UK Economy: Productivity vs Growth

Editors note: I first compiled this blog in late 2022 in the aftermath of  the ignominious fall of Trussonomics and before the 'advent' of AI. Many of the ideas are still very relevant today, so a revisit with recent developments in mind is probably appropriate....

Introduction

This has been a momentous couple of weeks all told, with more than the usual quota of economic and political U-turns, and probably more to come. The ‘new’ regime’s primary task now has to be to restore some sense of stability and prevent the economic meltdown which still beckons….

I’ll take the optimistic viewpoint and assume that the new team (whoever they turn out to be) somehow manage to pull this off over the next few weeks. I sincerely hope my optimism is justified, for all our sakes.

Assuming they do, what then do we need to do ‘post-crisis’ in the medium- and long-term to improve our economic and social prospects as a nation, and avoid getting ourselves into a similar mess in the future ?

I’ve framed the title of this piece in terms of productivity and growth being in competition. Make no mistake, though, the UK is in need of improvement in both. The big question is – which should take priority, and how quickly do we need to address each one ?

As I hope you’ll see from the following paragraphs, it’s important that we answer this question correctly and implement our policies accordingly if UK plc is to succeed economically in an increasingly competitive world.

Productivity

There has been much talk recently of the UK’s ‘lamentable’ record on productivity since the financial crisis of 2008. Our performance certainly seems to have been considerably worse than for our erstwhile EU partners and the USA. Why is this important, and more to the point, how have we managed to fall behind in the first place ?

First of all, let's take a look at what we mean by productivity.  

The term is widely used, but less well understood. It is normally defined by economists when referring to labour as the “output per hours worked, which can be obtained by dividing the volume of goods and services produced by the country in a year (real GDP) by the number of work hours supplied by the country’s workforce during the same year”.

This rather indigestible mouthful effectively boils down to a measure of how 'smartly' we work (i.e. how much we achieve while we're working, rather than how hard we work or how may hours we put in). It is an important concept because it defines how competitive we are likely to be as a nation. In times such as these, where there is an acute shortage of available skilled labour, higher productivity will also ensure we have sufficient workers to do the work needed to ‘earn our living’ as a country on the world economic stage, and provide support for our growing, but rapidly ageing, population.

Why has our productivity declined ?

There is still plenty of controversy as to the precise causes of this. In reality, it will prove to have been a basket of contributory factors, all of which have come together since 2008 and are manifesting themselves now as a ‘perfect storm’ of under-productivity, combined with sluggish or even non-existent growth, and now rampant inflation.

The key contributory factor that most pundits agree on seems to be chronic under-investment in both the public and business sectors. Productivity declined sharply after 1979, due largely to the loss of our heavy industries. This was due to the rising cost of UK labour induced by over-powerful unions, which effectively priced us out of world markets,  and the policy changes of successive governments (of both persuasions) thereafter, favouring increasing reliance on imports over self-sufficiency in resources as expedient. 

A more recent factor, the persistence of relatively low business- and public-sector investment in UK compared to other EU countries, is still something of a puzzle, though. A prime suspect as a cause is uncertainty, due to a combination of Brexit, Covid,  and the structure of the UK economy itself, all of which have resulted in UK notably lagging behind other G7 economies in implementing new technologies and updated working practices.

We live in an increasingly competitive world, and have the additional disadvantage of an over-large population for our geographical size. A substantial proportion of our population has also reached old age, is therefore economically inactive, and needs increasing levels of support. If we are to continue to make our way in the world effectively without becoming an economic ‘basket case’ dependent on IMF handouts, we must improve our productivity and grow our economy. These need to be done in parallel, but which task should take priority ?

I ask this question because it’s clear from recent events that we can’t hope to do both at once. There is also a strong case for making significant progress with productivity before we forge ahead with growth. This was the point missed by the abortive Truss government, and which led to their rapid fall from grace at the hands of the money markets.

The markets, and world economic and political leaders, have already shown us what they think of un-costed policies involving unfettered growth based largely on borrowing, in the present economic climate. To attempt to proceed regardless against this extreme ‘headwind’ would have been disastrous, and Hunt's recent U-turns on virtually all Kwarteng's mini-budget tax giveaways are hopeful signs that good sense may be returning. 

Hopefully the new chancellor, who it should be noted is an experienced politician of some standing, will be allowed to restore some stability now that the Tories have elected a new leader (assuming this one lasts !) and we all work out what to do next. I’m optimistic that this will be the case, given the Markets' favourable response to his efforts so far. 

There are good operational reasons why rapid growth across the board at this stage, in the absence of productivity improvement,  would have been a poor strategy. To grow an economy like ours without the important structural modifications it needs, would have required not only significant outside investment, but also – a lot more workers. We already have an acute shortage of available and suitably-trained workers for our existing jobs, and this is reflected in the million and a half vacant positions still waiting to be filled.

To stand any chance of success, we therefore need to address productivity before we can grow the economy efficiently.  By doing this as a priority, we will achieve two things:

1) We will reduce the number of workers we actually need to do the work and

2) We will be able to improve their working conditions and pay, and by doing so increase the attractiveness of the jobs and the ease with which we can fill them. The improved prospects should in turn improve retention and reduce turnover.

This will, in turn, have a beneficial side-effect on our current immigration problem. Our existing worker ‘shortage’ is partly due to the reluctance of able-bodied UK residents of working age to do these jobs, which are often physically demanding and usually poorly-paid. The structure of our benefits system, which encourages dependency by being over-restrictive on supplementary earnings, also makes taking up these jobs unattractive to claimants, and the benefits system needs to be redesigned in order to promote job uptake more actively. 

The ‘new’ improved job roles would then be likely to attract a lot more of those ‘not currently seeking work’, thereby reducing our benefits bill, increasing the tax take from earnings and reducing the need for us to 'import' unskilled migrants. A 'smarter' tax system for pensioners would also attract some of the over 65s back into the jobs market, allowing us all to benefit from their long years of experience of the world of work. Employers such as Halfords have recently recognised the value of long experience and are actively targeting recruitment in this age group. See my blog on this subject for more info. 

If we don’t address this problem, we will need to seek ever farther afield for unskilled immigrant workers. As our economy stagnates and our immigration policy tightens in response to Brexit promises, these workers may also become increasingly reluctant to move to UK on short-term visas as the cost of living here spirals and the value of our currency continues to fall against the dollar.

The all-important question, of course is: How can we start to improve our productivity ?

There is no easy solution to this, and it will take time – and money.

One of the key tools for reform will need to be automation. Many of the low paid ‘jobs’ that abound in our so-called ‘gig’ economy are boring, repetitive, stressful and insecure, and many could readily lend themselves to automation. One of our advantages as a nation is our inventiveness. Our robotics industry is growing apace, and I believe is more than capable of taking us into a new age of automation. The upcoming revolution in artificial intelligence will soon catapult our industry firmly into this arena, and will no doubt 'drag both employers and unions kicking and screaming into the 21st Century' by mandating new working practices in the name of successful competition.

The rapid implementation of  AI we ware already seeing can only hasten this process, and is likely to provide an even more irresistable stimulus to change in the workplace

That said, you can’t automate everything.... 

There will still be a need for human inputs in most job roles, but automation and procedural re-design can, and should, be used to make the jobs more interesting – and productive. As mentioned already, the improvements in performance and output per worker will enable improved remuneration, and lead to a higher-skilled and more motivated workforce. This move away from the 'gig economy' towards higher-skilled and better rewarded jobs will be a key element in attracting motivated and skilled workers in future - without it our productivity will continue to languish at the bottom of the G7 'table', and growth will remain elusive.

If this revolution in working practices promises to be so beneficial, why hasn’t it already happened, given that the technology needed is already here ?

For two principal reasons – cost, and resistance to change amongst the workforce and their 'representatives'.

Industrialists the world over know how difficult it is to get any sort of change in working practices past the unions. The ‘threat’ perceived by the unions to their membership of job cuts resulting from virtually any type of modification, however necessary for economic survival, leads to strong resistance and the threat of strikes. We’re seeing the results of this now as the main stumbling block to the current round of pay settlements, notably in the rail disputes, but also in a number of other industries. Another ‘winter of discontent’ similar to 1978 looks increasingly likely as positions become more entrenched. (hopefully without the particularly hard winter weather we also experienced that year !).

This ingrained and blinkered view of life on both sides of the industrial ‘fence’is a direct result of our industrial relations heritage dating back to the start of the industrial revolution in the 1800s, and is virtually impossible to shift. The deadlock will only be broken if and when the unions realise that the only hope to keep their ageing and uncompetitive industries ‘alive’ and avoid massive job cuts is to work with employers and embrace the necessary changes. 

A portent of things to come emerged yesterday in the announcement by Royal Mail of ca 16,000 planned job cuts as a direct result of loss of business to competitor carriers through recent industrial action. The miners’ strike of 1984 effectively killed-off an already doomed coal industry – let other work-forces beware, lest the same thing happens to them in 2024…

This ingrained ‘them and us’ philosophy which drives resistance to change, and the high investment cost associated with automation has led to a marked reluctance on the part of employer management to innovate. Employers have instead plumped for increasing the number of poorly paid, often ‘zero-hours contract’ jobs, leading to insecurity and job-dissatisfaction – the ‘hallmarks’ of our gig economy. Undoubtedly the easy and cheap way out, and more likely to generate quick profits in the short-term, but highly detrimental to our national productivity as a whole. Employers therefore need to improve their job offerings, both in terms of remuneration and working conditions. Hopefully AI and the automation 'revolution' will help drive this, and generate the increase in profits to fund the changes.

Can the current government lead us out of this impasse and drive forward the necessary revolution in working practices ?

I suspect not – however many ministerial (and PM !) iterations it goes through, its divisive ideology and the consequent party split is still baked-in and likely to mitigate against the all-party cooperation we need to achieve real change. It is also a ‘tired’ government, having presided over repeated traumas, from sorting out the 2008-2010 New Labour ‘bankruptcy’, the consequent austerity era, Brexit, Covid and now Ukraine and its worldwide consequences. I suspect it needs a well-earned rest, and the ‘pendulum effect’ I described in a recent blog on UK politics will almost certainly kick in fairly soon. Indeed many of the political pundits have already factored in a minority Labour government after 2024 – for better or worse.

This is not to say the current government shouldn’t start the ball rolling while it’s waiting for our 2024 ‘verdict’– the reversal of tax cuts should free up some cash which could be directed towards implementing automation and other projects designed to enable ‘smarter’ working. 

To do it justice, there are already a number of welcome new initiatives in the agricultural sector designed to improve our self-sufficiency in food, which are being promoted with active DEFRA funding support, but much more support is needed across the board. 

If it can pull this off in its last couple of years, the current government will earn valuable political ‘brownie points’, restore some of its lost credibility,  and arguably ensure its time in opposition, whenever that comes, is kept to a minimum. It may also help avoid a labour landslide and ensure a slim majority in 2024, which will be beneficial in restraining any excesses which might otherwise result from their particular brand of ideology. See my blog on UK government reform for the rationale behind this.

We Brits are an ingenious bunch, and should be applying our talents to the full in devising new ways of doing things, rather than giving up all hope of economic success. HMG needs to step up to the plate now and support this inventiveness with some of the hard cash it will have saved by reversing tax cuts, rather than pouring it all into the usual ring-fenced public sector 'black holes'.

Growth

If we're prioritising productivity improvement, how then should we tackle the pressing need for longer-term growth ?

The main effort on this can, and should, wait until there have been major improvements in productivity, for a variety of reasons which I’ve already alluded to. But we can start the growth process in parallel, by focusing on acquiring and training new workers from within UK to take up the increasing numbers of positions that are still unfilled. We have a major ‘skills gap’ in UK, and this will need addressing, however we choose to tackle our current economic crisis.

This process will also need to involve ‘importing’ some appropriately-skilled workers from abroad, but the main thrust should be in recruiting and training our indigenous workforce. We should remember that enticing skilled professionals from 3rd world countries to work in UK will leave a gap in their own economies, which may well be damaging to their way of life, and could in turn encourage further emigration.

I have already put together some ideas as to how we could boost 'indigenous' employment  in a recent blog. The key is to make the jobs more attractive and better paid. An important part of this process will also be to alter our tax structure to reflect the need to allow workers to keep more of their earnings – a first step in that would be to unfreeze the tax thresholds. This would be far more effective than the across the board 1% cut in the basic rate proposed in the recent mini-budget, and would cost the exchequer significantly less overall. It would also increase the tax 'take'...and reduce the benefits bill. Sadly, the prospects of this happening, at least while the current regime remains in power, now look decidedly bleak.

Achieving the desired level of productivity increase will take time, but is an essential investment that we must make. In the time it takes to achieve it, our return to economic ‘prudence’ should have built up sufficient confidence in the markets to justify their support for economic expansion without penalty.

Only then can we hope to grow the economy as necessary to reach our full potential as an independent and successful G7 nation.

Do we as a nation have the capacity to achieve any of this ? Undoubtedly...

Will we achieve it ? Only if government, employers and workers and their representatives are prepared to collaborate towards a common goal - and therein lies our main problem. Will they overcome it ? Only time will tell...

First published  24.11.22