Stefan Stern: Britain will never prosper if we don't break the low pay low productivity cycle

It is almost symbolic: over the course of the next four weeks a group of highly intelligent, well educated people will expend a lot of energy travelling around the country, making speeches, posing for the cameras, and will shift the eventual election result quite possibly hardly at all. This is, perhaps, not a very productive use of time.

And yet the biggest economic, political (and management) problem facing the UK is our stubbornly poor productivity. Without greater productivity nothing good can happen. The deficit will remain high as tax receipts disappoint. Wages will remain low as employers will be reluctant to pay for output that just isn't there.

And quality of life will not improve as too many of us will be stuck in non-productive, unrewarding jobs that do not pay enough... and so on. Improve productivity and we can improve everything.

The recent figures from the Office for National Statistics (ONS) were bad. There has been a bleak "productivity miracle" in the UK in recent years: in spite of new technology and jobs growth it has hardly picked up at all. UK labour productivity as measured by output per hour fell by 0.2% in the fourth quarter of 2014 compared with the previous quarter, the ONS said. Worse, "the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period".

In fact this has been a long-standing problem. Harold Wilson spoke about inadequate training and skills shortages in his 1963 "white heat of technology" speech. Over 50 years later some of the fundamental weaknesses remain. As Jeremy Warner reported in the Daily Telegraph recently: "On some measures, Britain is now around a fifth less productive per worker than the G7 average, and a jaw dropping 40% below the US."

And yet we see high levels of employment and a return to GDP growth. So what is going on?

The problem of labelling productivity

Perhaps it is worth trying to define productivity. While the ONS refers to output per hour, other measures could be used. A new paper called Productivity: Managing And Measuring A Workforce, written by the Aberdeen Group for the Kronos consultancy, lists several alternative measures: revenue per full time employee, service level achieved, profit per full time employee, sales quota achieved, human capital return on investment and so on.

That variety of labels perhaps gives us a clue as to why this remains such a knotty problem. We may not always know what productivity looks like. In an economy dominated by service industries "output per hour" is a problematic concept. How do you measure the productivity of a "knowledge worker"? In the public sector this gets even more complicated. A teacher with a larger class size may technically be more productive, but at what cost to the quality of education? Hospitals that increase their "through-put" of patients, or who employ fewer nurses, may look more productive on paper. But prematurely released patients will be back for more treatment, and neglected patients may die. This is not the sort of productivity we should be aiming for.

The economist George Magnus argues that the British problem is not so much with skills – our workforce is not badly educated or under-trained – but it is poor management and work organisation that is holding us back.

Thus the term "total factor productivity", which takes account of these matters, is the relevant one. Magnus's argument is backed up by a vast LSE study led by Prof John van Reenen and colleagues into management practices, which also pointed to basic management failure as a significant factor in persistent underperformance in the UK.

This question of productivity could not be more important. The more optimistic forecasts for the UK economy offered by the Office for Budget Responsibility depend on a return to productivity growth. Without it growth will slide back. And yet still economists are unclear as to what our productivity performance will be like in years to come. As Chris Giles wrote in the FT recently: "We are therefore left with the extremely unsatisfactory position that weakness in productivity growth is the most important known unknown for Britain's economy."

Better management is one thing. Better pay is another. And perhaps pay will have to rise before productivity will. That is an unpleasant thought for managers. But the low pay, low productivity cycle has to be broken somehow. McDonald's and Walmart have both just committed to raising the low pay rates of their staff.

The Nobel prize-winning economist Paul Krugman commented in the New York Times: "Decently paid workers tend to do a better job, not to mention being less likely to quit and require replacement, than workers paid the absolute minimum an employer can get away with. As a result, raising the minimum wage, while it makes labour more expensive, has offsetting benefits that tend to lower costs, limiting any adverse effect on jobs."

We have to crack this. Without better productivity we will fail as an economy and as a nation. It is too technical a subject to be discussed during the general election campaign. But nothing matters more.

Stefan Stern is a business, management and politics writer. He writes for The Guardian and The Financial Times and is a visiting professor at Cass Business School.