Measuring productivity in services: Part 1 Public services

Many of those who see the title may ask themselves why they should be interested in the topic. I understand: arguably it is a topic for nerds. But, let me set the scene. Services of all kinds represent 75-85% of national income in most rich countries. Whether and how we increase the level of economic output per person employed in the service sector is critical to growth in living standards. During the 19th and 20th centuries it was the growth of productivity in manufacturing and other industrial activities that underpinned the great increase in living standards from 1800 to 2000. However, the manufacturing sector accounts for less than 10% of national income in many rich countries, so growth in manufacturing productivity has a declining impact on living standards. It is productivity in services that is critical for the future. That is especially important in countries like the UK which rely heavily on exports of services to the rest of world. While this may be a topic for nerds, it is also one will affect how your children and grandchildren will live in the remainder of this century.

Two cheers for HM Passport Office (HMPO). I applied for the renewal of my passport about two weeks ago and I received a new passport in eight days. This is a great improvement over the time a decade ago when the delays in processing passport renewals were so long that people were afraid of missing holidays or weddings. We should acknowledge and welcome the fact that some Government services are getting better. The same is true for DVLA renewals of driving licences or dealing with vehicle registrations.

However, I am a sceptic. After the initial surprise and gratitude at the speed with which the process was completed, I began to wonder what this really tells us about public services and how we measure productivity for services more generally. In this article I will discuss public services. This will be followed by an article looking at financial services that will focus in more detail on the transition from personal to digital services.

Public services are important because in 2024-25 they accounted for over 20% of gross value-added (GVA) - a standard measure of economic output. Health services represented about one-half of that total, but other public services account for about 10% of national output. HMPO says that it has about 4,000 employees, but that covers a lot more than just issuing passports. The organisation includes the General Register Office which deals with the registration of births, deaths, marriages, etc. Total public employment in the UK was estimated at 6.2 million in 2025 Q3 or about 18% of the total workforce, of which about 2 million were employed by central government excluding the NHS.

Measuring the output of public services is difficult. HMPO says that it issues about 6 million passports per year and we can make a rough estimate of the number of births, death, and other registrations. However, calculating the relative values of renewing a passport and handling an application for citizenship is difficult or arbitrary.

For most public services the default method of estimating output is to calculate the net cost of providing the service after excluding purchased inputs. This is equal to the sum of (a) wages and salaries including employment benefits, plus (b) actual or estimated rents for buildings, plus (c) the annualised cost of equipment and other non-property assets. To calculate these costs at constant prices, i.e. to estimate changes in the real value of economic output, nominal values are adjusted by standard wage, cost and other price indices.

There is an obvious problem with this method. Since employment costs account for 90% of total net costs, any attempt to measure productivity in providing public services is almost meaningless. If the average cost per employee increases in real terms, i.e. after adjusting for an index of wages, this means, by definition, that average productivity per employee has increased. Using this method of estimation, higher real wages translate directly to higher productivity. Perhaps, this may convince public sector statisticians but probably not outsiders.

An alternative method of measuring the economic output of services is to estimate what the purchasers are willing to pay for the services. This may be reasonable for haircuts, accountancy and restaurant meals, but it is more questionable for monopoly public services. Based on my records and other sources, the charge for renewing a passport increased from £21 in 1996 to £66 in 2006 to £72.50 in 2016 and £94.50 in 2026. At constant 2025 prices, these are £41 in 1996, £108 in 2006, £98 in 2016, and £93 in 2026. Using these costs as indicators of the value of HMPO’s output would imply a huge jump in the value of output from 1996 to 2006 followed by a gradual decline since then. I doubt whether many of those using HMPO’s services would concur with such an assessment.

Thinking about it, the process of renewing my passport was more onerous on this occasion than in past. It has been digitised by transferring the responsibility for entering and validating information from HMPO to the applicant. Renewing a passport is little more than an exercise in transferring information that is already stored in a database from one document to another one. The only complicated bit is obtaining, entering and validating a photograph that meets certain requirements. This is where my experience wasn’t so good, hence only two cheers.

I thought that I would simplify the process by using the Post Office service, which includes taking a photograph, administration and express delivery. However, HMPO rejected the Post Office’s photo even though the software, presumably approved by HMPO, said that the photo met all the requirements. So, I had to resubmit a photo, on the second occasion taken in photo booth with direct submission to HMPO. In this case, HMPO agreed with the photo booth’s software acceptance that the photo met HMPO’s requirements.

The point here is that HMPO rely upon software validation of passport photos but is either unwilling or unable to ensure that organisations that manage taking and delivering photos can rely upon consistency between their software and the validation standards used by HMPO. As my case illustrates, this is both annoying and leads to unnecessary expense. I cannot think of any reasonable security concerns that prevent the use of identical validation algorithms.

Quite apart from this unnecessary annoyance, this story highlights a wider point. As far as I can tell most of the improvement in the apparent productivity in handling passport renewals has been achieved by transferring much of the work to users of the renewal service. One can break down the steps of the process from HMPO’s perspective. Key steps haven’t changed though they may have been automated: (a) receiving the old passport and validating against the application for a new passport (using OCR & comparison with the embedded biometric data); and (b) printing and dispatching the new passport (using standard equipment and processes developed for the banking industry). The big change has been to digitise the process of combining personal information and photographs as well as validating photographs by transferring the work from HMPO to applicants.

In economic terms what HMPO has done is to substitute capital for labour. Instead of using people to process and validate passport renewals as well as to print and dispatch the new passports it has acquired or leased equipment to carry out these tasks. To implement the new processes, it has hired software designers and IT staff, who will be paid more – possibly much more - than those whom they replace.

All these changes are, by definition, treated as enhancing productivity if we measure the value of output in the manner described above, i.e. as the total cost of providing the service of renewing passports. There has been a decrease in total staff numbers accompanied by higher labour costs per employee plus spending on capital equipment. Implementing such changes across the public sector, in the manner recommended by any number of consultants’ reports, bureaucrats can point to their contribution to improving national productivity.

Are such gains real or merely a chimera? The case for arguing that it is an illusion is that no adjustment is made for the costs incurred by those who need to renew their passports or who rely on other public services, or for the value of the service provided.

Consider the example of waste management and recycling. There is a large commercial sector that specialises in managing waste streams which contain recoverable high-value materials – metals, glass, plastics, and even paper. Standard methods can be used to calculate the net value of such activities.

Local authorities are expected to deal with residential and small business waste streams that are unseparated and dominated by low-value materials. When incomes are low enough, scavenging is the unpleasant but economic response to the opportunity to recycle materials that can be recovered from unsorted waste streams. However, with higher incomes and alternative employment opportunities, the costs of recovering materials from residential and small business waste exceed their potential value. By far the cheapest option is simple to dump such waste in landfills, including the full costs of building and managing such landfills to minimise adverse environmental impacts.

Landfills are unsightly and sometimes offensive neighbours, particularly when wildlife scavengers take advantage of the opportunities that they offer. Various reasons have been advanced to justify reducing the amount of waste sent to landfills. The primary one is that recovering materials from unsorted or partially sort waste is necessary because of the scarcity of natural resources. This is a variant of the limits to growth hypothesis of the 1970s, which has long been dismissed by most economists but remains popular with greens and environmental catastrophists.

The imposition of targets for “recycling” of local authority waste has had two major results which affect how we measure the value of the public service provided.

First, local authorities require people to act as unpaid scavengers by separating waste streams into various categories of recyclable and non-recyclable materials. This is largely ineffective and highly inefficient because the subsequent agglomeration of differentially sorted streams undoes most of the potential benefits of sorting.

Second, the value of partially sorted recyclable waste is low, because the percentage of high-value materials is small and the labour cost of further processing is high. Hence, there is a strong incentive to export such waste to low-income countries for further processing. When this is discouraged, most recyclable waste is minimally sorted and most is used as a low-value fuel in Energy-from-Waste plants, i.e. incinerators.

The point is that a measure of economic output and, thus, productivity based on the costs incurred by local authorities in collecting and recycling waste is grossly distorted. The value-added at market prices produced by the unpaid and paid labour used at different stages of managing residential and small business waste is small and may be negative.

Measuring the output of and labour productivity in public services by calculating the net costs of providing such services is a practical decision made by statisticians because of the difficulty of measuring value-added at market prices. However, we should not delude ourselves into thinking that such a measure tells us anything useful about trends in labour productivity in the public sector.

It is too easy for public bodies, most of which operate as monopolies, to improve their notional productivity by transferring costs to the users of their services. That, of course, was a significant part of the logic behind the wave of outsourcing and privatisation in the public sector in the last two decades of the 20^th century. Unfortunately, it turned out that a public sector that was incapable of improving the way in which it operated public services was equally incapable of managing arranging by which others were employed to provide the same services.