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Devolution is needed for a productivity revolution

Shared Intelligence’s work on devolution supports the IPPR’s latest analysis of the UK’s productivity puzzle.

UK productivity performance is a long-standing concern. When measuring economic output per hour worked, the country has a productivity gap of between 23 and 32 per cent between it and the otherwise comparable economies of Germany, France, the Netherlands and Belgium. According to the Economist, the French could take Friday off and still produce more than Britons do in a week.

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To make matters worse, UK productivity performance has been significantly set back by the economic downturn in 2007/08. The IPPR finds that output per hour is now 17 per cent below what it would have been if it had continued to increase at its pre-crisis trend.

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As the economy reaches the outer-limits of its jobs-rich recovery (the latest labour market data showed an increase in unemployment for the first time in two years), closing the productivity gap is increasingly recognised as the key to raising living standards and improving the public finances. The IPPR report offers a timely explanation of why the UK’s productivity performance has been so poor and what should be done about it.

Significantly, their analysis indicates that the UK’s ‘productivity puzzle’ is more to do with poor productivity performance within sectors (and across the economy), rather than a compositional bias towards low-productivity sectors. For example, it’s not just a lack of higher-value manufacturing jobs, but also that UK manufacturing is less productive than elsewhere – 27 per cent less productive than in France, and 33 per cent less productive than in Germany. This same holds true for sectors like wholesaling and retailing, and transport, accommodation and food services.

That said, the report also finds that recent jobs growth in low value-added sectors of the economy has affected the overall composition of the workforce, putting further (downward) pressure on productivity. The best way to restore productivity growth is, therefore, to boost job-creation in higher-productivity sectors, particularly in areas exposed to international trade.

However, activities like high-value manufacturing and life sciences, which are often the focus of Government support, account for relatively small share of total employment. In addition, they are already heavily incentivised to increase productivity levels because of international competition.

For that reason, the IPPR recommends that more attention should be given to measures to boost performance in lower-wage domestic services sectors, which account for millions of jobs, but do not come under the same pressure to raise productivity.

Raising the minimum wage is seen as welcome, if insufficient. Previous evidence reveals the UK to have too many low-performance workplaces and accompanying measures to boost workplace productivity are likely to be needed. This should include support for firms to improve management skills, job design, and employee engagement.

The IPPR also suggests that cuts to infrastructure spending, further education, and (in real terms) the science budget during the last parliament are likely to have contributed to recent productivity underperformance. It calls on Government to consider the impact of future spending commitments, and emphasises the importance of getting the most out of investments in these areas.

The report does not go in to detail about how to make this happen. But our recent experience of devolution proposals suggests that local areas have a vital role to play in improving national productivity performance. They are (often) well-placed to help deliver a better return on investment in areas like transport and skills, while support programmes to develop workforce productivity (e.g. management skills) can be more effective if designed and delivered locally, with local employers in the driving seat.

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