Britain's productivity gap with G7 peers widest in 20 years

British workers are producing considerably less per hour than the average worker in other major economies, resulting in the biggest productivity gap for two decades.

Official data on Wednesday showed that output per hour worked in Britain last year was 16 percentage points below the average of other G7 industrialized countries.

A breakdown by country shows British productivity was 29 percentage points below that of the United States, 24 percentage points below that of Germany and France, and marginally below that of Canada and Italy. Only one nation - Japan - scored worse.

The findings highlight the unusual behavior of Britain's labor market since the financial crisis. In contrast to the recession of the early 1980s when firms shed workers and unemployment soared, since 2007 companies have been reluctant to reduce headcount and workers have accepted below-inflation wage rises.

This so-called 'productivity puzzle' has big implications for the guidance the Bank of England has given on the future path of interest rates.

The BoE has pledged not to raise borrowing costs before unemployment has fallen to 7 percent - something it does not think is likely to happen before 2016 as it expects existing workers to become more productive before new ones are hired.

However, some economists say Britain's productivity took a permanent hit because of the recession, and reckon unemployment will fall faster.

"The extent to which the weakness in the UK's productivity has been structural rather than cyclical has vital implications for the economy's growth potential and for policy," said Howard Archer at IHS Global Insight.

(Reporting by Christina Fincher Editing by Jeremy Gaunt)