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ANALYSIS OF HISTORICAL CONSTRUCTION COST MOVEMENTS IN SCOTTISH SOCIAL HOUSING FINAL REPORT

11.0 PRODUCTIVITY

11.1 Introduction

Chapter 9 illustrated how real average earnings have consistently grown over time, almost irrespective of the peaks and troughs of the economic cycle. This has only been achieved by consistent improvements in productivity. Real economic growth portrayed by Gross Domestic Product has increased at a faster rate than earnings, rising at an average 2.5% per annum since 1948, again illustrating how productivity must have risen consistently over this period.

U.K. productivity, however, lags that of other major industrialised countries. The labour productivity gap with the U.S. was 45% in 1999, 18% with France and 11% with Germany.

11.2 Productivity in the economy generally

Government statistics measure productivity as 'output per job' or 'output per hour'. The government tends to use the former as the central measure for assessing the productivity gap. Output per filled job is the ratio of Gross Value Added (GVA) at basic prices and productivity jobs. Productivity jobs are the number of filled jobs.

Chart 11.1 shows the continuous improvement in productivity in the U.K. economy that has been achieved since 1979, measured as output per job. It shows that productivity in the whole economy has increased by an average 1.9% per annum over that period but that productivity improvements in the production industries, including manufacturing but also including mining and quarrying and electricity, gas and water supply, has increased by double that rate, at an average 3.8% over the same period.

The Office for National Statistics only publishes productivity estimates for production industries and the whole economy. Until recently productivity estimates for the services industries, which account for two-thirds of the total gross value-added (GVA) in the U.K. economy, have not been published because of known quality issues with the data. Following a range of improvements to the output measures, ONS is currently re-assessing the potential for extending productivity estimates to the services industries and, since 2002, has included Services productivity data on the experimental area of the National Statistics website. This data is also plotted on Chart 11.1. The data suggest that productivity in the Services industries has increased at a much lower average 1.3% per annum since 1979. Because this data is still being assessed, the figures should be treated with more care than the data published in respect of production industries and the whole economy.

Services industries covered by the data include the following:

Wholesale and retail trade
Hotels and restaurants
Transport, storage and communication
Financial intermediation
Real estate, renting and business activities
Public administration and defence
Education
Health and social work

Chart 11.1 Output per Job - United Kingdom

Much of the historical variation in whole economy productivity growth has been cyclical, with labour productivity growth tending to be fastest at the early stages of a recovery and slowest in the early stages of a downturn. However the pattern of change between manufacturing and service industries has been very disparate. Productivity in the manufacturing sector grew strongly through most of the 1980's and first half of the 1990's (averaging 4.7% per annum growth between 1980 and 1994), then experienced a period of weak productivity growth between 1994 and 1998 (rising at just 0.2% per annum average); output then picked up strongly in 1999 and 2000 before falling back below trend in 2001 and 2002.

The growth pattern in the Services sector has been largely the reverse, increasing at only 0.8% per annum between 1985 and 1992, rising to 2.4% per annum between 1992 and 1997 and easing back to 1.4% per annum from 1997 to 2002.

11.3 Productivity in the economy - Scotland compared to U.K.

Chart 11.2 compares productivity improvements in the U.K. and in Scotland since 1985 in relation to the whole economy. It shows that productivity started to improve in the U.K. as a whole from 1990 before a similar trend was observed in Scotland starting in 1992. Over the last two years the trend lines have diverged as Gross Domestic Product in Scotland has stagnated, though employment has continued to rise.

Chart 11.2 Whole Economy Productivity in Scotland and the U.K.

Between 1996 and 1999 GDP per capita in Scotland stood at about 94% of the U.K. average; in the North East output per job was between 100% and 101% of the U.K. average, and in Northern Ireland it stood between 90 and 91% of the U.K. Differentials in relative regional GDP per capita have been generally persistent over the last 30 years - Scotland has fluctuated between 92 and 100% of the U.K. average, though the North has generally been lower than the recent trend, at between 91% and 101% of the U.K.

The main source of GDP per capita inequalities is regional variations in labour productivity levels but other factors include unemployment rates, participation rates and working-age population share. Differences in the skill composition of the workforce in U.K. regions is the main underlying factor associated with regional productivity differentials. There are also significant differences in innovation between regions, in terms of the adoption of new technologies and working practices, with the South East and London leading the rest of the country.

11.4 Productivity in construction

A reassessment by ONS of the potential for extending productivity estimates beyond the production industries was carried out in 2002. It concluded that productivity measures should be produced for Services and for Agriculture, Forestry and Fishery but a measure for the Construction industry could not be defended on quality issues. This derives from the fact that a quarter of the employment in the construction industry is self-employed or working in firms not registered for V.A.T. The output of these self-employed is currently established by multiplying an estimate of their numbers with an assumed productivity level, leading to substantial uncertainty regarding a significant proportion of the workforce.

In spite of this proviso, a chart has been compiled plotting the value of construction output in Great Britain divided by manpower in the industry, which includes both employed and an estimate of self-employed personnel. Chart 11.3 indicates that construction output per man has increased by 61% since 1980 and 42% since 1985. This figure is in excess of the productivity gain measured in the whole economy for the United Kingdom over that period though not as great as in manufacturing industry. However, the headline statistic should be treated with caution as the figures do not fully reflect such changes as increases in off-site prefabrication.

The periods of largest productivity improvement came between 1981 and 1988 (productivity rising by 43%) and between 1991 and 1994 (rising by 20%). The former period encompasses the rapid growth in construction output in the late 1980's, not matched by equal growth in manpower; the latter represents the slump after the boom when construction firms were forced to slim down to survive.

The latest period, 1997 to 2002, has been a period of strong construction output growth (rising 17% at constant prices) but matched by a similar percentage increase in manpower.

Chart 11.3 Construction Productivity - Great Britain

11.5 Construction productivity in Scotland

Chart 11.4 plots similar data derived from construction output statistics and construction manpower data for Scotland from 1990, comparing the trend with that for Great Britain.

The trend line for Scotland is clearly much more erratic than that for Great Britain, which may simply be a function of a smaller data set. However a logarithmic trend line suggests that productivity improvements in Scotland since 1990 may have been greater than in Great Britain as a whole.

11.6 Conclusion

Productivity improvements in construction and management generally over the last two decades have been driven by rapid developments in information and communications technology, a process which is still proceeding apace.

Business investment as a percentage of GDP rose to around 14% in 2000, up from 10% in 1994; following the 2000 Spending Review, public sector investment is set to double; both factors driving forward productivity improvements for the U.K. generally.

Chart 11.4 Construction Productivity in Scotland

The concept of productivity relates to the ability of firms to organise production. Management ability, skills and investment and capital intensity are all factors which determine productivity. Studies of productivity highlight the weaknesses and strengths of firms and industries in terms of their human capital and investment in plant and equipment. In construction, market conditions within which firms operate affect productivity and the rate at which firms innovate. In reality, construction industry productivity improvements are often more related to opportunities to innovate that arise on site on an ad hoc basis rather than deliberate decisions of a firm's own choosing.

However, construction is a labour-intensive process. Some research suggests that 40-60% of a typical construction day is non-productive time. Clearly there is significant room for continuing productivity improvements, given sufficient reason or incentive.

In housing refurbishment, innovation and technological advances have and will continue to drive improved productivity where replacements can, and are, made with technically superior products.

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