Firm level labour productivity

Firm level labour productivity in the UK

In current price terms firm level labour productivity has been increasing in the UK, but not at an equal rate across all firms. Median labour productivity has increased from £19,500 per worker in 1998 to £30,500 in 2019, an increase of 56%. However, at the same time the 75th quartile increased by 69% and the 90th percentile by 82%. This means the gap between the most productive firms and the rest has been increasing over time.

Sector is one of the major determinants of productivity and this divergence is partially explained by already highly productive sectors becoming more productive. Median labour productivity in manufacturing for instance has increased by 87% since 1998, despite already being one of the most productive sectors in 1998. Over the same period employment in manufacturing decreased by 38%. 

Relationship between size age and productivity

Beyond the sector in which firms operate size and age are two important variables that influence the labour productivity of firms. 

Up to a certain point, larger firms are generally more productive than smaller firms. UK firms with between 250-999 employees had a median GVA per worker of £39,000 in 2019, compared to £22,500 for firms with only 1-9 employees. This relationship is often attributed to economies of scale, the idea that business functions can become more effective when they are applied at a larger scale due to greater opportunities for trial and error. 

Firms with over 1,000 employees, however, have lower productivity again. This is likely because many workers in these firms are employed in less productive sectors such as retail and administrative support services. Manufacturing, which also has many workers in large firms, demonstrates a more linear relationship between size and labour productivity. 

There is a similar pattern between labour productivity and age, with firms increasing their productivity rapidly as they gain experience for the first 0-5 years. Past this point however, there is no clear relationship between age and productivity, with firms that are much older than 5 years displaying no clear productivity advantage over younger firms. 

These rapid increases in productivity as firms age are likely explained by multiple factors, including learning through trail and error, firms experiencing headcount growth and therefore starting to benefit from economies of scale, and unproductive firms not surviving beyond five years of age.

Owernship, place and connectivity

Firm’s international and regional relationships also appear to have an impact on labour productivity. For instance, foreign owned firms tend to have greater labour productivity than domestically owned firms. The median GVA per worker for a domestically owned firm in 2019 was £27,500, while for an EU owned firm it was £45,000 and for a non-EU owned firm £44,000. 

This is largely explained by the fact that foreign owned firms are more likely to display the characteristics highlighted above, being large, mature, and operating in more productive sectors. Modelling which accounts for these differences however still suggests that EU owned firms are 13% more productive than domestic firms and non-EU firms 18% more productive. The causation is unclear but this highlights international connections are related to labour productivity. 

International connections through trading also have a positive relationship with labour productivity. Other factors being equal, firms that import and export goods and services are more productive, with services exporting appearing to have the largest effect. 

The effects of international connections are comparable to those of region and interregional connections. Firms with a location in London, other factors being equal, have labour productivity 31% higher than firms elsewhere in the UK. Firms with offices in more than one region have a productivity advantage over other firms too.