The single most important fact about the UK economy is that its productivity—and by extension its real wages—has remained almost flat since 2008.
The chart plots real wages in four countries before and after the financial crisis. Germany, once derided as Europe’s “sick man,” saw wages stagnate in the early 2000s but recover steadily after 2010. The UK traced the mirror image: healthy growth before the crisis which suddenly plateaued. A look beyond the pond towards the US is especially painful. US real wages grew roughly 18% from 2008 to 2024, whereas UK wages grew 4%. The outlier is Poland, where wages rose over 40% over the same period—a testament to EU integration and the catch-up growth it enabled.
The implication of lower UK productivity is that working-age adults in the UK must work more hours to generate income comparable to that in France or Germany. Historically, they do: UK working-age adults—like their Polish and American peers—work roughly 20% more hours on average than their French or German peers. Germany might have the highest labour force participation rate. It’s average hours worked per working-age adult are comparably low.
The LSE Diagnosis
Why have real wages stopped growing? It would be shallow to blame Brexit for events that preceded it. In 2008 no one could have foreseen Britain’s rupture with the EU. In 2013, the LSE published a landmark policy brief—in prominence comparable to the EU’s recent Draghi report—that offered three conventional explanations: human capital, infrastructure, and investment. These explanations are not wrong. But they do not fully explain the timing of the break, nor do they resolve the puzzle of why the UK specifically stagnated while peers recovered.
1. Human capital. The UK has one of the finest higher education systems in the world—second only to the US in Nobel Prizes—and produces more unicorn startups (Revolut, Wise, Monzo, Onfido, Autonomy, ARM Holdings, Nanopore) than any other European country. The LSE report rightly pointed to problems further down: longstanding weaknesses in adult basic skills, particularly in literacy and numeracy. Improvements to vocational training—as when Korea mimicked the Germanic dual model of on-the-job training—would lead to sizeable gains in the future. Lack thereof does not, however, explain the disappearance of positive productivity and wage growth as the conditions described were present both before and after 2008.
2. Infrastructure. The UK’s infrastructure deficit is real, testament to the UK’s current inability to build. Discussions over Heathrow’s non-existent third runway have spanned decades. HS2, the high-speed rail link between London and the Midlands, became a case study in cost explosion: over £100 billion for a project whose scope was eventually halved. The Lower Thames Crossing consumed over £1.2 billion in design and planning before receiving approval—its planning application reportedly ran to 359,866 pages. Hinkley Point C, the nuclear power station, has seen repeated cost overruns and delays.
The same problems also trouble housing. In 2024 the UK built 3.25 dwelling units per 1,000 residents, compared to 3.85 starts in France and 4.78 completions in the US. Only Germany, itself in the grip of a construction crisis, performed even worse at 3.01 completions per 1,000.
The binding constraint is planning: Hilber and Vermeulen (2016) showed that regulatory restrictions roughly doubled real English house price growth from 1974 to 2008, with prices in the South East an estimated 25–30% higher than they would be under even modestly less restrictive rules. The gap between prices and construction costs is extreme — Cheshire and Hilber (2008) estimated London office prices were marked up 220–810% above building costs by regulation alone, and Cheshire and Kaimakamis (2022) found housing scarcer still.
3. Investment. The UK’s overall investment rate fell from around 23% of GDP in the late 1980s to roughly 17% from 2000 onward. Business investment dropped from 12% to 9% of GDP over three decades. Current rates sit well below those of peer economies.
Critics of the previous Conservative government have argued that public investment has been too low. This may be true relative to France: government capital spending runs about one percentage point of GDP below French levels. But the comparison with Germany and the United States offers a different perspective. Against those economies, corporate and government investment rates are broadly comparable. The gap is dominated by significantly lower residential investment, instead: UK households invest just 4.3% of GDP in housing, compared to 6–7% in Germany and the US. This bears repeating. The single largest component of the UK’s investment shortfall relative to peers is residential investment by households. The evidence strongly suggests that a planning system which restricts homeowners’ ability to convert the existing housing stock and limits the supply of buildable land is the principal cause.
In summary, the LSE’s three factors—skills, infrastructure, investment—are real brakes on growth. But they share a revealing feature: the first is a longstanding condition that predates the productivity break, while the second and third are downstream consequences of a slow and procedural planning system that did not emerge suddenly in 2008.
Devaluation and an Export Puzzle
In this post, I will argue for another explanation of the UK’s productivity standstill.
Begin with a stylised fact about the exchange rate. There are two distinct episodes in which the pound deteriorated sharply against the dollar.
The time series reveals three regimes. Before the financial crisis, the Bank of England maintained higher interest rates than the Federal Reserve, attracting capital inflows and supporting an appreciated pound (averaging around $1.75). After the crisis, sterling settled at a new, lower level (roughly $1.58). The Brexit vote in 2016 delivered a further depreciation, pushing the rate to approximately $1.29, where it has broadly remained.
Simple trade theory offers a clear prediction: a 25% depreciation should make UK exports substantially cheaper in foreign-currency terms, boosting export volumes and improving the trade balance. Did it? The trade data, decomposed by sector from the ONS Pink Book, suggest otherwise.
Total UK exports grew from £268 billion in 2000 to £878 billion in 2023 in nominal terms. But relative to GDP, the trade balance failed to improve after either depreciation. The goods deficit widened from about 2% of GDP in 2000 to nearly 7% by the mid-2010s. A growing services surplus — driven by financial services, consulting and business services — partially offset this, but never eliminated it. The overall trade balance slightly deteriorated after 2008, and again after 2016.
High fixed costs and slow adjustment could explain why net exports in manufactured goods would rise only gradually in response to a cheaper pound — the standard identification problem in trade elasticity estimation. But these frictions cannot explain a complete non-response. To understand what happened, it is instructive to look more closely at energy-intensive manufacturing, the sector where the trade balance deteriorated most sharply after 2008.
An Overlooked Channel of Productivity Stagnation: Energy Prices
The reason British industry—unlike services—failed to capitalise on the depreciated sterling is, I believe, that UK industrial energy costs rose sharply relative to competitors over the same period, offsetting or exceeding the competitiveness gain from the weaker pound.
Since the mid-2010s, British industry has faced energy costs close to 50% above the International Energy Agency average. Relative to the United States—which consistently has the lowest industrial energy costs among advanced economies—British industry pays more than double.
The chart plots industrial electricity prices excluding taxes, which gives a better sense of the comparative burden on heavy industry. This chart also shows: German industrial electricity prices didn’t rise in comparison to peer countries until very recently. This is, because Germany’s industry was largely exempted from the cost of the country’s energy transition. Germany’s Energiewende imposed substantial levies for renewable energy subsidies onto household electricity bills, but its system of exemptions (Besondere Ausgleichsregelung) shielded energy-intensive manufacturers. UK industry enjoyed no comparable protection from increases in environmental levies until compensation schemes arrived—late and partial—in the mid-2010s. This, I believe, explains why German goods manufacturing could thrive until very recently whereas British goods manufacturing could not. The UK’s share of global manufactured exports declined over a period when, by the logic of exchange rate adjustment, it should have risen.
Why did UK energy prices rise so much?
Two reasons explain why UK energy prices have exceeded their European peers.
First, the UK’s fleet of nuclear power plants is rapidly coming offline without sufficient replacements under construction. As a result, electricity production has plummeted and gas-generated electricity almost always dictates the energy price as the marginal unit of supply required to meet demand. Crucially, gas has higher marginal cost than coal or nuclear. For a country comparison, a UCL study by Zakeri and Staffell states that “coal-based generation shapes electricity prices more than 70% of the time in Poland, Czech Republic, and Bulgaria, and approximately 48% in Germany” in 2021.
Second, the cost of connecting offshore wind power to the UK grid has been levied on electricity prices via network charges. With the expansion of wind power, these levies have risen substantially: 70% Britain-wide between 2019 and 2023 versus Germany (29%), Italy (20%), and France (16%). The cost is substantial as network charges account for 30-40% of businesses’ total electricity bill. And while Germany offers energy-intensive industries up to 90% compensation on network charges, the UK provides only 60%. (This level is set to rise to 90% from April 2026).
What would it take to lower the UK’s high energy prices at this point?
Much debate centres on the correct energy mix. This misses the point. Even countries where energy is cheap rely on diverse sources: China added wind power accounting for roughly 20% of new energy capacity between 2020 and 2024. And China built nuclear power plants—at a fraction of the UK’s cost. What is biting the UK is not the mix but the cost—across technologies, from wind to nuclear. The cost of building almost anything in the UK has got out of hand.
Take wind power subsidies. Contracts agreed today will lock in elevated electricity prices for the next twenty years—the duration of contracts for difference. This all but precludes the UK from participating in the AI-driven transformation of the economy, which will demand large quantities of cheap electricity to power data centres at scale. With services increasingly becoming compute-intensive, those future high energy prices will then undermine the UK’s remaining comparative advantage.
To quantify the cost, consider the latest auction run by the UK government (Allocation Round 7, conducted in January–February 2026). This resulted in strike prices of £94.6/MWh for offshore wind. Against a wholesale electricity price of roughly £75/MWh, that is a 26% premium over a price that is itself, by historical standards, abnormally high. (Why the £75/MWh benchmark? UK Summer-26 baseload futures are trading around £69/MWh, while the average wholesale price in 2025 exceeded £80/MWh.) The 26% premium, moreover, is not the entire cost of subsidising wind power. First, one must factor in the concurrent rise in network transmission charges—the cost of connecting new plants, especially those in remote Scottish locations, to the grid. Second, while the contract for difference guarantees generators the strike price for all their contracted output, not all of that output reaches consumers. In 2024, approximately 10% of wind-generated electricity had to be curtailed due to grid congestion, overwhelmingly on the Scotland–England transmission boundary. In 2025, that figure rose to 13%. In those cases, consumers effectively pay twice: once to compensate the wind farm for not generating, and again to dispatch gas plants to supply electricity where demand actually exists.
If there is a glimmer of hope in the latest allocation round, it is this: solar cleared at £67.6/MWh in 2026 prices—substantially below offshore wind. Even at British latitudes, the sun may be a cheaper bet than the sea. Pursuing solar, not wind, wouldn’t put Britain back on a competitive footing—a magical planning reform that would allow the UK to build nuclear at French or ideally Korean or Chinese cost would be required—but would represent an improvement on current energy policies nonetheless.
Puzzle solved?
I’m not the only one to wonder where the UK economy took a wrong turn. The question is difficult to overlook for the pain is real. Since our family arrived in the UK five years ago, my annual gross salary rose by 15%, the majority of which goes to HMRC. Meanwhile, rent (indexed to inflation) rose by 22%. If it weren’t for additional teaching, our growing family’s disposable real income would have fallen to 90% of what it was 5 years ago. Getting our foot on the housing ladder? Who are we kidding?But while the diagnostic is shared—the country isn’t getting richer anymore—the causal analysis remains contested. In this post, I have focused on uniquely British problems. But stagnant productivity growth has befallen other parts of Europe as well.
Pieter Garicano at the formidable Works in Progress blog thinks that rigid labour markets plausibly explain much of continental Europe’s stagnation—in France and Germany, letting an employee go costs four times what it does in the US, making the kind of high-risk experimentation that software demands prohibitively expensive. But this explanation has less purchase on the UK, which had flexible labour markets throughout the period of its productivity slowdown. Others point to financial regulation. The post-2008 Basel III accords tightened bank lending, and the bite was sharper in the UK where businesses depend on banks rather than capital markets. This explanation faces objections from both theory and practice. In theory, the Modigliani-Miller result suggests that how a bank funds itself—debt or equity—should not much affect its lending, provided we account for the tax advantage of debt. In practice, the UK’s financial sector is doing just fine. My colleague Maarten De Ridder argues that the rise of intangible inputs—software, data, organisational capital —eventually raises barriers to entry, slowing dynamism and growth. While compelling as a theoretical framework for global trends, this explanation does not account for the US-UK divergence. US markups appear to have risen by at least as much as in the UK. Yet in comparison to the UK, the US looks like a productivity miracle. At the end of the day, economists like to think about incentives (as in equity rules, labour laws and softening of competition). This is my bread and butter as a theorist—it is where economics is beautiful and counterintuitive. Yet when I think about the UK’s productivity shortfall I think—in spite of my training— about the physical world first.
For productivity and incomes to rise, economic activity must be allowed to transform the physical world. Services alone cannot grow the economy where politics denies the supply of houses, power stations, railway lines, runways, tunnels, or competitively priced industrial electricity. Until that capacity is restored, wages will remain low and workdays be long. One can only hope that other countries do not wish to follow such a path.
