“Glory to the Americans.” A sigh of relief from Juliana Delaney, boss of Continuum Attractions, came just a few breaths last week after she warned that the British were cutting back on spending.
Continuum, which operates coast-to-waterfront tourist attractions in Portsmouth, said Americans are resisting the trend of shrinking revenue and cutting spending.
Delaney's comments are eloquent. The world's largest economy has outperformed the UK and the rest of Europe on a range of economic fronts since the 2008 financial crisis.
What started as a slight disparity has turned into a chasm that has left the UK with questions about whether it has the work ethic to close the gap.
Follow, Not Lead
Jeremy Hunt wanted to start the New Year off by talking about growth. “British decline is just not right,” the chancellor told an audience of tech bosses and journalists in January.
Moments later, he was celebrating that the UK was “middle” in the G7 growth rankings. He boasted that productivity per hour was higher than before the pandemic. Economist Sam Bowman says 1.6% above pre-pandemic levels is hardly anything to celebrate. “We are not leading the world. We're trying to catch up.”
Lead author and economist Daron Acemoglu, whose book Why Nations Fail made a splash a decade ago, says there are huge consequences for “putting up with mediocrity” and terrible productivity.
Getting more out of less has always been the key to raising the standard of living. The ability to increase output per hour of work tells us how much an economy can grow without causing excessive inflation.
When productivity increases, both company profits and employee wages increase. This leads to stronger growth, a bigger economy, higher tax revenues and lower debt.
“The productivity problem in the UK is a disaster,” says Acemoglu. “It's an amazing economy that needs to grow a lot faster, and doing nothing about it is the biggest risk.” At worst, he adds, it's “severely distracting.”
And the economic outlook is far from rosy. Living standards are on track for their biggest two-year drop since registration began. The tax burden should also reach a post-war maximum. The UK's long-term growth potential is shrinking. Economists warn that wages will not rise for another decade, and the Bank of England intends to cause even more trouble for borrowers by further raising interest rates.
Ben Ansell, a political scientist at Oxford University, says it all matters in the polls.
Take Selby and Ainsty, located 90 minutes by car from Rishi Sunaka in Richmond, North Yorkshire. Many factors made the former mining district red in last week's by-election, including the economic backdrop, Ansell said.
Selby is in the top 40 counties in England and Wales for mortgage holders, with 35.9% of households still paying off their mortgages, according to the latest census data.
This has many voters thinking about rising interest rates, as well as rising cost of living and fuel prices (this is an area with high car ownership, where the proportion of people aged 30 to 64 is higher than the national average).Across the UK, the transition of homeowners to work has been huge, especially among those with large mortgages, Ansell says. Back in 2019, the Tories had a comfortable advantage over Labor of anyone with a home.
Today, that's all erased. Labor is 15 points ahead of the Tories among people with less than 50 percent left on their mortgages. Among those who own less than half, the lead is 43 percentage points, he said, citing the results of a recent survey.
Tories lose edge over mortgage holders Tories lose edge over mortgage holders 2022
“Big, big tears open up with age,” he adds. “These are young working people who have deviated further from the Conservative Party. And that's a problem, because traditionally the Conservative Party has always done well with these groups – that's what the yuppies were like in the 1980s. So when conservatives worry about losing millennial homeowners, they're right. And it is this group of people that is most affected by interest rates.”
As politicians begin their election strategies, economists fear that the gap between the UK and the US continues to widen.
The differences on paper are already evident. Bowman points out that in the decade before the pandemic, 8% productivity growth in the US was twice as fast as in the UK. The American economy has also grown much faster overall.
In 2021, the American worker was 26 percent more productive than his British counterpart, producing $74.80 (£58.3) an hour compared to $59.20 an hour for the British worker.
A more productive workforce means higher pay: In 2022, the average American worker earned $77,500 compared to $54,000 in the UK, according to one OECD metric that adjusts for purchasing power in each country.
For some professions, the difference is obvious. A nurse in America can expect a pay package of $85,000 compared to $48,500 for a nurse working in the UK. During the pandemic, severe shortages and a more mobile U.S. workforce meant many were earning much higher wages.
“In other words, Americans can stop working each year in September and still be richer than Britons who work all year,” says Bowman.
Americans earn more
These differences add up. A study released this month by the European Center for International Political Economy (ECIPE) think tank highlights that the difference between 2 percent and 3 percent annual economic growth is not one percent, but fifty.
“While it is common to compare growth levels across countries in one year, the reality is that what matters is the long-term trend,” the document says. “An economy that grows at 3 percent a year will double in 24 years, and an economy that grows at 1 percent will only double in 48 years. For a long time, average growth rates in mature and developed countries in Europe have been closer to 1% than to 3%.
Oscar Guinea, senior economist at ECIPE, says this divergence in the economic fortunes of the UK and the US has widened the wealth gap. ECIPE says that if European countries were US states, many of them would be at the bottom of the rankings in terms of GDP per capita, including the UK. Every country in Europe is poorer per capita than every other state except Idaho and Mississippi. The UK sits at the bottom between France and the gem state.
It wasn't always like this. Back in 2000, GDP per capita was higher than 14 US states and was similar to that of Ohio or South Carolina. Two decades later, the UK has dropped 11 places to have a GDP per capita that is closer to Arkansas.
UK GDP per capita has fallen over the past two decades to levels close to those of Arkansas Credit: John Finney photo/Moment RF
If these trends continue, by 2035 the gap between US and EU per capita output will be as wide as that between Japan and Ecuador today.
Guinea says the gap between the US and the UK will be more like the gap between Spain and Gaza.
Made in America
Bes There are no paid lunches. And in the world's largest economy, there are not so many long ones either.
According to the OECD, Americans spend 20% more time at work than their British counterparts, working an average of 1,811 hours a year compared to 1,532 hours a year. The UK is often described as one of the most flexible labor markets in Europe. But America's “at will” system makes two weeks' notice a courtesy, not a requirement.
Paid vacation is also not a legal requirement, although many companies offer 10 days as a standard. Ansell, who has worked in the US for ten years, says he still has learned that too much free time is bad.
“I think the longest vacation I've had since 2000 is about eight days. The thought of a two-week vacation is still a little weird for me.”
When Covid hit, America chose layoffs over layoffs, though government stimulus checks helped soften the blow of unemployment. In April 2020 alone, more than 20 million people lost their jobs, pushing the unemployment rate to 14.7%, the highest level since the Great Depression. But it also moved workers back to more productive areas of the economy. By contrast, British politicians have mostly pressed the pause button by funding payrolls for employees in existing positions.
The pandemic has had a huge impact on the workforce in both the US and the UK, but while America has seen a larger increase in unemployment, many Britons have stopped looking for work altogether.
UK Employment Status US Employment Status
Between the end of 2019 and early 2023, inactivity in the UK rose twice as much as in the US, especially among older workers aged 50 to 64, according to the International Monetary Fund. “A high level of inactivity due to illness has been a hallmark of the UK, despite a relatively low level of inactivity in terms of level,” the report said. “If inaction becomes structural, it could reduce labor supply and affect medium-term growth. In such a scenario, even if productivity grows twice as fast as in the pre-pandemic decade, the medium-term potential output will be mechanically lower than otherwise.”
A new report from the Institute for Employment Research, to be released this week, goes even further, blaming UK job centers for people not wanting to work. The proportion of job seekers applying to Jobcentre Plus to look for work in 2020 is the lowest in Europe. IES says its use has “dramatically dropped” over the past two decades as its focus has narrowed to people demanding certain types of benefits. People are also discouraged by the “any job” attitude, which increases turnover and deprives applicants of opportunities.
As a result, job seekers in other European countries are three times more likely to use employment services, and four times more likely in Germany. The IES think tank notes that this avoidance of employment centers cannot be explained by the greater use of private recruitment services in the UK. On average, 24% of British job seekers in both the EU and the UK say they have used private recruiters.
The UK Employment Service refuses jobseekers
It adds that “People in low-paying jobs who may want to help increase hours or progress, as well as (potential) second earnings in partner-employed households, receive little or no support.” There is also very little help for the self-employed or those who became economically inactive during the pandemic.
The government's own tax and spending authority warned this month that changes to the benefit system mean people are more likely to seek benefits where they don't have to look for work.
The Office of Budgetary Responsibility (OBR) said that “tightening conditions elsewhere in the system could lead to an increase in claims for unconditional disability benefits,” including a surge in mental health-related claims.
Failing to evaluate benefits face-to-face during the pandemic hasn't helped. “Various Covid easements” have seen the approval rate for disability benefits at the start of the pandemic “near 100 percent”, up from 55 percent in 2016-2017. The OBR notes that if disability claims had remained at 2016-2017 levels, “there would have been 670,000 fewer approved claimants.”
Tom Pursglove, Secretary of State for Disability, Health and Labor, says change will take time. “I know that we have a structural problem with our benefit system, where we have a significant number of people with disabilities and people with health problems who would like to try working,” he says. “I am regularly told we would like to try. In fact, we may have even spotted the opportunity. But the structural problem we have with the benefits system is that someone can try the role and fail, and then they will lose their eligibility and have to be re-evaluated to access support again. The danger of everything that interferes.”
The government has made plans to refocus handouts to focus on what people can do rather than what they can't. However, the Department of Work and Pensions acknowledges that there will be no change until the end of the decade. “We need to fundamentally overhaul the benefit system to get rid of this structural problem that we've taken on, but we also need intense employment support,” says Mr. Pursglove.
Health and Wealth
One area where the US is not as attractive as the UK is healthcare. Life expectancy in the US is lower, although healthcare costs are much higher. One reason is that health care is much more expensive, and although American employers often cover the cost of insurance, it is not universal. While 90 percent of people in America have some form of health insurance, the NHS means their share in the UK is 100 percent. ECIPE recognizes some of these differences in its analysis. “The fact is that the EU distributes its resources more evenly than the US and has a more generous welfare policy,” the document says. “In the EU, the top 10% own 36% of pre-tax national income, while the bottom half own 19%. In the US, the figures were 45% for the top 10% and 13% for the poorest half.”
But in recent years, the US has “become more European”, narrowing the social spending gap with the EU from six to four percentage points over the past two decades.
ECIPE's Oscar Guinea says this is a message for people who claim America is a richer but more ruthless place to live.
USD compared to USD 85,000 in the US Credit Fund. : TOBY MELVILE/REUTERS
“It's a 'wake up and smell the coffee' moment when the differences are too big to ignore. They can't just be dismissed by people who say, “It's because Americans work longer” or “It's because Americans are willing to put up with more inequality” or “Because Americans spend less on Social Security and social spending.” All of them are true, but over time they do not get worse. Inequality has been stable, the difference in working hours is stable. The US actually spends more on social security. But this growth gap is visible to everyone.”
Guinea is urging politicians to pay attention to regulation, which is much more stringent in Brussels than in Washington. He says the bloc also needs to be more ambitious. He cites the example of the Lisbon strategy, proclaimed at the beginning of the millennium with great fanfare. Its goal was for the EU to become “the most competitive and dynamic knowledge-based economy in the world, capable of sustained economic growth with more and better jobs and greater social cohesion”. However, little has been done since then.
Bowman says policymakers need to get back to basics because even worthy goals like net zero have become a distraction, he adds. Policy makers should spend less time addressing issues such as obesity, the gender and racial pay gap, and more time expanding the overall pie that will increase spending to achieve these goals.
“Economic growth is neglected,” he says. “I fully support decarbonization and recognize that this is a really important issue that we need to address. But what I don't know is that the way we're trying to solve this problem specifically considers its impact on economic growth. And I think if we recognized that there is a trade-off between how we approach net zero and economic growth, we might approach it differently.”
He uses zero as an example, where “each level of government has been tasked with developing a plan for its small area.” Even the Bank of England has its own 51-page climate change transition plan that will see Gov. Andrew Bailey oversee the installation of heat pumps on Threadneedle Street.
But Bowman says the plans don't even address basic questions like whether zero-emission homes would be good places to live. A recent viral photo showed how new safety and zero-emission building regulations for ventilation, energy efficiency and heating have distorted the way windows are installed in homes because glazing cannot exceed 25% of the total floor area. The government committee on climate change recently recommended a ban on roads that exacerbate emissions. Bowman says it's a disaster for growth.
“I find it a bit crazy that windows have to be a certain size to maximize zero benefits. The problem from a housing perspective is that if you build houses that people don't want to live in, then you limit the benefits of building them in the first place.”
Bowman and Ansell say improved mobility and housing are key. Ansell says: “The productivity gap we have is partly because when the UK has a booming region, it is very difficult to move to that area – unlike the US. People can't move to where there are jobs because there are no houses.”
Guinea says all of these policy proposals assume higher growth remains the answer to Europe's woes. “One of the reasons we compared Japan and Ecuador is because, in your opinion, which country is better prepared to deal with climate change? Japan or Ecuador? Economic prosperity matters if you want to face the challenges of climate change or an aging society. It will also allow you to move into an aging society and allocate more resources to public needs.”
Of course, living on both sides of the ocean has its pros and cons, as one person recently commented on an online Reddit forum. “Simplified, but: on a scale of 1 to 10, life in America is one if you are poor, and ten if you are rich,” they noted. “In England, four or six, no matter what. I'll take care of it.”
But as we know, there's little security in mediocrity.
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