Small firms could hold the answer to Britain’s growth puzzle

Britain’s productivity boom may be hiding in plain sight

Official figures suggest Britain has been trapped in a productivity slump since the financial crash. But millions of small and microbusinesses are difficult to measure and much of the economic and social value they create may be missing from the statistics. Britain could be performing better than we think — from the bottom up.

The Productivity Puzzle

Productivity is a conundrum. It has been exercising the minds of economists and statisticians since the financial crash in 2008. However, it may be more robust than we thought, and small and micro businesses are the key.

The ONS (Office for National Statistics which gathers our official figures in the UK) and most economists use ‘productivity’ to mean how much output we get for every hour worked. It’s a measure of efficiency, not effort. If a business produces more value with the same hours, productivity rises. If hours rise faster than output, productivity falls.

Measuring this stuff is important and difficult. The Resolution Foundation think tank says its figures tell a more positive story for recent years than those from the ONS. The Resolution Foundation dares to suggest that we may finally be coming out from under the shadow of 2008. That claim follows the London School of Economics saying something similar, and economists at Morgan Stanley say the UK is now in “an OK place”.

The micro businesses count

The big problem is counting the productivity of our millions of micro businesses. It’s like nailing jelly to a wall. What’s the real output of the smallest firms, the people who run several micro businesses, have adjusted to hybrid working, are digital micro‑enterprises, or indulge in informal economic activity? Their productivity has major implications for the economy, and for communities and wider society too. However, they’re difficult to engage with, have no time to respond to requests for information, and so go uncounted.

Official productivity figures may be underestimating real performance

Recent ONS research shows that productivity estimates change significantly depending on the data source used.

Non‑traditional measures of productivity; the measures of value contributed beyond the standard output‑per‑hour figures, such as wellbeing, innovation, environmental impact, and social capital, give a fuller picture of how organisations create long‑term value. They show stronger performance than traditional jobs measures.

Data from individual firms show that there’s a widening gap between high‑productivity and low‑productivity firms meaning averages hide strong performers.

All this adds up to a UK that’s more productive than official figures suggest, especially in sectors where output is hard to measure (digital, creative, micro‑enterprise, hybrid work, owners of multiple businesses) and in terms of social value.

A stronger economy

The UK’s “productivity puzzle” may be partly a measurement problem, not a performance problem. This matters because productivity is the single biggest driver of long‑term living standards and that driver could be stronger than thought.