Productivity: Building A Better Future

12/10/2017 11:49
The recent party conferences debated a host of economic and social policy issues, but underpinning cross-party calls to build a better future is the need to address the UK's productivity challenge. And that means harnessing technology, skills and infrastructure to deliver post-Brexit economic stability across the UK. When Andy Haldane, the Bank of England's Chief Economist, addressed the London School of Economics (LSE) earlier this year, he wheeled out the old chestnut, Paul Krugman quote that: "productivity isn't everything, but in the long run it is almost everything." Haldane reminded his audience that, even in this post-truth world, Krugman's quote has two important virtues: it is empirically verifiable and appears to be factually accurate. Little wonder then that politicians fret over the importance of productivity in building a better future. According to the Office for National Statistics (ONS), French output per hour in France was 14% lower in 2015 relative to the pre-recession trend. It was 9% lower in the United States and 8% lower in Germany - the developed economies' top-performer. But when it comes to the UK, productivity per hour in 2015 was 18% adrift from the 2007 trend and is now around 35% below Germany. And while most developed countries seem to be in the same leaking productivity boat, the problem about plotting the future course of HMS Productivity Puzzle is that neither economists nor bankers - let alone politicians - fully understand or agree what's causing the leak. It's not as simple as working harder and longer for the same (or less), at a time when real wage growth is broadly static. And the government recognises this: its Industrial Strategy is rooted in the objective of raising productivity growth through innovation, R&D and driving up exports and GVA per capita, as the key to greater wealth creation, higher living standards. Then there's fears of technology-driven job losses thanks to 'smart automation' - the combination of artificial intelligence (AI), robotics and other digital technologies. Our analysis (published in our March 2017 UK Economic Outlook) suggests that up to 30% of UK jobs could potentially be at high risk of automation by the early 2030s. For individual workers, the key risk factor is education. For those with just GCSE-level education or lower, the potential risk of automation is as high as 46%, but this falls to only around 12% for those with undergraduate degrees or higher. And, according to a report by Dell Technologies and the Institute for the Future (IFTF), 85% of the jobs that will exist in 2030 haven't been invented yet. That means that workers entering the labour market today need to be thinking - not about what they'll be doing 30 years from now - but what they'll be doing in the next ten, or even five years. Nevertheless, tech and talent offer real opportunities for expanding trade. PwC has calculated that matching Germany's employment rate for 18-24 year-olds would deliver a £43bn boost to the UK's GDP if those young workers have the skills and flexibility to move seamlessly between new, technology-enabled careers. Today's productivity puzzle needs a fresh approach. As we set out in our submission to the government's Industrial Strategy consultation, an holistic approach to encouraging innovation, investment, exports and wealth creation, can deliver productivity growth, driven by four elements:
  • the importance of education and training in raising workforce skills;
  • infrastructure - from housing and roads to broadband and competitive energy
  • government policies - including a new approach to taxation and deregulation; and
  • a national economy that harnesses and facilitates all the UK regions and all sectors

As we set out in the Demos-PwC Good Growth for Cities Index, local public agencies, collaborating with LEPs, the private sector and higher education, can embed an inclusive place based approach to growth. In a post-EU landscape this means cities and regions proactively seeking investment, developing trading links and promoting exports. And that means government devolving additional fiscal powers as part of a re-booted devolution deals process.

It's also not just a challenge for the private sector. There is also a contribution that the public sector can make. Still accounting for a sixth (16.9%) of UK employees, an increase in public sector productivity would make an important contribution. In recent years there does seem to have been an uptick, with total public service productivity increasing by 2.3% between 2010 and 2014 (according to the latest ONS release). But there's more that can be done, driven not just by cutting costs but by transforming the public sector through new operating models and, as we set out in our work on Productivity in the Public Sector:
  • Redesigning jobs for high productivity working, particularly against the background of the rise of Gov.Tech, Artificial Intelligence and robotics.
  • Tailoring learning and development to accelerate the creation of an adaptable public sector workforce, ready to meet the challenges of the future.
  • Aligning pay and rewards to incentivise and sustain productivity improvement.
There is no silver bullet to improving productivity, in the public or private sectors, but a focus on embracing technology, developing flexible skills and looking to the future is a good place from which to start.