Sector by sector

Earlier this week a Nobel prize winning economist warned that unless the UK is able to improve its productivity performance, George Osborne’s ‘national living wage’ policy will end in failure. Sir Christoper Pissarides was right to intervene.

Boosting productivity is the key to ending low pay and putting the UK back on the path to sustainable, inclusive growth. But the government’s current approach is too broad brush. There needs to be a sector-specific strategy to improve pay and productivity that recognises the characteristics and needs of firms in different industries.

Paul Krugman, winner of the Nobel prize two years before Pissarides, once said ‘productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.’ Krugman and Pissarides aren’t alone in placing productivity at the core of living standards improvement. A growing chorus of those emphasising the key role of productivity ranges from the TUC to the CBI.

But right now UK productivity growth is in the doldrums. Our historically low unemployment levels mean we have long lagged behind the United States on standard definitions of labour productivity – output produced per worker, or per hour worked in the economy. But the productivity stagnation caused by the 2007/08 financial crisis has created a widening gap between the UK and the other G7 countries. Only Japan performs worse than us.

The Office for Budget Responsibility (OBR) expects this productivity problem to right itself as previous post-recession slumps have done before, forecasting a return to pre-crisis levels of growth in 2017. But the evidence suggests this downturn is different to the others – productivity stagnation has been longer and deeper than in any previous recession. Even analysts within the OBR have called their forecasts an “act of faith”.

George Osborne has signalled a need for government action on productivity, describing the closure of the productivity gap as a “prize worth striving for.” In doing so, he has produced a 15 point ‘Productivity Plan’ of action on national investment and infrastructure.

But the chancellor’s productivity strategy has been called in to question. The plan received criticism from the Labour party for resembling a “patchwork of existing schemes” and from business for not doing enough to address skills gaps. The CBI have previously questioned the government’s direction on productivity, warning Ministers are failing to recognise that ‘so much of what influences productivity performance happens at the microeconomic level, within firms and sectors.’

The broad brush nature of the government’s current strategy makes it difficult to address the needs of specific firms and sectors. This approach is problematic because the UK’s productivity performance problem is not evenly spread across all sectors. In fact, the government’s own analysis points to just five sectors that account for the vast majority of the country’s productivity shortfall.

The retail sector is at the top of this list. With just under three million employees, it accounts for more of the UK’s workforce than any other industry. But it has also become a haven for low paid, low productivity work, with four in ten workers falling beneath the low pay threshold.

The imminent introduction of the ‘national living wage’ means that retailers are now having to actively look at boosting productivity to offset increases in their wage bills. PwC estimates retailers face an average annual increase in wage bills of £3.8million in 2016, rising to £25.6million in 2020.

Some retailers and employers in other traditionally low paying, low productivity industries like hospitality have already shown how it is possible to get ahead of the curve. Richer Sounds, Ikea and Oliver Bonas have become accredited Living Wage employers, agreeing to pay the higher voluntary rate of pay set by Citizens UK and the Living Wage Foundation. But these examples are currently exceptions to the rule.

With the introduction of the national living wage in April, there is a real opportunity for other employers to actively look at how they can work with staff to boost productivity and pay together. But not all sectors are equal. The government needs to take a sector by sector approach to work with different firms to ensure the benefits of the national living wage are sustainable, that the policy does not cost jobs, and crucially, to create the room for employers to go further and faster on pay and productivity than the legal minimum.

Boosting productivity is no simple task. If it was, it would not be the public policy problem that it is. Yet while the debate goes on about macroeconomic policy levers, there are sparks of innovation from individual firms in individual sectors that we can learn from. So it is worth taking a more granular, sector-based approach to finding the keys to unlocking the productivity puzzle. After all, our ability to improve our standard of living depends almost entirely upon doing so.

Cameron Tait is Senior Researcher at the Fabian Society. On 28 January 2016, the Fabian Society launches a new taskforce looking at productivity and pay in the retail sector chaired by former Morrisons executive Norman Pickavance.