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Productivity is back: but what have we learnt?

Martin-Christian Kent, executive director, People 1st

Productivity is back in the news; firstly after the Budget revealed that the Office for Budget Responsibility (OBR) had downgraded its growth forecast for the UK and last week, when the government released its latest industrial strategy white paper.

So what have these events taught us, and what do they mean for businesses in practice?

Downbeat forecasts

The OBR expects the economy to grow by just 1.5% this year, slowing to 1.4% next year and 1.3% in 2019. This gloomy prognosis is in step with recent retail figures that suggest weaker consumer spending, and concern in the hospitality sector about an overstretched restaurant industry and increased discounting in the run-up to Christmas.

These forecasts have led to the usual soul-searching about how UK productivity is lagging behind its main international competitors and how it can be improved. Naturally, much of the discussion has focused on how businesses can be encouraged to increase their investment in technology and the critical relationship between productivity and wage rises.

“There is no evidence that increased productivity has impacted wages.”

Some sectors, such as hospitality and retail, have come in for some criticism given their reliance on lower-paid workers and, whilst some of the discussion has been illuminating, too often the debate has been predictably dominated by entrenched views, rather than what is really happening on the ground.

We have seen this in relation to the discussion about immigration, pay and productivity. The service sector has seen increases in all three areas in recent years, but the relationship between them is far from straightforward. Productivity in retail has been largely driven by the growth in online and omni-channel retail, whereas productivity increases in hospitality are largely structural, as a result of the growth of businesses with multi-site operations.

As we explored in two of our recent reports – The performance and talent management revolution and The chef shortage - A solvable crisis? –there is no evidence that increased productivity has impacted wages. Instead wage increases have been largely due to the ongoing recruitment problems. In fact, most businesses are making incremental productivity improvements in order to offset increased costs.

“Many of the roles employers are seeking to fill will not get anywhere near a skill shortage list.”

A number of commentators have also expressed a clear view that immigration is depressing wages and hampering investment in productivity. Again there is no evidence of this, and the view that the businesses, in a post-Brexit world, will be able to fill vacancies by paying more, targeting those on unemployment benefits and bringing in foreign labour to fill occupations through the skilled occupation list is concerning.

It’s a simplistic view which ignores the investment involved in recruiting a UK workforce and the fact that unemployment is at a record low - not to mention that many of the roles employers are seeking to fill will not get anywhere near a skill shortage list.

Similarly, many businesses are not in a situation that allows them simply increase wages. As our recent chef shortage research revealed, many operators are working on wafer thin margins and a fall in consumer spend means that many operators can’t simply afford to pass on the costs to customers.

Industrial strategy

So how does the government’s industrial strategy white paper address this? In large part, it doesn’t.

Despite the government stressing that the industrial strategy is not about cherry-picking specific sectors in its earlier consultation paper, it’s hard not to believe that they are doing just that as it largely focuses its attention on the digital and STEM sectors.

Given the growth of artificial intelligence, few would argue about the long-term need to do this, but at the same time, despite its colossal 225 pages, there is little in the strategy that is likely to alleviate the problems affecting productivity and wage growth or the immigration challenges facing many service sector businesses today.

“There is little to no mention of management skills.”

The strategy is structured around five pillars: ideas, people, infrastructure, business environment and places. Given its size, there should arguably be something for everyone, but nothing jumps out as substantially addressing the service sector’s current productivity issues.

The ‘people’ pillar, for example, largely focuses on the introduction of new T-levels and the importance of more effective maths provision. There is little to no mention of management skills, which our research consistently shows is a key focus for businesses looking to improve staff performance and talent management.

Nor is there much about how businesses could be encouraged to introduce methods such as job flow and job design and increase effective technological investment and learning and development to increase productivity.

“Many don’t label these activities as productivity increases, but that’s what they are.”

I imagine that most of the latest discussion around productivity will seem abstract for many businesses, who continue to make incremental performance and productivity changes in response to rising costs, recruitment problems and changing employee attitudes.

Many don’t label these activities as productivity increases, but that’s what they are.

At the same time, we will continue to stimulate businesses in thinking about productivity gains and through our virtual network, The Wire, we will provide a platform for businesses to share best practice and create a space for those with a good story to tell.

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Members will have access to exclusive insights, blogs and webinars, as well as two exciting new tools that will help businesses measure their performance and productivity.

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