The recent fall in productivity could become a permanent feature of the UK economy unless we see a significant boost to demand and a return to growth, according to the TUC's latest economic report published today (Thursday).
With productivity growth the best way to reduce the structural deficit, deliver economic growth and raise living standards, the TUC report examines why the UK has fallen behind its major competitors - including the US, France, Germany and Japan - in recent years.
The report considers the main reasons for the UK's low productivity puzzle and what policies would best address the fall in economic performance.
The labour market offers the best explanation for falling productivity, says the TUC. While union and employer efforts to keep skilled staff on during the recession have prevented unemployment levels from reaching the heights of the 1980s, the collapse in demand has caused real wages to fall and over a million job losses. Recent TUC analysis found that a worker on a median salary of around £25,000 has already suffered a real wage loss of nearly £4,000 since December 2009.
Weak demand is preventing hiring by higher productivity firms and restricting limited employment gains to lower productivity sectors, says the TUC. This explains the recent rise in low-paid, part-time and temporary employment and partly explains the productivity drain.
The TUC warns that unless there is an immediate boost to economic demand, employment growth will continue to be concentrated in low productivity sectors, and the economy will not create the skilled jobs in high productivity sectors that are needed to boost growth and raise living standards.
The report also argues that poor levels of business investment - which is still 15 per cent below pre-recession levels - and a lack of access to finance are also harming productivity.
One of the government's favourite explanations for poor productivity - over-regulation - is dismissed for a lack of supporting evidence. The UK already has the third lowest level of employment protection of all OECD countries, while its better productivity performance during 2001-07 took place when new regulations, such as flexible working rights and paternity leave, were added.
The TUC believes that a combination of measures to immediately boost economic demand and longer term structural reforms, are needed to raise productivity.
This means an end to demand-sapping austerity, as well as banking reform and an industrial strategy to deal with the UK's long-term problems of poor investment, skills shortages and a lack of lending to firms outside of finance and real estate, says the TUC.
TUC General Secretary Frances O'Grady said: 'Solving the UK's productivity puzzle may not be the main conversation in Britain's pubs, cafes and offices but it's the best way to reduce the structural deficit, raise living standards and secure sustainable economic growth.
'Many explanations have been offered for Britain's productivity drain, though some of these are based on political dogma rather than actual evidence.
'Economic stagnation in recent years has had a huge impact on productivity, leading to falling living standards and rising underemployment. These problems need to be addressed, or the UK will continue to move towards an under-performing, cheap labour economy. Unfortunately the government's demand-sapping austerity plan risks accelerating this slide.
'But as well as short term measures to boost growth, the government also needs to tackle some of the longer term challenges facing the UK economy. The Chancellor needs to encourage banks to get better at lending, and have an industrial strategy that plugs skills shortages and targets investment at growing industries.
'Rising productivity is essential in the global race for growth and unless the Chancellor changes course the UK could fall even further behind its competitors.'