Why businesses can’t ignore the productivity challenge

By: Declan Curry | Date: 17-05-2015

Tagged as: ArticleUnited KingdomGameplan

 

What is the future for business, after the Government revealed its plans in the Queen’s Speech? Business journalist and Lloyds Gameplan host Declan Curry takes a personal view.

Declan Curry

Journalist, former BBC business broadcaster and Gameplan Live host.

Declan Curry 
EF977_Declan_Curry_at_a_glance

My tastes in art are plain. Philistine, almost. Take me to the finest galleries and museums in Europe, and you will find me corralled in the café and gift shop long before you’ve finished savouring the precious things.

Unless there’s a clock. I love a big clock. I love the beauty of the intricate mechanisms, the elegance of their complex interaction and the simplicity of the result – a human measurement of the nebulous progress of events.

Mr Cameron and Mr Osborne – given a fresh gift of time by the General Election – need the skills of a gifted clockmaker as they tackle the challenges facing business and the economy. Their mission is expressed as simply as time on a clock face: to grow the economy and cut the cost of the state so that annual Government borrowing can be reduced, eventually to zero, and we can start repaying the national debt. But to achieve that result, they’ll have to manage the complex interaction of three intricate policy mechanisms: productivity, immigration and our relationship with Europe. In this article, I am going to focus on productivity and immigration and their effect on business in Britain today.

Productivity

Productivity is the oscillator; the driver of better living standards. More productive companies offer more competitive goods and services, make higher profits and pay more in tax - tax that is used to drive down that Government borrowing. More productive workers earn more, spend more, feel better about their finances – oh, and pay more tax. A more productive nation makes its own people richer and pays its way in the world. (That’s the theory, anyway.)

Labour productivity measures how much we produce in goods and services, and how much time and effort it took. You might think we’d be okay on that front; we work longer hours than most of our economic neighbours. But despite all those bosses over the years telling us to work smarter not harder, we haven’t got the knack for it. Those neighbours may work fewer hours than us, but they get just as much work done. What the average Brit takes five days to produce, the average French worker knocks out in four.1

When you look at other major industrialised nations – our key global rivals in the G7 – we are almost at the bottom of the pile. We are less productive than the United States and Germany; less productive than France, with its 35-hour week; less productive than Italy and Canada. We beat Japan, but its economy has been stagnating for the best part of two decades.2 Outside the G7, we also lag behind Spain, Finland, Sweden, Norway, Ireland, Denmark and the Netherlands, to name just a few.3

The Bank of England has been anxious about this for some time. It wants to know why the economy has recovered, but productivity has not; while the overall economy is bigger than it was before the crash, productivity is still some 5 percentage points lower than it was in happier times.4 It’s partly the reason that people haven’t been feeling better off during the recovery; companies haven’t been productive enough to offer bigger pay rises.

Is low productivity simply the price we had to pay to survive the Great Recession? We avoided the enormous rises in unemployment we suffered in previous downturns in the 1990s and 1980s, because this time companies held on to workers, even if they no longer had a full day’s work for them. Hoarding staff you don’t need for the volume of work you’ve got on the books may benefit the company in the longer run, by keeping skilled teams intact and saving on recruitment cost and hassle, but in the short-term it made businesses less productive.5

The Bank of England thinks that was a factor, but not the whole answer. It doesn’t explain why productivity didn’t improve, even as companies hired over one million new workers in the recovery.6 Typically, companies would only hire new staff when existing workers were back at full speed.

“We need to develop more of our own scientists, software developers and engineers.”

There are other partial reasons for low productivity, which may dissolve as the economy continues to strengthen. While the European debt crisis was raging, companies with cash to spare hoarded it, too afraid to invest in new products, services or equipment. Companies spent more time and effort than they used to winning new clients in a more competitive world. In economic terms, that lowers productivity as the money and time spent did not lead directly to new products or services. And people, grateful to have a job at all during the Great Recession, were reluctant to seek out new, better jobs as vigorously as they once did – and companies were less willing to give people promotions.

But economists think there are more fundamental problems, deeply rooted in business. British companies are innovating less. Company spending on research and development has been stable, but fewer companies are introducing new or significantly improved products as a result of that spending.7 Companies are still taking fewer risks with their capital, less willing to sacrifice actual short-term profits for the potential gains you might get in the long-term if you invest in new products and processes. And then there are the zombie companies – the businesses that are on financial life-support, damaged so badly during the Great Recession there is little prospect of future recovery, surviving only because of low borrowing costs and public policy. They absorb cash, but do little that is productive with it.

Immigration and the skills shortage

And there is the skills shortage. Businesses have long said they can’t get enough workers in Britain with the right skills for the job – an obvious obstacle to improved productivity. The solution for many businesses is to import workers with the right skills from abroad. Bosses of engineering, computing and science companies tell me they routinely hire new workers in Asia for projects in the UK. Those businesses are now chafing under the Government’s controls on immigration. Many of the bosses who took part in the Lloyds Gameplan events around Britain last year singled out the immigration crackdown as an important factor holding back growth and expansion.

I would argue that the issue business needs to fix isn’t immigration policy; it’s the underlying crisis in skills. From low-skilled workers picking fruit in the Kent orchards to technicians so highly skilled that there are only a dozen of them in the entire world, British business has become addicted to immigration as a solution. It can only ever be a short-term fix. We need to develop more of our own scientists, software developers and engineers. We need to improve the ability of all our graduates to understand and use numbers – a recent OECD survey shows UK graduates have lower numeracy skills than peers in 32 other developed nations; the only nation with a lower score than us was the United States.8

The role of business

The solution for this skills crisis is wider than business; but business has an essential role to play. Business can offer the apprenticeship schemes that bridge the gap between school and work. Business can deliver credible training for young people who left school without formal qualifications.

“The solution for this skills crisis is wider than business; but business has an essential role to play.”

Business has the capacity to support more adult education and to encourage people – in work or not - to avail of it. And the approach can be imaginative. I had the great pleasure, some years ago, of accompanying the Prince of Wales and various FTSE 100 chief executives as they visited a scheme organised by his Business in the Community charity. The rather grand minibus took us to a school in South London, where local businesses supported after-school reading clubs. But in these clubs, the children were encouraged to bring along their parents. It signalled to the children that reading was something they should do, in school and at home. It also gave the parents who needed it, that second chance at education.

Business must step up and address the skills crisis, properly. If it doesn't, we’ll languish at the bottom of the productivity class for a long time to come.

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