This is a blog I prepared a few years ago, and never published. In the light of current concerns about productivity, I’ve decided to publish it, even though it’s a draft. I think it’s a pretty good draft.
The Tories, sadly, will win the next election because they have made most of the public believe four things that aren’t true. Firstly, that the 2008 crash was caused by the Labour Party, rather than banks in New York. Secondly, that the right response to this is raising taxes and cutting public services, when we learnt in the 1930s that in these circumstances these are the last things to do – the government should maintain its spending to keep employment and demand high. Thirdly, that the UK government has been successful in managing a recovery from the crunch, when they have done less well than most. Lastly, they have got people – and especially journalists, for whom deficit mania means they do not have to prepare for interviews when talking to politicians – to think that the most important economic issue is the budget deficit (or the National Debt, a different thing) when the main problem is productivity.
I am aware that there are many people who would agree with me on the first three points. The last one has only recently (and marginally) crept into public debate – for example, this blog, posted last week, and this one too. Productivity basically means output per head, and the news for the UK is not good. The Labour shadow Business minister points out that the average French worker has produced by Thursday the output that a UK worker needs all week. This is a nice way to start thinking about productivity, though not technically the last word. After all, a foreign worker could be more productive – create more wealth, make more stuff, do more things – with the aid of better but very expensive machinery. In this case, greater labour productivity might be outweighed by inferior capital productivity. But the problem in the UK is that we have poor labour productivity and poor capital productivity. Our people produce less value, and so do our machines. The LSE’s Centre for Economic Performance have recently identified UK’s poor productivity as “probably the greatest challenge facing our economy”.
Why does this matter ? Because our productivity determines our standard of living. We can only consume what we produce – unless, that is, we are into selling off assets (which we are in a big way – ever wonder why the French own our dustbins, the Arabs our football teams and the Russians Kensington ?). There is also a minor moral point, in that if we are producing things inefficiently – taking more fuel or more equipment than others seem to need – we are using more of the world’s resources than necessary – and that includes the time and effort of our people. The superior productivity of overseas economies can be taken in improved living standards (Germany, USA) or in increased leisure (France – interesting that the BBC’s economics guru Robert Peston could complete a full programme on the awfulness of the French without mentioning that they are more efficient than the British).
The UK Commission for Employment and Skills’ recent report acknowledged that the UK has usually been behind that of its industrial competitors. But it also noted that the gap, rather than closing, has recently been widening. And it’s not that other countries are shooting away – here’s a discussion of the problem from an American eye – they are stumbling, but we still fall behind. The LSE worries about the “danger that low pay and productivity could become entrenched”. This should be surprising. The UK is not a low skills economy. We actually have a high proportion of well qualified people, and the growth in jobs has been at the upper end: “productivity has crashed despite the UK’s highly skilled workforce”. It attributes the problem to ‘multi-factor productivity’, which basically means they don’t know. It’s not that the UK worker has inferior equipment (that was thought to be true in the 50s and 60s, when the problem first became obvious). They then say:
An important backdrop to productivity performance is that we have a workforce which has never been so well qualified. If we have a better-educated workforce, then we have to look at how their talents are being applied: the workplace must have played a role in that productivity slowdown.
I think this must mean that the UK workforce is poorly managed. What else could it mean ? We have the people, they have the skills, they have the equipment, but they are not performing well. If that is not down to poor organisation, I don’t know what is. It is worth recalling the various excuses that UK management has used to explain why it does not perform well. It was because we were outside the EEC’s fast growing market (we joined). It was because investment was costly (we gave investment tax breaks). It was because trades unions prevented efficient work practices (we disempowered trade unions). Tax rates were too high to incentivize talented individuals (we slashed the top rate of tax). The Commission, and credit to them for telling the truth in a world and government dominated by rich executives, agrees. “The UK clearly has a deficit in management quality, and this is likely to be a key factor explaining the productivity gap with other countries such as Germany and the USA”. The deficit is at the bottom end – the UK has a tail of poorly run enterprises, and other countries do not.
What can we do about all this ? One thing is to make the problem publicly known, and talk about it rather more than Jeremy Clarkson or politicians’ kitchens. A good start would be improved financial support for small business training and investment. We are the only major economy without a special bank for small enterprises. Mind you, firms have little incentive to replace people with machines when they can get workers so cheap – only Greece and Portugal have lower hourly wages, and we can always rely on immigration to stop them edging up. Investment in research and development is poor compared with other countries: not just industrial research, but government R&D. No major party has committed itself to safeguarding the science budget: with 10% of world research, 4% of world scientists, we invest less than any other G8 country. Worse, I suspect, is the way that technical and further education is being savaged. I nearly said decimated then, but decimated actually means ‘cut by 10%’ and the adult skills budget this year is being cut by 24%. For a country with an ageing population and a productivity gap, it is difficult to think of a more foolish policy. Even if you believe in the nonsense of balancing the books, this is not a necessary part of austerity, forced by budgetary constraints. Mick Fletcher points out that the giveaways to whisky and beer in the last budget could pay for substantial improvement in skills training – and throttling back on pensioner bonds could avoid any need for cuts there at all.
The authors of the LSE report conclude:
The UK’s longstanding productivity underperformance has been heightened since the global financial crisis. ‘To meet this central policy challenge, the UK needs a long-term framework for investment and innovation. This ties in with many other policy areas, not least ensuring that there is an adequate supply of skills and a strong infrastructure network.
And even Robert Peston – who seems to have swallowed the austerity pill without a blink – recently wrote a BBC column entitled “productivity is almost everything”:
… it would be a pretty foolish government that neglected to take any steps to improve productivity. And calibrating the balance between austerity and productivity-enhancing measures is perhaps the most important judgement for the next government. If we could only boost productivity, there would be no need to ink in any more austerity in Wednesday’s budget. So how on earth do we improve output per worker?
Well, Robert, why not make your next documentary about international comparisons one that looks at why France has higher productivity than us, rather than worrying about the wickedness of their longer lunch-hours.