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Technical Note for PSA 1

URN No: 02/1613/A1

DTI PUBLIC SERVICE AGREEMENT 2003-2006
TECHNICAL NOTES

PSA Target 1. Demonstrate progress by 2006 on the Government’s long term objective of raising the rate of UK productivity growth over the economic cycle, improving competitiveness and narrowing the productivity gap with the US, France and Germany.  Joint target with HM Treasury.

Definitions and data

Productivity: Two measures of productivity are used in our assessment: output per worker and output per hour.  Output per worker is calculated by dividing GDP by total LFS employment, while the methodology for calculating output per hour is set out in Economic Trends 570, ‘Introducing new and improved labour productivity data’ by Chris Daffin.  Further information on both measures, including the precise definitions, the data used and the methodology for compiling international comparisons is also detailed in Economic Trends 577, ‘International comparisons of productivity’ by Craig Richardson.  These data are published on the National Statistics website.

Output gaps:  In order to take into account countries’ economic cycles in our assessment, it is necessary to use output gap data.  These are provided for France, Germany and the US by the OECD and are published biannually in the OECD Economic Outlook, Annex, Table 11. 

UK productivity growth over the economic cycle: Estimates of trend productivity growth for the UK are published in the Budget and Pre-Budget Report.  These are based on LFS employment and hours data.  For the latest assessment see Table B3, Annex B: The Economy, Budget 2002, April 2002.  The full methodology is outlined in ‘Trend Growth: Recent Developments and Prospects’, HM Treasury, April 2002.  Note that these estimates are based on National Statistics data.

Competitiveness: The basic measure of improved competitiveness is taken here to be improved productivity.  The Government also monitors competitiveness indicators on an annual basis in order to benchmark UK performance against our major competitors.  

Meeting the target

When measuring the target, two issues are relevant: that average UK productivity growth has increased over the economic cycle and that the productivity gap between the UK and the US, France and Germany has narrowed. It should also be noted that estimates of both productivity growth and the productivity gap are subject to measurement error.  

… raising the rate of UK productivity growth over the economic cycle

This part of the target stipulates that UK productivity growth must increase over the cycle.  Consistent with how progress towards meeting the Government’s long-term objective of raising trend output growth is measured, estimates of trend productivity growth will be used. 

Baseline timing: Trend productivity growth is compared between two economic cycles; the first to occur before the PSA period and the second after.  The UK economic cycle is defined as a period during which the economy, starting from a point when it is judged to be ‘on-trend’, moves first through a phase when it is above (below) trend, followed by a phase when it is below (above) trend, before returning to an ‘on-trend’ point.  The last point when the economy is judged to be ‘on-trend’ is 2001 Q3. 

It should be noted that, if the depth and/or length of a cycle changes markedly over time, then it may not be possible to make a reliable or timely assessment.  Should this be the case, then it shall be reported why it is not possible to produce an assessment on the basis outlined above, at that time, and whether an assessment on an alternative basis can be made.

Demonstrate progress by 2006: Progress will have been made if the rate of trend productivity growth is estimated to have increased between the two cycles being compared.

… narrowing the gap

National Statistics publish international comparisons of productivity (ICP) data.  These can be used to assess whether the UK has made progress in closing the productivity gap with the US, France and Germany.  It will be necessary to take into account the comparator countries’ economic cycles.  This will be done using OECD estimates of output gaps.

Baseline timing:  Performance against target shall be measured at the end of the PSA period.  In practice this means that the latest year against which we will measure performance will refer to 2005, reflecting the latest published data available in 2006.  If countries’ economic cycles evolve in a way that makes such an assessment impossible, then this will be reported.

Demonstrate progress by 2006:  The assessment of performance against target will report each country’s outcomes, relative to the UK, on both measures of productivity: per hour and per worker.