A surprising proportion of companies fail to understand that low labour productivity is a cost. There is both low utilisation (are they working for the full hours for which they are employed) and low productivity (are they producing the amount of value they should be per unit of labour). The sad fact is that many do not realise the financial impact of low utilisation or labour productivity for companies. Keeping people busy is one challenge but producing a product or service with an increasing amount of labour is another. So, as economic growth falters, let’s look at the labour productivity challenge again.
Labour productivity
Labour productivity is the amount of output, broadly defined as economic value, for a given amount of labour. This means that an efficient company and an efficient economy requires more output (value) per unit of labour or less labour per unit of output (value). Teams that slack on the job never achieve 100% utilisation, which means that their labour creates less output (value) than it should. Similarly, over-staffed teams, functions and divisions face growing labour costs, tilting the productivity metric downwards. Furthermore, processes, systems and siloes drag on economic value.
The UK measures gross value added (GVA), which stands at around £77k per UK worker. At the end of 2025, it was around +2.4% above the pre-pandemic output per worker from 2019. The summary is that it has increased but not rapidly. Some of this increase may be due to price increases by firms, masking an underlying reduction in utilisation (effort) to produce the same output. So, let us look at the financial impact.
Financial impact of low labour productivity
As artificial intelligence (AI) replaces some routine tasks, this may drive increased productivity. This is because more output should be possible per worker and per hour worked. Unsurprisingly, aside from profit and cashflow benefits, this may explain the optimism built into the share prices of many companies with large workforces. However, since we know that a high proportion of AI-related investments fail to deliver the promised return, only time will tell. All Governments seek to grow GDP and the resulting taxes collected to fund public services and pension commitments. One way to do that is to find ways to get companies to grow and/or to also boost productivity.
A company with a worsening output (GVA) per worker or per hour worked is probably either experiencing a slowdown in order intake or a slowdown in people power. The former may be as a result of macroeconomic conditions and geopolitical instability. The latter may be due to anything from management and culture to systems and procedures. A slowdown in output, if rooted in people, makes operations more costly. It also makes your relative cost base higher than your competitors. Unfortunately, this is a self-fulfilling prophecy that leads to lower competitiveness. In summary, worse labour productivity, when it is within your gift, is financially disastrous. When your order intake is declining, you also need to increase output per worker and per hour.
Labour productivity in focus for companies
Many companies view their cost base as relatively ‘fixed’ aside from some variable costs that they can control and suppliers that they can negotiate with. However, the largest element of that cost stack for many businesses are people and buildings. With ongoing reductions in the occupancy of office space, it would seem that the latter has been largely addressed. The former is a challenge that often results in some ‘helicopter’ decisions such as to cut bonuses. Such tactical, short-term decisions don’t make much of a dent in the wage bill. With the increase to employer national insurance contributions (NICs), many have tried to reign-in pay rises. Despite this, private sector wage growth averaged 3.9% at the end of 2025, slightly ahead of inflation at 3.5%.
So, if wages and payroll taxes have increased and output per worker fell -0.5% (or -0.2% per hour) based on estimates, it presents a challenging dilemma. If headcount and wages are not brought under control, underlying profitability must be challenging for many. As a result, this may expedite the rush into AI with the promises of efficiency gains and automation. In the US, for example, some analysts suggest that around 3,500 jobs were lost every day since the start of 2026. Many believe that this trend will only accelerate during the year, which decouples GDP growth from employment. Some recent neuroscientific research suggests that employees need to be confronted more often about what truly motivates them. Have we again forgotten that employee motivations have shifted since the pandemic?
Correcting the financial impact of low productivity
Clearly, depending on the jurisdiction, rapid reductions in headcount are impossible. Similarly, in most companies, it is challenging to deliver a much greater output per worker or per hour. In many cases, firms resort to price increases to offset the slump. Price rises are a strategy with a finite time horizon, unless you are one of the only suppliers of a product or service. Ongoing price rises motivate your customers to seek alternatives. Also, the relative competitiveness of the industry comes into greater focus. A rival that has increased labour productivity will deliver more output (GVA) per worker or hour worked. This makes them more competitive and able to undercut you for bids, tenders and requests for pricing (RFPs). Sure, you may have other advantages, but a material cost difference cannot be ignored.
The other alternative is transformation. That is, a focused and sustained effort on the delivery of capabilities using fewer workers or hours worked to deliver the same or greater output of value. Improved motivation, leaner processes, system automation or new technologies are just a few of the ways that this may be achieved. Controlling travel expenses, reducing training or cutting the free tea and coffee will make a minimal impact. Remember, a manager with a basic salary of £50,000 could cost you anywhere between £70,000 and £100,000 (including taxes) depending on their total benefits package. Therefore, labour productivity should be a priority against the current economic conditions.
Assistance with assessing the financial impact
Here at Think Beyond, we have experience of dealing with transformation and the business cases that underpin it. Many organisations are trying to carry on as before despite waning productivity and international competitiveness. The tectonic plates are shifting and only the bold will make it. Therefore, let us identify the opportunities together, planning for success and executing at pace.
If you would like support on your project, please reach out to us via our website. Alternatively, here is the link to a summary of what we offer and to which sectors we generally work.
Finally, why not read a related article about the challenge of getting workers back into offices.