Why is labor productivity in the United Kingdom so low?

By Nicholas C. Lovegrove, Simon Fidler, Vicki J. Harris, Helen M. Mullings, William W. Lewis, Scott D. Anthony

There's not enough competition. The major culprit is product market regulation. Can social objectives be achieved at lower cost?

In the mid-nineteenth century, the United Kingdom boasted the highest economic output per capita of any nation in the world, and its material standards of living were without equal. Ever since then, it has gradually lost ground. It now ranks bottom of the league of G7 countries, trailing the leader, the United States, by 30 percent.

To find out why, the McKinsey Global Institute conducteda detailed study of the United Kingdom’s recent economic performance. As well as looking at the economy as a whole, we compared the productivity of UK companies with that of the world’s top performers in six key product markets: automotive, food processing, food retailing, hotels, software, and telecommunications. In each case, we sought to uncover the reasons behind differences in performance.

Our principal findings were that:

  • Despite the labor and capital market reforms of the past 20 years, output per capita in the market sector remains almost 40 percent behind that of the United States, and 20 percent behind that of West Germany. The root cause of this gap is low labor productivity. The results of our productivity case studies confirm this overall trend.
  • Contrary to conventional wisdom, the main causes of low labor productivity are a lack of exposure to global best practices and low competitive intensity. The reasons often cited for poor performance, such as low capital investment and poor skills, are consequences of these factors.
  • Lack of exposure to global best practices and low competitive intensity are often the result of product market barriers such as trade restrictions, price constraints, and land use regulations. In some cases, these barriers constrain competition and so limit the pressure on management to adopt global best practices. In others, they prevent the implementation of best practices or render it uneconomic.
  • Many of these regulations have been put in place to promote legitimate social objectives, yet the economic cost of these objectives has been largely overlooked. Replacing them with more market-friendly alternatives could boost GDP growth by more than a full percentage point a year over the next ten years.

More from the McKinsey Quarterly