Productivity in Focus

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Economists Vicky Pryce, CEBR and BCU, Mark Beatson, CIPD and Paul Forrest Midlands Economic Forum and IDEA Birmingham, throw light on the UK Productivity conundrum. Beverley Nielsen reports …

IDEA Birmingham assembles leading experts to review UK productivity conundrum, September 2015

Mark Beatson, Chief Economist, Chartered Institute for Personnel Development, CIPD, speaking at Birmingham City University’s newly opened Curzon Building at the first event organised by the newly formed Institute for Design and Economic Acceleration, (IDEA) Birmingham, to an audience of business people and academics from BCU, Aston and Birmingham Universities, on ‘UK Productivity in Focus’ explained how he had been assessing the UK productivity conundrum. Through his work in producing the latest CIPD report, Investing in Productivity, unlocking ambition’ (published 25th September 2015), he observed that more companies than he had expected, two thirds, were using the term ‘productivity’ in conversations about the performance of their business, with a further two thirds of businesses measuring productivity – although they were not necessarily the same businesses.

Productivity calculated as economic output per hour/ per person, had, on this measure, reached its slowest rate of growth in nearly two decades. “Productivity has wobbled around for the past seven years; it basically hasn’t increased and that’s not happened as far back as we can tell, probably since the year dot,” he said.

“This is a real surprise and we have been at a productivity standstill. The productivity gains we made against other countries from 1991 until 2008 have been lost since then we’re back where we were a quarter of a century ago in relative terms.

“Productivity growth actually drives wages, so in the last parliament when we were talking about the cost of living crisis, “why are earnings going up less than inflation?” lack of productivity growth was the main part of the answer, and despite our recent economic growth we have yet to see much productivity growth. This is known at the ‘productivity conundrum’,” he said.

“The recession was accompanied by an investment slowdown, a liquidation rate which has also slowed with company churn slowing and the term, ‘zombie’ companies having emerged. In addition we have seen a slowing in the movement of people from job to job and this has been trending slower for the past fifteen years with much less of this happening than we would have expected following the crash.”

Mark Beatson had through his research identified three types of company – Survivors, Cost Cutters and Balanced Investors, with each grouping showing typically differing levels of productivity.

Survivors companies who identified with the statement “We were in survival mode for a long time and have not been able to invest in major improvements to the business” were most likely to say their productivity was only average (57%).

Cost Cutters, who identified with the statement “We are a leaner business now because we took cost out during the recession and the productivity of our workers has improved as a result” were generally showing better productivity with 54% of the sample above average.

Balanced Investors, who identified with the statement “We have continued to invest in equipment, technology and people and have increased our productivity significantly” were also more likely to show above average productivity levels with 54% of this group above average and 16% well above average compared to just 1% and 3% of Survivors and Cost Cutters.

However, we needed more dynamism in our businesses, he noted, as above average productivity amongst business overall was noted in only 45% of businesses survey, suggesting that perhaps we needed a high productivity grouping or ‘agitators’, able to shape markets and move swiftly to take advantage of emerging technologies and opportunities.

Both Vicky Pryce and Mark Beatson observed the growing importance of design-led companies with open and creative cultures able to collaborate with others and engage with customers more successfully – all of which was becoming an increasing determinant for domestic and international market success.

Economist Vicky Pryce, speaking in her role both as Chief Economist for the Centre for Economic and Business Research, CEBR, and Visiting Professor, Birmingham City University, said that post the recession firms had seen a reduction in the value of sterling, interest rates had remained low and as a result they had seen margin increases which they had not passed on to customers, taking the increased revenues to both decrease their dependence on banks and hold onto staff, resulting in lower productivity levels.

“In the period 1997-2007 the financial sector had been expanding, people had been earning a lot of revenues with the overall improvement of the UK economy being very considerable. However, we may have overestimated this so we may not go back to where we were,” she noted. In the years following the crash business investment had fallen 20% with output falling faster than staff reductions and borrowing remaining cheap through low interest rates.

“Now we are out of the crisis we need to see productivity growing. However we have concerns now about investment into Skills, R&D, machinery, people, universities and FE, technology. Without this vital investment future productivity growth will remain challenging,” said Professor Pryce.

“There is a close relationship between government investment and business investment which has been demonstrated by Jonathan Haskel in his research. In particular investment by government into science and research in universities has strong and positive spill-overs to productivity,” she said.

“Cuts to local government spending could also lie behind the productivity crisis. Over the period of the Coalition government in comparison to the previous five years, we have ended up with the average infrastructure spend being £45bn instead of £48bn.

“But when it comes to the regions, that halved over the same period and now we are already seeing electrification plans being abandoned, so there is a real issue for the regions.

“We are beginning to see the various authorities work together but in fact they will be working together with less money and raising revenues in a way that’s going to have to make up for the shortage.

“The UK’s productivity problem is deep-rooted and long-term,” observed Vicky Pryce. “The solutions need to be equally holistic and far-reaching requiring patience and perseverance from policy makers as well as from business.

“Investment is important but so too is making best use of the assets we already have – capital, knowledge, ideas and skills and ensuring sources of knowledge and skills are properly connected within local economies is critical. However, a lot of this also depends on what happens within the business – it is not an easy area for policy makers or business support agencies to reach.

“You have to have productivity growth if you want to continue to grow, without that you just can’t have growth and this is the point we are now at,” concluded Vicky Pryce.

Midlands Economic Forum Economist, Paul Forrest, emphasised the Midlands economic position in the context of UK productivity. The West Midlands had enjoyed the strongest export growth and according to PMI the strongest productivity growth of any UK region since the end of the recession. The Midlands region was the second largest exporting region in the UK after the South East and enjoyed the largest export surplus with China with four times more exports from the West Midlands than any other UK region. 30% of all UK cars were made in the West Midlands and 3% of world aerospace output is made in the Midlands. 50% of our exports as a region were from the auto sector indicating a need to diversify our Midlands economy.

“How we measure productivity matters,” stated Paul. “ Is it net margin per hour or day worked, or is it output per person in work or output per person within the total population?” he asked. “The answers make quite a difference to the way we view success.

“Productivity growth in manufacturing during the period 1997-2007 has been greater than that enjoyed by every other sector in our economy outside of Transport and communications and Agriculture with manufacturing growing by +48% during this decade, compared to +58% for transport and comms and +50% for agriculture. Financial services however had grown by +31% with distribution and hotels productivity growing by +25% during the decade.”

Labour productivity had been flat since 2006 with manufacturing labour productivity outperforming the whole economy labour productivity since 2010.

The greatest gains to productivity growth had come from three key sectors within manufacturing including transport and communications, Computer and electrical and chemical and pharmaceutical.

“This means the Midlands contribution to UK productivity should not be underrated and needs to be properly understood. However, productivity growth can only continue at a sensible rate in the Midlands if investment in infrastructure – physical and digital – continues.

“Connectivity within our supply chains in these sectors is vital as manufacturing has moved from being production focussed to a manuservices-focussed set of activities that involves highly collaborative inter-company engagement. For example within aerospace there are three hundred identified businesses based in the Midlands and being able to move people, goods and services easily between them to produce next generation products into this world-leading UK sector is essential. It can take 5 or 6 SMEs collaborating to produce a new product in auto and aero and improving connectivity to improve productivity is vital to these. We need to do more to understand where innovation is taking place but within transport and communications there are 200 sub sectors alone,” said Paul Forrest.

However the public sector capital infrastructure costs of moving the M25 road infrastructure at Heathrow so as to enable the building of the London Heathrow third runway is equivalent to 6.5 years capital transport investment in the West Midlands and 9.5 years capital transport investment in East Midlands.

“Intelligent factories are based in barns and garages in cities and rural places around the Midlands with designers using 3-D printers to produce prototypes which are then being taken and produced in factories in places like Telford and Staffordshire and we are beginning to see the start of the Internet of Things, but broadband access is a problem for us. Average download speed is a major constraint for the Midlands.

“Rail access from places such as Birmingham to Stoke and Nottingham to Derby which take around 2 hours are a problem. The government by moving Network Rail from the private sector to the public sector meant that it ran out of money and moved all planned activity and investment into the next phase – so investment planned for 2020-2025 is now scheduled to take place in the phase 2025-2030, way beyond the timeline required by most companies seeking to improve productivity today.”

It was important to understand that whilst SIC code measures identified manufacturing as contributing 15% to the Midlands economy, sector production was now distributed as a result of servitisation of production combined with outsourcing.

“The evolution of the economy makes it increasingly difficult to distinguish the distinction between the manufacturing and service sector and in reality there is a much more sophisticated interaction between enterprises which were once regarded as solely services, but now provide innovative knowledge transfers to the manufacturing sector and similarly manufacturing enterprises no longer sell a product but offer a range of ancillary services that both extend the lifetime of a product and deepen the innovative potential between customer and provider.”

Midlands Economic Forum estimated that due to these trends the real contribution of manufacturing amounted to closer to 38% rather than 15% and as most of the logistics taking place in the region was driven by production activity it could be as high as around 50% of our economy. On this basis the region had to push to gain its fair share of investment with government to redress the imbalance of the past three decades.

Professor Bruce Philp, Head of the Department of Strategy, Marketing and Economics, Birmingham City Business School commented that a vital measure for the Midlands was the cost of output per hour foregone to work-related activity through the cost of congestion, with Paul Forrest observing that the Office for National Statistics did not measure the use of capital for productivity measures.

“Greater investment in long haul freight could reduce manufacturing costs by 10% and create 243,000 jobs over the next five years according to the Heseltine report, No Stone Unturned,” claimed Paul Forrest. “Getting rid of Air Passenger Duty was shown to have had a dramatic impact on productivity on the Netherlands economy.

“The productivity puzzle is perhaps more as result of Whitehall preoccupations with national aggregates rather than place-based specifics, whereas the solution lies in understanding the dynamism of the different sectors and regions within the UK, with the West Midlands offering the most obvious example of how productivity is being constrained by infrastructure.”