What’s the historical context for Britain’s low productivity growth?

The British industrial revolution brought about the transformation in productivity that created modern economic growth and raised standards of living across the globe. Yet the country has long struggled to sustain productivity growth that compares favourably with other advanced economies.

Unless output per worker rises, standards of living fall (House of Lords Library, 2023). Britain has had low growth of output per worker since about 2008 – the big year of the global financial crisis. What’s more, productivity growth has been comparatively lower than elsewhere, which poses a big problem for the government.

Indeed, productivity is a historically stubborn problem for the British economy (Krugman, 1994). This is paradoxical because the British industrial revolution brought about the transformation in productivity that created modern economic growth and raised standards of living across the globe (Broadberry, 2021).

Before the industrial revolution, average trend growth rates of over 0.25% per annum were rare or impossible. Today, we have come to see less than a regular 2% annual growth as disappointing. Early industrialisation made Britain grow faster than everywhere else from the late 18^th century until about 1870, but after that, Britain fell behind in the ‘productivity race’ (Broadberry, 1997).

Historical data are a lot scarcer than people realise, and productivity is hard to measure. We have no reliable way of observing labour productivity hundreds of years ago, but output per capita is the best historical measure (Broadberry et al, 2015 was a leap forward in this area).

Using this measure shows that rather than the industrial revolution being a single step change in productivity out of a stagnant early modern economy, there have been many eras of growth where productivity gains were made but then fell back again (Fouquet and Broadberry, 2015).

Not falling back again has been key to the sort of growth that has made everyone better off since the 18^th century (Broadberry and Wallis, 2017). What worries economic historians is that the cessation of falling back is the historical anomaly.

What’s more, over the centuries, eras of high output per capita growth have not always been associated with good times, wage growth or other nice aspects of positive economic performance that we all remember before 2008.

As highlighted at the 2024 Festival of Economics, when you ask people on the street today what they associate with productivity, generally they are not enthusiastic. They believe that it will involve harder work, loss of welfare or their job, and cost cutting, as well as being bad for the environment. From a historical perspective, these fears have some grounds.

From 1400 to the mid-17^th century, average trend growth was essentially stagnant. There were periods of growth largely driven by urbanisation and trade. But these were followed by severe retractions, which reduced output per head to the same levels as previously – or lower.

But in the late 17^th century (1660-1710) there was a big boom in output growth in Britain, with levels of more than 0.8% trend growth on average (Crafts and Mills, 2017).

This was the outcome of investment in construction (especially in London), transport and distribution, new agricultural techniques, shipbuilding, state formation, war mobilisation and new financial institutions – all financed by expanding trade.

This boom brought some wage rises to London workers, but it was less apparent elsewhere. A sharp retraction in GDP per head of only about a third of what had been gained occurred until about 1720; then there was a long era of more moderate volatility and growth (Broadberry et al, 2023). The early industrial revolution of the 18^th century is not notable for a revolutionary boom, but rather for a new secular sustained output.

Over this period, sustained output was not accompanied by wage growth. Nominal wages were stubbornly rigid and real wages fell significantly. This meant that the later decades of the 18^th century were marked by violent disruption in industrial relations (Randall, 1990; Dobson, 1980).

The significant ‘take-off’ in productivity growth of the classic industrial revolution occurred from about 1820, well after the beginning of ‘factoryisation’ (Crafts and Mills, 2017). For those who were around at the time, this might be surprising as these were years of post-war slump, profound upheaval, poverty and unrest (Aidt et al, 2022; Engels, 1844; Snell, 2014; Treble, 2018).

Average trend growth rates in Britain peaked at 1.25% per annum in the mid-19^th century, when the economy was the most productive in the world. Yet these gains were unevenly distributed.

At the bottom of the earnings distribution, workers with no property, no vote and unpredictable work faced levels of destitution that are inconceivable today. Average real wages did not begin to rise until around the 1860s (Allen, 2009; Feinstein, 1998). Soon after, British productivity growth slowed but living standards improved (Crafts and Mills, 2020).

Britain’s growth rate was overtaken by the United States after 1870. Because of its ‘first industrial revolution’, British output per capita was comparatively very high at this time, but its productivity growth rate much lower.

American productivity was double that of Britain before 1914, a result of more capital-intensive technology in industry, and a developing form of ‘managerial capitalism’ with high yields to scale and scope. British business did not readily adopt these innovations and thus began a persistent trend of the country’s productivity lagging its peers. Living standards nevertheless continued to improve, largely because the state began to take responsibility for health and public services generally (Crafts, 2018).

Notwithstanding the mobilisation of the Second World War, productivity growth was comparatively weak in Britain, even as workers’ wages rose (Crafts, 2007). The Golden Age (1950-73) saw record GDP per capita growth, yet still trailing Europe and the United States (Crafts, 1998).

As economic performance improved during the 20^th century, short-run growth rates declined. Yet for reasons that are still not well understood – other than the performance of our financial services – labour productivity in Britain surged to match US growth in the 1990s, continuing until 2007 (Broadberry and Wallis, 2017).

This will probably be seen as an unusually golden period by future historians, because real wages also rose throughout. Our current two-decade productivity stagnation – during which the country is lagging behind other economies in productivity growth, has a lower level of output per worker than the United States and stagnating real wages – is therefore historically significant. We haven’t been here for a while.

Lots of contemporary commentary points to the importance of capital investment (Resolution Foundation; Institute for Fiscal Studies; Hansard, UK Parliament). Historically, capital investment has driven British productivity gains. Turnpikes, canals, railways and shipping boosted trade and later enhanced labour mobility (Bogart, 2005).

Infrastructure invariably invokes questions about state versus private investment, but two hundred plus years ago, neither the state nor the private sector were in the same form as they are today. The state of the early industrial revolution was not economically active like today's government, and private enterprises were often institutions with broader social responsibilities, not shareholder-owned companies.

Project success was no better in the past than it is today, but projects were vital to all growth, and they were multifarious in their funding, accounted for as ‘extraordinary’ and unrelated to day-to-day taxation and spending (Flyvbjerg and Sunstein, 2016).

The stress on investment implies that wages can only grow if capital investment goes up. While this makes sense intuitively – as we have noted, periods of investment or output growth have not always been accompanied by wage rises – in reality, real wage gains follow investment and productivity gains in unpredictable ways, as do living standards. Recent economic work on employers’ power over employees (their ‘monopsony power’) may provide some explanation (Machin, 2024).

We should bear in mind that it was effectively illegal for workers to withhold labour or strike until the mid-19^th century (Hay, 2000). Today’s wage bargaining and worker protections are much fairer.

A historical context for Britain’s productivity problems therefore suggests that we should temper our expectations about the level of growth we can expect in the 21^st century. Nevertheless, even moderate growth can do great things for living standards. And there has been enough progress in the institutions of the labour market not to fear a return to the upheaval of early industrialisation.