The Productivity Blind Spot: Why UK policymakers can’t afford to ignore low-wage sectors
Tanya Singh explores how UK policymakers can crack the productivity code in the foundational sector.
UK productivity remains sluggish. The so-called "productivity puzzle"—the persistent failure of output per worker to grow as expected—reveals deeper structural weaknesses. The foundational economy is no exception —the essential but lower-paid non-tradable sectors like retail, social care, hospitality, and transport that sustain daily life and employ millions.
As Labour refines its long-awaited industrial strategy—now delayed until June—it has an opportunity to reassess national priorities. So far, and yet again, sectors like life sciences and advanced manufacturing seem to have taken centre stage (see Invest 2035), but overlooking low-wage, high-employment sectors risks deepening inequalities and weakening economic resilience. Boosting productivity in these low-wage industries is not about shifting focus away from high-productivity sectors, but recognising that a modern economy depends on both.
As this blog calculates, the UK’s underperformance in foundational sectors costs the economy at least £105 billion. Productivity in these sectors lags behind OECD peers, but more concerning is the sharp local disparities within the UK. Why? Could it be weak competition, slow digital adoption, poor management, or outdated skills strategies? And crucially, what policies could drive real change in these sectors that keep the country running?
Falling behind, failing to catch up
Closing the UK’s labour productivity gap in low-wage sectors could deliver far greater economic gains than widely acknowledged. In 2021, the UK ranked 22nd out of 28 OECD countries, with output per hour at $30.58—half that of Luxembourg ($61 per hour). Among the G7, it fares no better, sitting last out of five (where data is available), while Germany leads at $44.78 per hour.
The UK’s decline has been stark and persistent. Before the financial crisis, it ranked 14th in the OECD; by 2019, it had slipped to 19th, and today it stands at 21st. Raising productivity in low-wage sectors to the OECD average of $40.81 per hour would add $126 billion (£105 billion) to GDP—a shift that could boost wages, improve living standards, and strengthen economic resilience.
But low productivity levels are only half the story. Growth rates paint an equally troubling picture. Between 2009 and 2019, productivity in the UK’s low-wage sectors grew by just 0.7% annually, lagging behind Canada (1.6%), Norway (1.94%), Germany (1.37%), the Netherlands (1.66%), Italy (1.17%) and France (0.94%). These figures suggest that not only is the UK behind, but it is failing to catch up.
Fig 1. Labour productivity in low-wage sectors in UK far lags behind other OECD economies Note: The data represents labour output per hour in low-wage sectors (defined as wholesale and retail trade, motor vehicle and motorcycle repair, transportation and storage, and accommodation and food services) for the year 2021. Figures are in US dollars per worker, PPP-adjusted, at constant 2015 prices.
Fig 2. Labour productivity in low-wage sectors in UK has shown no signs of convergence with the rest of G7 Note: The data represents labour output per hour in low-wage sectors (defined as wholesale and retail trade, motor vehicle and motorcycle repair, transportation and storage, and accommodation and food services). Figures are in US dollars per worker, PPP-adjusted, at constant 2015 prices.
Research from Joseph Rowntree Foundation (JRF) six years ago found an important pattern: countries ahead of the UK in productivity for low paid sectors were more likely to invest in workforce training, adopt stronger management practices such as performance-related pay, make better use of ICT, and rely less on temporary contracts. Clearly, the organisation and management of low-paid work are critical blind spots in UK policy.
Geography of low-wage sector productivity
As concerning as the UK’s global productivity gap is the stark inequality within its own borders. In London alone, low-wage sector productivity ranges from £16.67 per hour in Haringey to £56 in Lambeth. Sectoral composition explains some variation, but why does productivity within the same low-wage industries differ so drastically across the country?
Fig. 3. Productivity in low-wage sectors varies significantly across England
Note: The data represents output per hour in low-wage sectors (including wholesale and retail trade, motor vehicle and motorcycle repair, transportation and storage, and accommodation and food services) for the year 2022. Figures are in pounds (£), at current prices.
One possible explanation is occupational mix—perhaps Lambeth has more retail managers while Haringey has more frontline staff. But our analysis shows this accounts for just 18.5% of the variation, meaning the real drivers lie elsewhere—possibly business practices, digital adoption, and local economic conditions.
Regional price differences could also be a factor. The ONS acknowledges that unmeasured price variations influence subregional productivity rankings. But that alone can’t explain the stark disparities within the same regions, as seen in the data. If prices were the main driver, we wouldn’t see such extreme productivity gaps between neighbouring areas.
Cracking the productivity code
The UK’s persistent productivity gap in foundational sectors raises pressing questions: What drives economic performance in these sectors? Why do some areas thrive while others lag? The truth is, we don’t fully know. But there are some areas of interest that could potentially lead us to some answers.
A key factor may be competition—or rather, the lack of it. In a well-functioning market, competition should incentivise businesses to improve efficiency, adopt new technologies, and offer better working conditions to attract and retain talent. It forces firms to innovate, invest in productivity-enhancing measures, and respond to consumer demand with higher-quality services. Weak competitive pressures in local markets may stifle innovation and efficiency, but how exactly does competition shape productivity? Are high barriers to entry the main obstacle, or do deeper structural issues play a larger role?
Technology is another piece of the puzzle. The UK excels in high-tech sectors, but digital adoption in lower-wage services remains patchy. Simply investing in tech isn’t enough—barriers to adoption, whether firm size, management quality, or sectoral constraints, must be tackled. And do digital tools deliver the same productivity boosts in foundational sectors like retail as in manufacturing or finance? Instead of assuming automation and AI will drive growth, we need targeted research to determine where tech interventions are truly effective in this case.
Skills are often cited as a solution, but is a lack of skills the real bottleneck in foundational sectors? And if so, what kind of training makes the biggest impact—technical expertise or better management practices? Does upskilling translate into higher wages and better jobs, or do structural weaknesses limit its impact? Research suggests poor management skills might be a key issue—economists John Van Reenen and Nick Bloom have linked the UK’s productivity struggles to low-quality management.
Beyond this, how does ‘place’ shape productivity? If areas with similar industry-occupational mix perform differently, local factors clearly play a role—and deserve closer scrutiny.
Reframing the productivity debate
Low-wage sectors have rarely been a priority in industrial strategy or productivity debates. Yet, if we can close some of the gaps in productivity in these sectors - both within the UK and those with other nations - we can make a major contribution to overall economic performance, all while tackling the UK’s broader productivity and inequality problem. Crucially, these inequalities should not be seen as barriers, but as opportunities—evidence of what can realistically be achieved.
This responsibility can't rest solely with central government. Local players are key—especially in shaping Local Growth Plans that tackle place-specific challenges. Any industrial strategy must sit at the intersection of place and sector performance, making local and subregional interventions central. National policy alone won’t cut it—growth must be built from the ground up as well as the top down.
The precise policies needed to achieve this remain an open question and an area for further research—one that we will explore in greater depth in the coming months. What is clear, however, is that these foundational sectors must be central to the government's ambition of driving economic growth nationwide.
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