Unlocking Productivity Growth: Can Britain Work Its Way Out of Stagnation?
The upcoming UK General Election means there is no shortage of politicians talking about
jobs and growth. Both Conservative and Labour Party’s whole economic strategies are
based on achieving “growth”. But with low unemployment and high vacancies, creating
jobs isn't the main challenge. The real problem lies in stagnant productivity. This article
explores the dilemma facing the next government: how to achieve true growth amidst a
shortage of skilled labour and a sluggish economy. It delves into potential solutions, from
boosting activity rates to increasing investment in crucial sectors and analyzes the
proposed plans from both Conservative and Labour parties. What part can labour market
policy play in unlocking productivity growth.
We are in the middle of a General Election campaign in which both Conservative and Labour
Parties have adopted a central aim of “growth”. Indeed, without growth, it is common
consensus amongst economists (including the respected Institute for Fiscal Studies, IFS)
that the current budget position will mean either significantly increased taxes or reduced
expenditure, whichever party forms the next Government
Political parties are used to arguing for “growth” but, in the past, this has always been about
creating jobs and dealing with unemployment. Right now, we appear to be in a situation
where this is the least of our problems. Though there are recent signs of a slight ‘cooling’ of
labour demand, we have pretty consistently low unemployment and high vacancy rates. We
do not appear to have the available labour force to create growth without a very significant
increase in either:
Productivity: or
The activity rate (proportion of working age people working) or hours worked per worker: or
Net immigration:
or two or all three of these
The UK has had very poor productivity performance over the last decade, our activity rate
has recently fallen and both of the main parties aim to reduce net immigration. “Growth”
will therefore present severe problems for the next Government.
Both the main parties have proposed some action around the activity rate, the
Conservatives getting tougher on (and providing more support for), the rising “inactive”
population and an increase in early years education and Labour an even bigger increase in
early years provision, together with careers and job centre reform and a “new deal for
working people/making work pay”.
Neither party talks much about the need for productivity growth! Yet it is only an increase
in productivity and/or the activity rate which will increase GDP per head and hence real
incomes and real new wealth to pay for public services. If GDP goes up by 1% but the
working population increases by the same, then the GDP growth will have no effect on
incomes or the ability to pay for public services. Indeed any increase in GDP which is lower
than the increase in working population is tantamount to a recession.
So any Government has no choice but to increase the activity rate (to provide more labour
and to increase GDP per head of population) and to increase productivity (to increase GDP
per worker and in turn, per head of population). And these two together must increase by
more than the rate of growth in the working population which last year was 2% (600k+) and
is expected to be something like 1% for the year we are in now. These numbers are
admittedly crude but they illustrate the sheer size of the task. Massive programmes will be
needed aimed at:
Improving the activity rate (and average hours worked) for both men and women, young people and those over voluntary or statutory retirement age, including the long term sick. Early years education/childcare is definitely one strand of this; another is reducing long-term sickness, which accounts for half of the 1.5m rise in economic inactivity over the past years. But with more people set to retire than join the workforce (as young people) between now and 2030, we need fewer people retiring early and more working after statutory retirement age.
Improving productivity, workplace by workplace, in all sectors, via action on investment and skills. OCED data suggests UK productivity growth has seriously stagnated, failing to exceed 1% annual growth since 2006. From 2009-2019, the UK’s average annual productivity growth stood at less than half that of the USA’s.
Supporting growth in high productivity sectors like manufacturing, construction, science, utilities and energy/net zero. Again, this is about investment and dealing with skills shortages.
The last thing we need is employment growth in lower value added sectors such as retail
and hospitality. In current circumstances this just takes labour away from higher value
added sectors and occupations.
As I complete this article, the Labour manifesto has just been published. Although this does
not contain much that is new, it does provide a headline strategy for growth including,
sectoral industrial strategies, a national wealth fund and “Great British Energy” on the
supply side, and opening up the planning system for both domestic dwellings and
commercial/infrastructure, to create demand. Labour is also committed to a “Carbon Border
Adjustment Mechanism” which could lead to some demand/import substitution.
Recent polling has consistently indicated that a Labour government is the most likely
outcome of the upcoming General Election. Labour’s manifesto is light on skills, proposing
only the creation of “Skills England” and what look like sector skills bodies of some sort. It
does contain an innovative approach to legal immigration which proposes a skills
programme for each occupation on the skill shortage list and Skills England working closely
with the Migration Advisory Committee.
So, what more could any new Government do to address the country’s skills problems, were
they to become really serious about growth? The technical education system can help with
some of the skills supply (for example via relatively short courses leading to employment
with training) but only a huge increase in training with employers via apprenticeships and
upskilling can produce occupationally competent people for growth and high productivity.
The problem is that employer’s investment in training has been falling not rising in the last
decade and although we are now seeing growth in apprenticeships delivered by levy paying
firms, it is from a low base. Labour’s proposals for the levy could also lead to a reduction in
apprenticeship numbers or at least, delivery of less than is possible.
In future articles, I will explore how employer investment in apprenticeships and upskilling,
could be improved and how a sectoral approach to skills and the levy could work.
