May seeks solution to productivity conundrum

Posted on November 21, 2016

When Theresa May ran for leadership of her party and country in July, she said she would “deal with Britain’s longstanding productivity problem”. Wednesday’s Autumn Statement mini-budget provides the first opportunity for her government to set out how they hope to achieve this.

If workers increase their productivity, producing more output without working any more hours, everyone’s standard of living should improve.

Steady productivity growth is the holy grail for policymakers but in Britain it has been slow or non-existent for the past eight years and the reasons for this are not well understood. But experts agree there are policies that should help and areas ripe for government intervention and that leaving the EU could provide new impetus and open up options.

Infrastructure

British governments have for a long time underinvested in infrastructure, hindering productivity. Commuters and vehicles carrying goods sit in traffic jams and businesses struggle with slow internet connections.

The last government set up a National Infrastructure Commission to try to address the problems in the long term, outside the five-year electoral cycle. Mrs May’s government has retained it but has not established it in statute, meaning it could be dissolved by government at any point.

Tim Besley, one of the NIC commissioners, is optimistic about its potential to boost long-term growth but says a “joined up strategy” is needed. Infrastructure investments need to be “integrated with other investments”, such as housing, he says.

The chancellor is expected to announce £1.3bn of infrastructure spending on Wednesday, including £27m to support the NIC’s latest proposal for new links between Oxford, Milton Keynes and Cambridge. The rest of the money is expected to go to small-scale projects, such as improving local roads, rather than the large initiatives — like HS2 — that George Osborne favoured.

Access to finance for small businesses

Private sector investment has also been low in recent years. One reason is the difficulty that small and medium-sized businesses have in accessing credit. There could be more flexibility to create a government-backed small business bank after Britain leaves the EU, which restricts the ability of its member states to target aid at particular businesses.

Skills

From the most basic cognitive abilities to vocational and job-specific skills, Britain has room for improvement. The cognitive skills of poor children are lower even before they start school, suggesting intervention at very early ages could help. At older ages, Britain lags behind its peers in vocational training.

There is a “massively larger imperative” following the vote to leave the EU to address the lack of intermediate skills, says Prof Besley.

Sectors such as construction rely heavily on EU workers. If it becomes harder for them to come after Brexit, the British workforce will need to improve its skills to maintain current productivity, let alone increase it.

Skills policies would ideally be co-ordinated with the government’s proposed new industrial strategy. “In the long-run, skills are really important for growth,” said Stephen Machin, co-chair of the new LSE growth commission, which is collecting evidence on how economic growth can be enhanced.

Innovation

Productivity could also be boosted by developing and adopting new technologies and working practices. Previous initiatives, such as the Catapult programme, have tended to focus on manufacturing, engineering and science.

But the government could try to establish a similar initiative for other sectors. Although manufacturing is more productive than the service sector, it makes up only a tenth of the economy.

Even small improvements in productivity in a sector like retailing, which makes up a fifth of the economy — for example, improving the efficiency of supply chains — could deliver significant improvements to overall productivity.

One area where British companies lag behind foreign competitors is the quality of management practices, according to John Van Reenan, a professor at the Massachusetts Institute of Technology. Better managers are better able to adopt new technologies and use existing ones most efficiently.

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