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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.
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