1. UK labour productivity growth is about 0.3%pa, 2019-2024. US labour productivity growth is at least 1 percentage point higher over a similar period (see OECD ). So what would we have to do to get an extra 1%pa productivity growth?
2. Lets see this in terms of building more houses.
3. The rate of return on capital is around 10%. That tells you the extra output from one extra unit of capital. Let's convert that into a percentage: since the capital output ratio is about 3, then the percentage change from a 1% change in capital is 0.3%.
4. The UK has around 30m dwellings (25m in the England). Dwellings are about 40% of the UK capital stock. So to get 1 percentage point more growth we would need 12% more housing (0.3*0.4*12%=1%).
5. On a stock of 30m, 12% is 3.6m new homes. The government's target is 1.5 new homes over 5 years = 300,000 per year. Over the last decade we have been building around 0.8% of the stock which is around 240,000. So at previous rates, this objective would take us 15 years, at the new rate 12 years. That is, we would have to do 15 years worth of building in one year.
6. a passing note. Why do we care about these seemingly small numbers, changes from 0.3% to 1.3% to 2.3%? The answer is compounding. By the rule of 72, we can double output in 72/2.3 = 31 years with growth at 2.3%. With growth at 1.3% and 0.3% it takes 55 years and 240 years.
