We can solve the productivity puzzle by investing in people

By Patrick Spencer, Head of Work and Welfare Unit at the Centre for Social Justice

In his Budget, the chancellor Philip Hammond announced forecasts from the Office for Budget Responsibility (OBR) that the British economy will grow by 1.4 per cent in 2018, below previous forecasts of a 1.6 per cent expansion.

The reason? “Regrettably, our productivity performance continues to disappoint,” said Philip Hammond.

He is right to lament the UK’s poor productivity performance: productivity (measured as output per hour) is below its pre-crisis level a decade ago. If productivity had grown at the same pre-crisis rate (approximately two per cent), our economy would be one fifth larger.

The chancellor’s predisposition with productivity is nothing new – he announced the creation of a National Productivity Investment Fund in 2016, with £23bn for local infrastructure and productivity related spending.

The £23bn is to be targeted at accelerating housing construction, building electric rail lines, research and development and installing a 5G communications network.

However, while infrastructure spending, business investment and local growth initiatives are all important factors that contribute to productivity growth, more attention must be paid to one of the most significant drivers of productivity stagnation. The bottom 20 per cent of earners, those that have been marginalised in society and are in need of government support.

There are nearly six million low paid workers in the UK today, and the Social Mobility Commission, the public body that monitors social mobility, estimates that just 10 per cent will progress out of low pay within 10 years. Figures from Eurostat, the statistical body for the European Commission, suggest that just 15 per cent of low-skilled workers will see any form of occupational progression in their working lives.

Most concerning, analysis from the Institute for Fiscal Studies, a think tank, shows that wages at the bottom of the income scale have hardly grown in two decades. Income growth has been propped up by government intervention in the form of cash transfers.

Productivity will never grow with such a waste of human capital in our economy. Life on low pay can be hugely damaging to an individual’s long term personal and economic prospects. It is a self-perpetuating cycle of underperformance.

Low pay is stressful, sometimes physically and mentally damaging, and can lead to a sense of disenfranchisement and low morale at work. The associated financial anxiety can put pressure on families. Insecure work with flexible hours reduces the time parents can spend reading, eating and talking with their children.

This can have very damaging long term effects on a child. It is hardly surprising that the Social Mobility Commission found that 45 per cent of income inequalities passed down from parents to children.

Low pay is of course a fact of economic life, determined by market forces and often reflective of how economically valuable an individual’s skills are. However, many of the most disadvantaged in society in low-paid employment are stuck there, unable to climb up the economic ladder of opportunity.

At the root of the problem is an education system that fails a majority of disadvantaged students. Sixty per cent of students on free school meals won’t reach the basic level of attainment, an A* to C grade at Maths and English GCSE.

The UK has a weak vocational education sector, with fewer students studying vocational courses than more productive economies like Germany, Belgium and the Netherlands. We have an underfunded further education system.  Further education college students receive approximately £5,639 per head in public subsidies – half that of university students.

We also don’t invest enough in professional development options for workers. Just one in three workers in Britain will be given the opportunity to access a professional development course, designed to boost their skills and aptitude in work.

What can be done in the near and medium term to address this issue? The Centre for Social Justice has set out some far-reaching proposals to tackle exactly this. The government must continue the reforms that have already helped improve schooling, allowing more than 1.8m more children to learn in a good or outstanding school.

More must also be done to support disadvantaged students through school, both via vocational routes and into high quality further and higher education courses. The gap between per student funding in further education colleges and universities must be closed. Apprentices should be paid the living wage and employers should be encouraged to provide the resources for staff to seek advanced qualifications.

Money for infrastructure, boosting exports, empowering entrepreneurs, and supporting local growth are all important for productivity in the long term. But the steps outlined here will increase productivity, while also offering a helping hand to some of the most disadvantaged in society.

A version of this first appeared on City AM