Productivity tops the next government’s to do list

Blog posts

1 Apr 2015

Jim Hillage

The lack of discussion of youth unemployment in the Budget Statement got us thinking about which other key policy issues will be on the desks of the new employment and skills ministers after 7^th May. Probably the number one priority will be productivity.

As Nigel Meager pointed out recently, the persistent absence of productivity growth is one of the surprising features of the current UK economic upturn. The latest statistics published today, which show a slight fall, provide no grounds for optimism that the productivity trend is improving. Indeed, output per worker has been flat-lining since 2007, an unprecedented performance in UK post-war history. The ‘productivity gap’ between the UK and its competitors is widening alarmingly. This matters because low productivity makes the economy less competitive (taking more labour to produce a unit of output than our rivals) and means lower wages and living standards.

The causes of the UK’s productivity deficit include: low levels of investment in innovation and research and development; declining quality of technological and transport infrastructure; structural shifts to low productivity sectors; and lack of access to finance for private sector investment. Most are beyond the policy scope of employment and skills ministers, but reinforce the perennial need for ‘joined up’ policy making and for the new ministers to work constructively with those in other departments.

Closer to home, a contributor to the productivity deficit is the relatively low level of intermediate skill attainment. Tackling this, for example by increasing both the penetration and quality of apprenticeships, will require a significant culture change across the education and training sector including among:

• Employers: to take a greater lead in designing standards with more firms providing apprenticeship places. While some large (mainly production sector) employers are at the forefront of developing and delivering high-quality apprenticeships, the involvement of smaller employers remains patchy.
• Providers: to improve the quality of training, assessed through more rigorous testing and enabling simpler progression between frameworks.
• Schools: to provide timely and impartial information to young people to enable them to make informed choices between academic and vocational options.

Many of these improvements will take time to bear fruit, and early reports of skill shortages in key sectors are already emerging as the labour market tightens further. Understanding niche skill deficits and developing effective and tailored solutions, which is likely to continue to include controlled economic immigration and further expansion of higher education and vocational training, will become increasingly important to ensure sustained economic recovery.

However, improving the supply of skills is only part of the solution. Most of those who will be employed in 2020 are already in the labour force and many are not utilising the skills they already possess or not working to their full potential. One cause of this under-employment is that unemployed people are pressured to take the first job available, for which they may not be best suited and many take jobs which are neither productive nor sustainable. A new government and a recovering economy offer the chance to reconsider the Work Programme with a view to greater emphasis on the quality rather than the quantity of employment growth.

Even when people with the right skills are in the right jobs, the evidence from IES and others suggests that how work is organised can make a huge difference to organisations’ performance. The role of government in encouraging employers to adopt productive working practices and effective job design is debated, but there is a clear need for better understanding of what policy initiatives can support job progression and advancement in the workplace.

Reversing the productivity trend will therefore require a concerted effort across government but won’t be the only employment-related policy goal for the next government. Ensuring equity of treatment in employment and reducing labour market disadvantage is clearly another, especially in light of increasing public concern about inequality and living standards. Which leads us on to other standout issues such as equal pay, diversity in the boardroom, the ageing workforce, self-employment, zero-hours contracts, mental health at work, and human rights and fair treatment at work. But these are all subjects for future blogs.