two gaps. A long and lengthening tail of stationary
companies explains why the UK has a one third productivity gap with its international competitors. And that
same tail is also an important reason why the UK has a one fifth productivity gap relative to the past.
To mix metaphors for a moment, the UK is in many respects a tale (tail) of two companies: a small set in the
upper tail gazelling along the productivity high road and a much larger set in the lower tail snailing along the
5
For example, Tenreyro (2018), Swinney (2018), Remes et al (2018). An alternative strand of the literature considers the role of
market power, for example De Loecker and Eeckhout (2017). There is also a strand that debates mismeasurement of GDP and
productivity, for example, Mokyr (2014).
6
For example, Brennan, Haldane and Madouros (2010).
7
The gap in manufacturing is around 50%.
8
UK estimates of firm-level productivity dispersion are based on Bank of England analysis of ONS data, whereas non-UK estimates of
productivity dispersion are provided by the OECD. Differences in underlying data used may therefore play a role in Charts 5 and 6.
low road. Capitalism always of course throws up winners and losers, hares and tortoises, gazelles and
snails, upper and lower tails. In the UK, however, these differences are far-larger, and have increased by
the roots of the UK's productivity
more, than elsewhere. And therein, I would argue, lie gaps.
Let me start with the good news, focussing on companies on the high road. The first and most important
point to make is that the UK does not lack for innovative, high-productivity companies. If you tour the UK, as
I do, you find these "frontier" companies in every region
and every sector. Their productivity is world-leading,
their technology world-beating, their managers and workers world-renowned. They are inspirational.
Micro-analysis of UK companies confirms this anecdotal impression. Chart 7 plots the distribution of UK
relative to French and German companies.9 There are more UK companies in the upper tail than in
Germany, with its much-vaunted industrial reputation, and France. The top 10% of UK companies have
levels of productivity at least 100% above the median. The top-decile of German and French companies
have, by comparison, levels of productivity 80% and 60%, respectively, above the median.
If we look more closely at companies in the top 1% or 0.1% of the productivity distribution, the scale of this
success story becomes clearer still (Table 1). On average over the ten years to 2014, 1%-er companies
experienced annual productivity growth of 8%. 0.1%-er companies have seen annual productivity growth of
12%. There is no evidence of a lost decade among these high-fliers. For them, the Fourth Industrial
Revolution has already arrived.
It is tempting to think these frontier companies are a tightly-knit bunch, geographically and sectorally. By and
large, you should resist that temptation. Table 1 shows productivity growth over the past decade among the
top 1% and 0.1% of companies, broken down by region and by sector.10 There are some important
differences in productivity performance. Even among the 0.1%-ers, there are some wide regional variations
in performance, with the East Midlands at the top (30% per year) and Wales at the bottom (0%).
Differences across sectors are larger still. The upper tail of sectors such as transportation and storage and
information has seen annual rates of productivity growth of 30 or even 40%. Among virtually all sectors, and
across virtually all regions, however, upper tail companies have seen positive and healthy rates of
productivity growth. The Fourth Industrial Revolution has reached almost all sectors and all regions to some
degree, even as the productivity problem in the UK as a whole has perpetuated.
So how have these upper tail companies been able to buck the UK trend? The short answer appears to be
because the UK is, on many dimensions, a global innovation hub. At a headline level, various indices of
countries' innovation status have been constructed.
The UK has appeared in the top 5 of the Global
9
These numbers control for differences in the sectoral composition and sizes of firms between the countries in question. Further detail
of the method used here is set out below Chart 7 in the annex.
10
Data refer to non-financial business sector.
Innovation Index for each of the past five years, ahead of France and Germany.11 It also ranks ahead of
describes the UK as an "innovation leader".
them on the European Innovation Scorecard; it
Digging a little deeper, the UK scores particularly highly on research and development and start-ups. For
rankings of the world's top universities, with 5 of the world's top 25
example, it tops the charts among
universities according to The Times rankings for 2018, including the top two slots. And it also ranks first
globally in categories such as citable scientific publications, e-commerce and ICT. It ranks fourth globally for
its creative outputs. The UK is the largest magnet for tech talent in Europe.
This creativity and entrepreneurship is reflected in business start-ups. Over 1,100 new businesses start up
day -
in Britain each roughly, one every 75 seconds.12 And when started, a disproportionately large number
succeed, with the UK home to half of the top 10 fastest-growing companies in Europe.13 Financing them is a
venture capital industry which, in 2017, invested more in the UK than in Germany and France combined.
The upper tail of UK companies, then, is large and thriving. It more than holds its own relative to
international competitors. Although there is ample scope for improvement, the upper tail is fairly well-spread,
sectorally and geographically. Its success is built on world-leading education, innovation and research. The
UK is, genuinely, an innovation hub, with companies to match.
Let us now reduce altitude and take a closer look at the lower tail. As Chart 7 also illustrates, there is a
materially larger lower tail of UK companies, productivity-wise, than there are in Germany and France.14 The
bottom 25% of UK companies have levels of productivity around 80% or more below the UK median. Their
Germany and French counterparts have productivity around 60% or more below the median.
If we look more closely at this lower tail, what is striking is both its scale and longevity. Table 1 shows
growth in average productivity among the bottom 99% of the productivity distribution. Since 2004 - that is,
-
before the crisis average productivity growth among the 99%-ers has averaged only 1%. This suggests
that, among a significant swathe of UK companies, levels of productivity must have flat-lined or fallen.
This lower tail of companies shares one important feature with the upper tail: neither is confined to particular
regions or sectors. Near-zero rates of productivity growth among the 99%-ers are a feature of all regions
and almost all sectors (Table 1). Even the best-performing region (London) and best-performing sector
(professional, scientific and technical) in the lower tail has mustered productivity growth of only 2% and 4%.
11
Cornell University, INSEAD and WIPO (2017).
12
Department for Business, Energy & Industrial Strategy (2017).
13
Department for Business, Energy & Industrial Strategy (2017).
14
These numbers control for differences in the sectoral composition and sizes of firms between the countries in question. Further detail
of the method used here is set out below Chart 7 in the annex.
We can look more precisely at the fraction of firms who have seen effectively no rise in productivity since
before the crisis.15 For the UK as a whole, that amounts to around half of them. For some regions and
sectors, the fraction of firms that have stood still in the 21st century is closer to two-thirds. This tail of serially-
stagnating companies is long indeed.
accounting for the UK's
It also goes quite some way towards two productivity gaps. It is, arithmetically at
least, the reason why the UK has a productivity gap with France and Germany. The positive effect of the
UK's
larger upper tail of high-performing companies is being comfortably offset by the negative effects of its
much longer, lower tail. The UK's international
productivity gap is, to a large degree, a long tail problem.
cannot by itself explain all of the UK's poor productivity
This long tail long pre-dates the crisis and thus
performance since the crisis. But as my colleague Patrick Schneider has shown, a striking feature of the
past few years has been how previously high-performing companies have seen their productivity laid-low.16
These are companies which, previously, were nestled just inside the technological frontier.
The crisis has caused these companies to stand still, productivity-wise, while frontier companies have forged
ahead. Companies previously gliding in the slipstream are now floundering in the wake of frontier firms.
That has widened the distance between the best and the rest; it has lengthened the lower tail. And that
the UK's productivity slowdown over the past
lengthening helps explain decade.
There is an active debate underway, in academic and policy circles, about the forces shaping future
productivity and growth. Often, this debate centres on whether the forces of secular innovation, brought
about by the dawning of the Fourth Industrial Revolution, will win out over the forces of secular stagnation,
arising from adverse trends in demography, inequality and the like.17
The UK is, in many respects, a prime example of that secular struggle in practice. The forces of secular
innovation and secular stagnation are both operating powerfully, with the two productivity poles acting like
magnets pulling in opposite directions. This is widening the distribution of productivity across firms and, as a
by-product, contributing to a widening of the distribution of pay across workers. The tail of two companies
has, as its mirror-image, a tail of two workers.
Another perspective on these productivity dynamics is provided by viewing them through the lens of
technological diffusion. In the fullness of time, innovation should be expected to diffuse through the
economy, lifting all boats. That has been the lesson of every industrial revolution. Yet in the UK, this
technological trickle-down, from frontier to tail, appears to have dried up. A lengthening flotilla of boats has
remained in dry dock. The diffusion engine appears, for them, to have seized up.18
15
Defined as the share of firms with annualised productivity growth of less than 1⁄2% between 2004 and 2014.
16
Schneider (2018).
17
For example, Gordon (2012) and Brynjolfsson and McAfee (2014).
18
To a lesser extent, there is some evidence of the same being true internationally (Berlingieri et al (2017)).
Empirical evidence, using international innovation indices, supports this diagnosis. Despite ranking
consistently in the top-5 for innovation, the UK ranks only 38th globally for knowledge diffusion.19 This is far
lower even than England's ranking in the World
Cup.20 Moreover, that diffusion ranking has fallen very
in lockstep with England's
sharply over recent years, again world football ranking.21
-
It is not just that the UK has a lowly ranking on R&D expenditure by international comparison at 1.7% of
the UK's
GDP, more than 1 percentage point below our main competitors.22 It is that three-quarters of
private R&D spending is concentrated in only 400 companies, less than 0.01% of the UK's business
population.23 Among smaller firms, the UK ranks low down the European league table on in-house
innovation and the introduction of new products and processes.24
of "Research and Development" (R&D) as a rhyming couplet. In the UK's case, the
Typically, we think R and
the D do not seem to rhyme. The UK does R well, as a world-leading innovation hub. But it does D poorly,
where the D refers not just to development but the diffusion and dissemination of innovation to the long,
lengthening, languishing lower tail. When it comes to innovation, the UK is a hub without spokes.
Understanding the Barriers to Diffusion
What explains why the UK is poor at disseminating and diffusing the innovation it is rich at generating?
Answering that question is important for identifying potential barriers to improved diffusion and, hence, for
devising policies for breaking down these barriers and supporting productivity growth.
A useful framework for thinking about the determinants of technological diffusion has been provided by
economists Diego Comin and Marti Mestieri.25 Drawing on evidence from a wide range of countries and
technologies over many centuries, they highlight four structural factors which are crucial for technological
trickle-down within and across economies. I shall consider the UK evidence on each in turn.
(a) External Openness
Over recent decades, globalisation has resulted in secular rises in cross-borders flows of good and services,
capital, people and information. One of the key potential benefits of this sweeping globalisation and
19
Cornell University, INSEAD and WIPO (2017).
20
but just you wait...
Which currently stands at 12th,
21
Between 2013 and 2017, the UK fell from 18th to 38th in the global ranking for knowledge diffusion. Since 2012, England have fallen
from 6th to 12th in the FIFA world rankings.
22
Department for Business, Energy & Industrial Strategy (2017).
23
Department for Business, Energy & Industrial Strategy (2017). According to Rhodes (2017), the UK is estimated to have had 5.7
million private sector businesses.
24
European Commission (2018).
25
Comin and Mestieri's
Comin and Mestieri (2013). We use a slight variant of organising framework. For example, we do not consider
investment plans and
the influence of demand expectations on innovation and diffusion - a shorter-term cyclical factor affecting firms'
the UK's
capital-deepening. Tenreyro (2018) discusses the contribution of reduced capital-deepening to post-crisis productivity
performance.
openness is that it can serve as a vehicle for the transmission and diffusion of new technologies across
borders.26 Globalisation would tend to accelerate catch-up between countries operating at the technological
frontier and those operating inside.27
The evidence appears to support the first leg of this hypothesis: increased openness, across its various
dimensions, does appear to be associated with higher levels of productivity as innovation diffuses. To
illustrate, Charts 8-11 show some indices of external openness (for goods and services, capital, people and
a summary of all three) plotted against levels of productivity in a selection of 32 countries.28
The relationship between them is positively sloped and statistically significant: countries with greater
-
external openness - whether trade, capital or people tend to have higher levels of productivity. It would be
brave to claim causality. But it is consistent with openness of factor flows being an important cross-border
conduit for ideas and innovation, as indeed other studies have found.29
across within
Adding weight to that, what is true countries appears also to be true countries. Charts 12 and
13 plot the productivity distribution of UK companies sliced in two different ways. Chart 12 distinguishes
companies according to whether or not they export. Exported-oriented companies have average levels of
productivity one-third higher than their non-exporting counterparts.
Chart 13 looks at a different dimension of external openness, namely whether a company is foreign-owned.
The performance of foreign-owned firms captures some of the wider benefits of cross-border flows (foreign
capital, ideas and people). The productivity differences with domestically-owned firms are even more
striking. Productivity is around twice as high in foreign-owned firms.30
These stylised facts suggest external openness is an important driver of productivity. Whether it can explain
the UK's productivity gaps is, however, more questionable. The UK in fact scores highly on all the external
openness metrics. Given that degree of openness, its productivity under-performs other countries; it sits
beneath the regression line of best-fit (Charts 8-11). Openness cannot, on the face of it, easily explain the
UK's
productivity gap with other countries.
explain the UK's productivity slump since the crisis. Over recent years, most
Nor can it measures of the
UK's
external openness have been increasing, not decreasing. Cross-border flows of people, direct
investment and trade into the UK have risen to their highest levels in a generation in the past few years,
while flows of information have risen to their highest-ever levels, at the same time productivity has flat-lined.
26
For example, Feyrer (2009a) and Feyrer (2009b).
27
Baddeley (2006).
28
The indices of openness come courtesy of the McKinsey's Global Institute
as shown in Manyika et al (2016).
29
For example, Frankel and Romer (1999), Feyrer (2009a) and Feyrer (2009b).
30
Batten and Jacobs (2017).
A similar openness puzzle is operating at a global level. Cross-border flows of goods and services, money,
people and especially information have all risen to their highest levels, in some cases, ever. Yet at the same
diverge.
time, levels of productivity across countries have tended to So too, as a result, have levels of GDP
per head. Technological trickle-down and GDP catch-up has gone into reverse gear at the same time
external openness has switched up a gear. How do we explain this?
(b) Technology Transfer
To begin doing so, it is useful to recognise that two distinct forces are at work when technology is transferring
across countries or companies.31 First, there is technological adoption - the time it takes a new technology
technological penetration -
to first reach a country or company. Second, there is the extent to which
technology then reshapes processes and products in a company or country.32
Economists often refer to the first of these as the extensive margin, the second as the intensive margin. In
principle, we might expect these two aspects of technology transfer to move in lockstep. The two
dimensions to diffusion should be complementary. In practice, international evidence seems to suggest a
puzzling divergence in the two dimensions of technology transfer across countries.
Average adoption lags for new technologies have tended to fall over time, consistent with rising cross-border
flows of ideas, capital, goods and services and people. For example, the adoption lag for steam ships (18th
century) was over a century, for the telephone (19th century) was around 50 years, while for the kidney
transplant (20th century) was just 13 years.33 Each century has seen a halving of adoption half-lives. 21st
century technologies, like 3-D printing and AI, appear to have had a shorter-still adoption lag.
Over the same period, however, the intensity of use of these new technologies appears to have diverged
between countries. For example, rates of technological penetration of steam ships, telephones and kidney
transplants have shown a greater divergence between frontier and non-frontier countries with each passing
century. It will be interesting, in time, to see if the same is true of 3D-printing and AI.
What has been the net effect of these two opposing forces? In practice, it seems that cross-country
divergences in rates of penetration have more than counter-balanced convergence in rates of adoption. And
that, at least in an arithmetic sense, explains why we have seen a puzzling divergence in levels of
productivity, and living standards, across countries since the 1980s.34
31
There is a particular literature which discusses the technology frontier where firms in regions/countries that are skilled-labour
abundant tend to choose technologies that are best suited to skilled workers; firms in poorer regions/countries, which tend to be
unskilled-labour abundant, choose technologies more appropriate to unskilled workers. Noteworthy papers include Acemoglu (2002),
Acemoglu, Gancia and Zilibotti (2015) and Caselli and Coleman II (2006).
32
Comin and Mestieri (2013). Filippetti and Archibugi (2011) also discuss innovation across countries.
33
Comin and Mestieri (2013).
34
Haldane (2017), Comin and Mestieri (2013).
Globalisation has meant that ideas and innovations are indeed spreading more rapidly and more widely than
perhaps ever previously. But for later-adopters of these technologies, they are spread thinly. And despite
thickening over time, penetration of these technologies among later-adopters never appears to catch up.
Nor, then, do levels of productivity and living standards.
If that is true across countries, might it also be true within countries? Do the differing dimensions of
technology transfer help explain the slowing rates of diffusion from frontier companies to the long tail? There
is no ideal economy-wide measure of diffusion and patterns differ technology by technology. Nonetheless, it
is possible to build up a reasonable picture by looking at transfer patterns among some specific technologies.
Looking first at adoption rates, on the face of it the UK fares reasonably well looking across a range of
technologies. Firms with internet access and a website are high in the UK by international comparison.
Chart 14 looks at the number of UK firms adopting five basic ICT technologies (computer, internet, website,
e-purchases and e-sales) on three dates (2002, 2007, 2015). There has been a clear and significant
rightwards shift over time in this distribution, consistent with increasing adoption.
Nonetheless, by 2015 there were still only 13% of companies who had adopted all five of these basic
technologies. And there was still a tail of 9-10% of companies who had adopted only 2 or fewer of them.
This tail appears to be largely made up of smaller firms. In innovation surveys, UK SMEs fare poorly by
European comparison on introducing new product and process innovations, ranking 20th out of 36.35
This picture is less encouraging still when it comes to the adoption of more advanced technologies. Chart 15
looks at adoption rates across UK companies of six such technologies (mobile access to email, documents
and software, websites with online ordering, fast broadband access and electronic data interchange sales)
on two dates (2011 and 2015).
Progress towards adoption of these technologies appears to have been slow between 2011 and 2015, with
only a modest rightward shift. Even by 2015, fewer than 10% of UK companies had four or more of these
advanced technologies. More than half of all UK companies had adopted one or less of them and a quarter
had yet to adopt any. This suggests a patchy picture of technological adoption among UK companies, with a
long tail of slow-adopters of basic and especially advanced technologies.
If we turn to penetration rates, the picture is in some respects similar. There appears to be a significant but
small upper tail of companies with high utilisation of technologies and a large lower tail whose penetration
rates are low and patchy. Chart 16 illustrates this for one technology - computing. It shows the percentage
of employees in a company using a computer on three dates (2002, 2008, 2015). The good news is that it
shows a clear trend towards increased employee computer use over time.
35
European Commission (2018).
The distribution of computer use is, however, clearly twin-peaked. There is an upper tail of companies where
more than 90% of staff use computers. By 2015, this had increased to a little under half of all companies.
But there is also a large, if diminishing, tail of companies where employee use of computers is much more
modest. For example, even by 2015 around 40% of companies had fewer than half of their employees using
computers. And there were still 20% of companies where fewer than one in five employees used computers.
This picture is patchier still for more advanced technologies. Chart 17 looks at the distribution of the
proportion of employees in UK companies with access to a portable device with internet access on two dates
(2011 and 2015). It, too, is twin-peaked. But the upper peak is now a very modest one, containing only
around 10% of firms. And the lower peak, by contrast, is Himalayan. The fraction of companies where 50%
or less of employees use portable devices is around 80%.
Patterns of technological adoption and penetration among UK companies, then, tell a broadly consistent
story. There are clearly identified upper-tail companies, who are fast adopters of new technologies which
then appear to spread quickly and widely across the firm. Adoption of innovation is rapid and diffusion
widespread. This helps explain why these companies are on the productivity high road.
But there are many more companies where, by contrast, technological adoption has been slow or non-
existent. Even when adopted, technologies have tended not to have been quickly or extensively employed.
For this lower tail, neither innovation nor diffusion has been rapid or widespread. This, in turn, probably
helps explain why these companies' productivity performance has been stuck on the low road.
(c) Human Capital
One of the key mechanisms through which ideas and innovations are diffused across countries and
companies is, unsurprisingly, through people. As workers transition between companies, their expertise and
experience is transferred within them. Empirical evidence from a range of countries confirms the importance
of human capital as a transmission and diffusion channel.36
Can these human capital channels help explain the UK's productivity gaps? One aspect studied in some
depth is management skills. A survey by Nick Bloom and John van Reenen found that UK companies had
management skills around half a standard deviation lower than competitor countries, such as the US. These
management skills-scores have a statistically-significant link with levels of company productivity.37
The UK also exhibits a greater degree of dispersion in management skills than competitor countries. Chart
18 plots the distribution of management skills from the survey in the UK, Germany and the United States.
The UK distribution has a notably larger lower tail. The UK has around twice as many companies with a
36
For example, Davis and Haltiwanger (2014) and Bjelland et al (2011).
37
Bloom and van Reenen (2007), Haldane (2017).
consisten