As he stood at the Dispatch Box on November 23rd, Chancellor Philip Hammond laid bare to Parliament a problem that has been vexing economists since the 2008 crash.
The UK, he intoned, has a truly dreadful productivity rate. To illustrate the point, he told MPs gathered for the Autumn Statement that the average UK worker takes five days to produce what a German worker manages in four.
Productivity matters because, in the long run, it’s how our economy remains competitive at the global level and creates the added value that drives up wages and living standards.
But since 2008, our productivity has been pretty much flat, even as our main international competitors have raced ahead. The US and Germany are now 30 percentage points more productive than us and we’re even behind France and Italy, well known for their structural economic problems.
Mr Hammond announced a range of measures designed to address this woeful record and make UK businesses more ‘resilient’ and ‘match fit for Brexit’, as some tabloids would have it.
Borrowing will increase this year to fund a £23bn Productivity Investment Fund to support investment in innovation and infrastructure over the next five years. Alongside this were commitments to £2bn per year extra for R&D by 2020-21, and increased spending on digital infrastructure, management skills, export finance, and equity investment.
But will it work? And are we, through our business support ecosystem, trying to achieve contradictory aims?
We highlighted the difficulty of raising productivity at the recent ERC State of Small Business Britain Conference at London’s Shard on November 30th
Some of our new research unveiled at the conference was based on a cohort of 250,000 businesses tracked over 2008 to 2015. The findings show that while aggregate productivity (aggregate turnover divided by aggregate jobs) increased by 30% over that timeframe, average firm-level productivity actually declined by 0.3%.
In fact, taken as a whole, only 5% of the firms studied managed to significantly increase turnover, jobs and productivity at the same time – some 10,000 firms. What we now know is that three-quarters of firms which grow their turnover grow productivity, but that only one in five firms which grow jobs boost productivity.
The findings show the fundamental tension between jobs growth on the one hand – often considered the main objective of industrial strategy and business support programmes – and increases in productivity.
In particular, the recent focus in enterprise policy circles on High Growth Firms (HGFs) – also referred to as ‘scale ups’ – could actually be detrimental to productivity gains. There are currently approximately 11,500 such firms in the UK [defined by the OECD as firms with 10+ employees growing employment by 20% per year over three years] and our research has found that only 575 of these HGFs have positive productivity growth.
So what practical steps can we take to raise productivity?
On this, we were fortunate to be joined at our conference by Phil Smith, Chairman of Cisco UK & Ireland and a member of the newly-minted Productivity Council chaired by John Lewis’s Sir Charlie Mayfield.
Two-thirds of UK workers, he said, work for companies with below-average productivity. Just a 10% change in the right direction could add £130bn to national GVA.
For the Productivity Council, which received £13m in grant seed funding in the Autumn Statement to commence its work in January 2017, improving the management advice available to business owners is seen as mission-critical. It is developing an app for entrepreneurs with a range of practical tips. Terminology, he added, was important here; at the firm-level, business owners don’t tend to think in terms of productivity. While a critical concern at the macroeconomic level, the concept is too abstract for firms getting on with the day-to-day. Instead, management support should focus on how streamlining practices and upskilling and empowering staff can give firms a competitive edge. As Richard Evans of Mechatronic Solutions, one of the Goldman Sachs 10,000 Small Businesses Programme alumni at the conference, said: “We need to think about productivity in human terms and not just the numbers”. In aggregate, these incremental gains will add up to productivity growth.
This is exactly what we observe with ambitious firms participating in business mentoring programmes such as the Goldman Sachs programme. After ‘graduating’ from this four-month, intensive taught course, alumni go on to make major changes in their business practices. A recent evaluation report found that 84% make process changes in their business and 92% make greater use of financial data to make decisions. What’s more, graduates also grow their turnover faster than employment, on average (81% per year vs 31%), resulting in a boost to labour productivity.
This suggests that the right support that equips business owners with the skills they need to plan their growth in a more structured and sustainable way stops them from speculative ‘over-hiring’ of staff on the assumption that sales growth will outstrip their added costs.
If their growth opportunities are correctly identified, then business owners can be more confident that when they hire people it’s based around realistic ambitions. This means they’re less inclined to add staff too quickly and negatively impact their productivity. A small shift in this type of thinking across a large number of businesses may have a positive impact on overall UK productivity.
Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the Enterprise Research Centre, its Funders or Advisory Group.