22  All speeches are available online at www.bankofengland.co.uk/speeches  22  The UK faces perhaps no greater challenge, economically and socially, than its productivity challenge. Meeting that challenge would deliver benefits to workers in improved wages and skills and to companies in greater efficiency and profitability. It would also contribute to closing inequalities of income, wealth and opportunity which have rightly and increasingly pre-occupied policymakers over recent years. The UK has a rich, in some respects world-leading, endowment of innovation and talent. This is, however, unevenly spread. Developing an institutional infrastructure, which draws on the UK’s comparative advantage in innovation but which spreads its benefits more widely, would support the long tail of UK companies and the people who work for them. It would help close the pay and productivity gaps between the best and the rest, the present and the past, the in-crowd and the out. It would put the rhyme back into R&D. The returns to doing so are difficult to quantify precisely. As a thought-experiment, imagine the bottom three quartiles of the UK productivity distribution saw their productivity gap with the quartile above closed. That would boost UK levels of productivity by around 13%. 58  This would close a large part of the productivity  shortfall relative to its pre-crisis trend. And it would make inroads into closing the productivity gap with the US and Germany. In today’s prices, it would boost the level of UK GDP by around £ billion.
Few are those who can define it and fewer still those who can measure it. Yet it has entered the popular lexicon and with good reason: the one thing we do know is that productivity is crucial to our pay and living standards over the longer run. Productivity is what pays for pay rises. And productivity is what puts the life into living standards. History, distant and recent, makes this only too clear. It is no coincidence that productivity, pay and living standards have moved in lock-step over the past millennium – flat-lining for the first three-quarters before sky-rocketing in the final quarter - as each new industrial revolution has dawned (Chart 1). Pay and living standards have increased over fifteen-fold since 1750. Productivity explains why. More recent experience has been more painful. Since 2008, productivity in the UK has essentially flat-lined. This is almost unprecedented in the modern era, a “lost decade” and counting. And it has been mirrored, as in the past, in a lost decade for pay too (Chart 2). Inflation-adjusted pay has stood still since the crisis, something also almost unprecedented in the modern era. 1  This prolonged pause has become known as the productivity problem. In the UK, the problem is a big one by any historical standard. And it is cold comfort that the UK shares this problem with much of the Western World and a decent chunk of the emerging market world.