The United Kingdom: Services and the Productivity Puzzle

How Britain's economy became dominated by services and finance, why productivity growth stalled after 2008, and the debates over causes.

The United Kingdom, the first country to industrialise, is now one of the most services-oriented economies in the world. Services make up around four-fifths of its output.

Services and finance

The City of London is one of the world’s leading financial centres. Britain is also strong in business services, law, higher education, creative industries such as film and music, and pharmaceuticals and aerospace. Manufacturing’s share of the economy has declined greatly since the 1970s.

The productivity puzzle

Before the 2008 financial crisis, UK productivity grew at around 2 percent a year. Since then, it has grown far more slowly, and much more slowly than the pre-crisis trend. Economists call this the productivity puzzle. It explains much of the weak growth in real wages since 2008.

Proposed explanations include:

Low investment by businesses and government.
Damage to the financial sector, once a source of productivity growth.
Slow diffusion of new technologies and management practices from the best firms to the rest.
Uncertainty after the 2016 Brexit vote, which may have held back investment.

Regional inequality

The UK has large differences between regions. London and the South East are much richer and more productive than many former industrial areas in the North, Midlands and Wales. Governments have announced plans to “level up” these regions, with mixed results.

The long tail of firms

Research by the Bank of England and others found that the UK has some very productive firms but a long tail of low-productivity businesses that are slow to adopt better technology and management. If the average firm caught up with the best, national productivity would rise substantially.

Thinking finance alone drives the UK economy

Finance is important, but it employs a small share of workers. Most British jobs are in health, retail, education, business services and hospitality, and productivity across these sectors shapes living standards.

Key takeaways

The UK economy is dominated by services, with the City of London a global financial centre.
Productivity growth has been very slow since the 2008 crisis, a puzzle for economists.
Low investment, slow technology diffusion and uncertainty are proposed causes.
Large regional inequalities separate London from many other regions.