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Beyond the silver bullet approach to raising productivity

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Featured Image: by Adam Marikar on Unsplash

Stephen Boyd
Economic Policy Unit, Scottish Government

The Scottish Government’s Economic Strategy (2015) recognises that “more productive economies can produce greater quantities of goods and services for a given set of resources, typically leading to higher incomes, living standards and wealth”. Raising the rate of productivity growth is not an end in itself but one of the means by which we can build a better society for all.

Indeed, it has been argued that ‘raising productivity is arguably the central economic challenge in the UK’ and the same might be said for Scotland. But experience suggests that raising the rate of productivity growth – significantly and durably – in any economy operating at or near the technological frontier is, to say the least, difficult. There are few (any?) examples of advanced countries achieving such an outcome.

Therefore the Scottish Government was delighted to learn about the launch of the Productivity Insights Network. In the past, the productivity debate has suffered from a narrow focus on ‘5 drivers’ (competition, enterprise, skills, investment and innovation) with insufficient attention paid to how these interact with each other and to the practical application of policy at workplace level. PIN’s interdisciplinary approach, emphasis on ‘insights’ and openness to ‘alternative and innovative ideas’ seemed particularly promising and very much in step with our thinking.

Following our attendance at PIN’s excellent 2019 conference and discussions with Prof Leaza McSorley, PIN lead researcher for Health and Wellbeing and Iain Docherty, PIN Infrastructure lead, a series of seminars was organised around the chapters in PIN’s forthcoming book Productivity Perspectives. The following seminars have taken place to date:

• Leaza McSorley – Inequality, Wellbeing and Inclusive Productivity Growth
• Kirsty Newsome and Tim Vorley – Contemporary Work, Employment and the Productivity Puzzle
• Iain Docherty and David Waite – Infrastructure and Productivity
• Colin Mason and Andrew Henley – Small Business Growth and Productivity

Over the next few weeks seminars will also be held with Philip McCann (Productivity Perspectives: Observations from the UK and the International Arena), Maria Abreu (Human Capital, Skills and Productivity) and Richard Harris (FDI, Capital and Investment Markets). Our hope and expectation is that the series will continue thereafter.

The seminars are providing an excellent opportunity to consider ways in which current research and analysis can help inform policies aimed at raising productivity growth in a manner that is consistent with the Scottish Government’s wider policy priorities on sustainability, wellbeing and fair work. All have stimulated much useful discussion and debate.

What have we learned so far?

First, policymakers want to engage! The seminars have generated a lot of interest from colleagues across all departments and grades of the Scottish Government. Colleagues want to learn about new research and analysis and how it might be applied to their areas of policy. It is, of course, helpful that PIN members are proving very adept at tailoring their presentations to a non-academic audience.

Second, the silver bullet fallacy – the belief that policy measures with the potential to send productivity skyrocketing are lurking somewhere just around the corner – is dying (if perhaps not quite dead). The presentations haven’t pretended to offer easy solutions to improve Scotland’s productivity performance or even suggest that such solutions might emerge in the future. Rather, taken together, PIN’s work indicates that raising the rate of productivity growth is a long term project requiring action across a range of policy areas, some degree of experimentation and recognition that effective policies are likely to be context-specific. This is far from a counsel of despair: PIN’s work is providing practically useful insights into developing and targeting new interventions.

Third, encouragingly, the emerging policy prospectus for productivity growth looks consistent with the Scottish Government’s wider policy agenda. As Leaza emphasised, fair work and inclusivity are not barriers to productivity growth but the means by which it might be achieved. It is difficult to see anything emerging from PIN that would support an agenda based on deregulation, cost minimisation and work intensification. This represents a significant, and from our perspective welcome, advance on pre-crisis approaches to productivity growth. Yet, as Kirsty and Tim concluded, we do require further “research on how the ‘fair work’ policy agenda relates to and can advance productivity outcomes”.

Finally, raising the rate of productivity growth in Scotland must be a continuous learning process through which Government will work with PIN and others and involve representatives of the businesses and workers whom we ultimately wish to become more productive. There must be room to experiment and learn from both successes and failures. Our seminars with PIN are proving a tremendous springboard for this new approach to productivity growth.

Most of the 21st century has witnessed a prolonged slump in productivity during which policy measures – particularly at UK level – have often returned to old standards such as tax cuts and initiatives to cut ‘red-tape’ which, unsurprisingly, have proved stubbornly ineffective. It is therefore exciting to observe the emergence of PIN and other ESRC funded research on productivity. We now have good reason to believe that our understanding of this complex issue will continue to improve and with it the prospects for developing effective policy. There also seems to be a growing awareness in the business community of the importance of raising productivity: despite the long-standing belief that businesses do not react well to initiatives framed around productivity, the response to the Productivity Clubs currently being piloted by the Scottish Government has been hugely positive. It is imperative that we build on this upsurge of interest.

PIN is proving itself to be a model of academic engagement and it is a pleasure to be working so closely with the team. The Scottish Government is excited about developing this relationship over the coming months: running future seminars and considering ways in which we might draw together PIN researchers’ work to practically support effective policymaking in Scotland. By doing so we increase the chance of making a tangible difference to long-term productivity growth and, in turn, improving the living standards and wellbeing of all Scotland’s people.

Find out more about the series here.

Harnessing productivity through inclusive innovation in the North West

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Featured image: Kendall Ruth on Unsplash

Dr Lara Pecis
Lancaster University

Income inequalities and unequal distribution of economic growth across regions in the UK has increased since the 2008 financial crisis. But why are region variations present in the first place? A reason for these variations are the different levels of engagement with entrepreneurial activities across areas; engagement is also affected by the access to resources that different groups of entrepreneurs have (e.g. women and ethnic minorities). One of the solutions is to focus on innovation as a resource for productivity and inclusive economic development across different strata of society.

To address this regional productivity gap, my research project (full report), supported by PIN, has focused on the link between inclusivity, social cohesion and policies supporting regional entrepreneurship activities through innovation hubs in the North West (NW) of the UK. These issues were considered through 24 interviews with entrepreneurs, senior managers of hubs and policymakers mostly across Liverpool City Region, Lancashire, Cumbria, and Greater Manchester.

With regards to inclusion, our findings suggest that women and BME entrepreneurs across the NW generally find the entrepreneurial landscape to be challenging. There is a perceived lack of inclusivity of voices on what is relevant for entrepreneurial groups or individuals. In this context, entrepreneurs interviewed feel that the disadvantaged and the disabled are often left behind because of scarce financial resources or lack of connection to influential groups. Ethnic diversity in some of the NW sub-regions is deemed scarce in the context of business. This might also refer to the general population composition of the area. Thus, in terms of diversity in ethnic backgrounds and mental/physical abilities, the data reveals a perceived lack of a promising inclusion.

An interesting insight of the project is that women-focused organisations constitute an excellent place for women entrepreneurs to find help to start their enterprise. Programmes offered by these organisations provide significant help in mentoring and networking at the start-up phase. Women entrepreneurs specifically found mentoring and supporting courses and events immensely helpful to build confidence, which is typically lacking in women entrepreneurs. They also appreciated the flexibility of these organisations to provide courses built around time commitments for women who juggle multiple roles at home and outside. However, our research revealed that the real problem for women-focused organisations is in helping these new businesses develop and grow, to help them find the means for productivity, as well as securing reliable funding for their sustenance.

Emerging from the interviews is an awareness that issues of confidence, stress, and mental and physical health for women, BME and under-represented parts of the population categorized through post-codes limit productivity to a considerable extent. More attention to these issues would be beneficial towards more successful business set-ups, increased economic activity, closing the productivity gap and creating a more equal society.

Common across all hubs interviewed is the constant worry for the serious dearth of public funding that can support investment for promising innovative businesses and help them grow. There is a general perception that for funding and networking purposes hubs should look outwards to build connections with businesses and funders in London. Otherwise, even with a good talent pool, businesses lose out on people and opportunities.

On the policy level, interviews reveal that different sub-regions require different approaches. Policy managers voice concerns for access and support to poor communities and their entrepreneurial needs. Unfortunately, the bias towards the very definition of innovation and the importance of technical over social innovation from broader policy perspectives moves funding away from social innovation projects. Some policy managers emphasize the need for recognition of social innovation and inclusion at a national policy making level. They argue that datasets focusing on health and productivity, measured around access to transport, housing etc. show that much of economic benefit comes from developing the social side of entrepreneurial activities.

Thus, what seems problematic is a definition of innovation at the political and funders’ level as something strongly technical, and that loses out on fostering and funding social innovation that can create avenues for inspiring the youth, help develop local talent and retain them in local jobs. This might represent a solution to reduce unemployment, increase social cohesion and contribute to increased productivity in the NW.

Overall, this project has highlighted a number of important issues policymakers should consider when approaching regional growth and productivity through innovation. In the NW, innovation hubs have been instrumental in helping women and BME entrepreneurs set-up their businesses. They help building confidence, skills, networks and clients and often provide a place to begin their business operations. Unfortunately, lack of funding towards these small businesses often means that the companies cannot grow. Hubs in the NW try to influence policies, but often fail because of regional disparity in funding schemes, the conflicted notion of innovation itself, subtle gender discriminations faced by women hub managers in discussions around policy, and issues of transport and communication that often deprives them of opportunities to lobby in London.

A series of blog posts by Dr Pecis regarding the project are available here.

Employers and Employees Can Benefit from Reducing Insecure Employment

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Daniel Kopasker and Catia Montagna (University of Aberdeen)

Featured image: Cytonn Photography on Unsplash

Last month Business in the Community hosted a roundtable event that brought together employers and HR professionals to discuss the incentives to provide secure employment. The title of the event, like the findings of our recent Productivity Insights Network project conveyed a very clear message: job security is good for business.

How can employers benefit from job security? The key finding in our report predicts that every 1% of employees transferred from temporary to permanent contracts will increase UK firms’ productivity by 0.7%. This result is in line with studies of other countries. We also find that reducing temporary employment is particularly beneficial to the less productive firms.

Within the project we formed an industry-level panel, covering the period 2004-2017, that combines employer-level data from the Business Structure Database (BSD) and employee-level data from the Annual Survey of Hours and Earnings (ASHE). Using this matched dataset, the figure below demonstrates a clear upward trend in the incidence of temporary employment over the period. As is well known, this period of increasing temporary employment coincided with stagnating labour productivity growth.

Trend in the Incidence of Temporary Employment in the UK Private Sector


Source: ASHE-BSD 2004-2017 matched dataset using main job only for private sector employees (n=1,428,901).

Our findings demonstrate that there are substantial potential benefits from effective legislation or HR policies addressing insecure employment. One proposal, within the UK Government’s Good Work Plan is to introduce an employee’s right to request more secure employment after a fixed period with an employer. How effective or enforceable such legislation would be remains to be seen. Certainly, in Ireland  legislation has gone further than allowing employees to make a request.

Contract status, however, is only one aspect of insecure employment. We have previously found that around 10-15% of employees on full time permanent contracts experience work-related insecurity, and this is damaging to their mental health. The challenge for HR professionals is to understand and address the sources of this insecurity. These could include factors such as workload, management style, and financial pressures as highlighted in a recent report on workplace mental health.

The causal relationship between insecure employment and mental health is central to our analysis. In related research we found that the mental health benefit of increasing job security is worth around £2,000 per year to employees. Although this is a conservative first estimate, it clearly shows the value to employees of secure employment.

Employers do not have to wait for government legislation to reap the benefits of limiting insecure employment. The Chartered Institute of Personnel and Development (CIPD) have developed the Mental Health at Work gateway that provides resources, training and information to develop approaches to workplace mental health and many employers are introducing HR policies to improve workplace mental health.  By recognising the interrelationship between insecure employment and workplace mental health, such practices can benefits employers and employees.

Our report, in combination with other research, clearly demonstrates that reducing insecure employment is good for both business and employees’ mental health.

We conjecture that workplace mental health is a key pathway to achieve productivity benefits through reductions in insecure employment. Our aim is now to form knowledge exchange partnerships with employers to test this conjecture. If you are interested, please get in touch.

You may also be interested in Professor Karina Nielsen’s Productivity Insights Network project (‘Thriving at Work’), which has produced resources to support employees returning to work following mental ill-health sickness absence. 

Universal Credit and In-Work Conditionality – a productive turn?

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Photo credit: Valeria Boltneva from Pexels

By Dr Katy Jones
Senior Research Associate
Decent Work and Productivity Research Centre (Manchester Metropolitan University)

Universal Credit – the new working age benefit for people who are unemployed or on a low income – potentially involves the introduction of “in-work conditionality” (IWC), placing responsibilities on individual claimants to increase their earnings (e.g. through increasing their hours/earnings in their current place of work or by taking up additional or alternative jobs elsewhere). These expectations may be backed up by support (for example, through advice from Jobcentre Work Coaches, or access to training), but also by penalties (benefit sanctions) if individuals do not comply with mandatory work-related requirements.

According to the DWP, Universal Credit will help ‘business to grow’ and ‘improve productivity. However, detail on how this is to be achieved is lacking. The policy of IWC arguably has a number of implications for a range of productivity-related issues, including skills, well-being and the nature of work. Arguably, focusing on individual workers, and emphasising work intensity (i.e. increasing working hours), whilst neglecting to consider demand side issues, such as work quality and management practices seems unbalanced, if ‘improving productivity’ is an aim of UC. Our project (briefing note and full report), supported by PIN, considered these issues through interviews with Owner-Managers and HR Managers representing 12 businesses operating in Greater Manchester.

The employers sampled varied in terms of the nature of roles offered and the contractual status of their staff – some offered mainly full-time positions, others offered mainly part-time roles but required staff to take on additional work as required by fluctuations in demand, some mainly employed staff on zero hours contracts. Productivity was generally understood as being mostly about making efficient use of resources and getting the most out of staff. Particularly for service sector employers, productivity was about providing a quality service in an efficient and effective manner, generally underpinned by a strategy of minimising labour costs. Flexible workforces were considered key to this – both in terms of staff being available to take on more work at times of high demand, and having staff who were willing and able to work in different roles when necessary. Increasing the hours worked by staff was not considered key to efforts to improve productivity. Instead, several employers talked about the importance of improving the skills of staff, including management skills.

Regarding expectations for employees to progress within their firm, employers generally reported that this was something they would consider, but that ultimately whether or not they offered more hours/pay depended on whether there was a clear business case to do so. Capacity for existing staff to take on more hours reportedly varied, and weak consumer demand could make offering more hours difficult. Several employers described opportunities across different departments/partner organisations to take on more hours. However, this depended on the number of hours required, and may not be offered on a permanent basis. Employing staff on a part-time, flexible basis was central to existing business models:

“We wouldn’t want to have every single person on a full-time contract. We’d still need some flexibility to fluctuate with the demands of business levels” (Employer 11, hotel)

Ultimately, the businesses we spoke to explained that their ‘bottom line’ would continue to have more sway than expectations placed on staff, and there was widespread reluctance to increase wages due to perception that this would impact negatively on the profits of the business.

Employers felt that the impact of IWC would depend on a range of factors including business needs, worker responses, and the approach taken (i.e. whether a supportive/sanctions-based approach, and the nature of support). There was a concern that new expectations introduced as part of the policy may be a hindrance to workforce flexibility and it was widely felt that if staff hours increased in response, this would not necessarily be productive for their business. Employers voiced concerns about the potential for it to have an adverse impact on staff (and their business as a result), as it might negatively impact staff motivation and well-being, and lead to absenteeism and presenteeism:

“[It’s] simple, happy team, happy guests…If we have a team who’s burdened with all these headaches, then of course that’s going to impact on our quality, productivity” (Employer 5, hotel)

Employers also felt IWC could lead to increased costs for businesses, incurred through managing recruitment – not only due to increased turnover, but also if more applications were made by others subject to it. Employers complained about the high costs associated with dealing with a high volume of applications, which they felt in part resulted from the existing emphasis of Jobcentres on requiring jobseekers to focus on the quantity, rather the quality of applications and job fit:

We get people applying for jobs just so they can sign on and say that, ‘Look, I’ve applied and I’ve been for interviews,’ and then waste all our time because they don’t actually want the job… It’s a cost to our business” (Employer 6, social care provider).

A few employers raised concerns that the policy could have a negative impact on employer-employee relationships, and that tensions could arise from mismatches between their requirements and those placed on workers by the Jobcentre. Some employers felt that policymakers should focus more on employer practices, rather than solely on claimants. Supporting employers to be better businesses was felt to be more likely to have a positive impact on both individual progression opportunities and firm productivity:

It would be probably more beneficial for the government to help employers become better employers, and to make the workplace a more positive environment than it is to push employees to get more jobs” (Employer 10, soft play centre)

Our project has highlighted a number of important issues which policymakers should consider as their ‘in-work offer’ is developed. Importantly, it shows that rigid expectations placed on individuals to increase hours or pay are at odds with the realities of working life in the UK labour market. At a time of low unemployment (and low productivity), the key challenge for policymakers is not moving people into work, but ensuring that, where appropriate, UC claimants are supported into decent and productive work where their skills and capabilities will be developed and used effectively. A ‘work first, then work more’ approach, focused on placing conditions on individual workers fails to consider long-standing issues of poor work quality and management practices, and appears to be at odds with the broader policy agendas focused on improving productivity and the quality of work.

A view of cloudy London from the Shard

The time has come to sharpen the focus on productivity

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By Dr Vicki Belt
Deputy Director
Enterprise Research Centre

Raising productivity is often cited as one of the UK’s most important economic challenges. On the surface of it, improving productivity sounds like a pretty straightforward idea to grasp. It’s about economies, workplaces and people being more efficient, increasing the volume of goods created in relation to the inputs used to produce them. But in practice, things are more complicated than that. Productivity is a term that is used and understood in multiple ways, varying depending on context. A mix of ideas also exist about how to best measure productivity and about exactly what needs to be done to improve productivity levels. But what do these multiple meanings and ideas mean for policymakers tasked with finding solutions to the UK’s productivity problem? Where should the priorities be? A joint event organised by the Enterprise Research Centre (ERC) and the Productivity Insights Network (PIN) brought together a group of researchers from different disciplines looking at productivity through different lenses to explore this crucial question.

Philip McCann, Co-Director of the PIN opened the workshop, using the lens of geography to examine the UK’s productivity problem. His presentation highlighted the marked productivity imbalances that exist in the UK, both between and within regions. These disparities are especially pronounced in the UK compared to other countries. Although there have been many attempts to theorise these patterns, their complexity means that they defy simple explanation. Philip argued that this fragmentation points to the need for more place-based productivity policies that are tailored to the needs of specific areas, rather than top-down, national productivity policies.

Nigel Driffield of Warwick Business School continued the discussion on the relationship between productivity and place, drawing on insights from his work on inward investment. Inward investment is highly important to the UK economy, and studying its impact on localities can shed light on the key ingredients of productivity growth. The presence of inward investors can lead to productivity improvements in local economies, but the mechanisms by which this happens are not straightforward. Much depends on the specific local context, particularly the types of firms that invest (e.g. sectors and job types/skill levels) and the linkages that are established with local firms and supply chains. To ensure positive impacts, policymakers need to carefully consider what sort of investment they want to attract and how they can ensure it becomes properly embedded in their local economies.

In the next presentation, Stephen Roper, Director of the ERC refocused the productivity lens from the local level to look inside the workplace, exploring employer perceptions of productivity.  Drawing on the findings from new research into understandings of productivity in six sectors, he drew attention to the ‘disconnect’ that exists between policymakers and employers on productivity. In most cases, employers interviewed in this study were likely to have narrow definitions of productivity associated with efficiency. In fact, productivity itself was a term that was rarely used spontaneously, and some interviewees declared it as virtually meaningless. This raises big questions about how resonant policy messages about productivity improvement are likely to be with employers. Is it possible to create a successful national narrative on productivity improvement when businesses do not have a shared understanding of what it is and how it applies to them? Would it be better to in fact to refocus the policy dialogue more clearly on how to ‘create value’ through people?

Temitope Akinremi, Research Fellow at the ERC provided further evidence on employer understandings of productivity in her presentation looking at productivity improvement practices in the metal industry. Interviews with employers in this sector show that again productivity is often defined in simple terms, typically linked to the efficiency and profitability of production, making cost savings and ensuring minimal human intervention in the production of outputs, with only a minority measuring value added per employee or per hour. Even within this specific, relatively small sector there are a diversity of productivity-related measurement practices in place, and a lack of consensus on exactly which measures should be used. Temitope argued that there is a strong case for an agreed industry-focused measurement to help raise productivity in this sector.

Katy Jones of Manchester Metropolitan University continued this more fine-grained focus on individual understandings of productivity, drawing on her research with employers in low paid work in the service sector. Amongst these employers it was notable that employer understandings of productivity were not all focused on efficiency related measures. Instead, different dimensions come into play, recognising the central importance of employee motivation in these jobs, with customer satisfaction and employee engagement, skills and training taking on more significance in considerations of productivity.

The panel discussion that followed picked up on a range of issues, but a central concern was the implications that the complexity of productivity definitions and theories brings for policymakers and practitioners. As one delegate pointed out, as more and more data has become available on productivity, it feels like we understand less and less about it. This causes confusion about what action is needed to improve it. One delegate questioned whether we should abandon use of the term productivity completely given the lack of transparency that surrounds it.

What was agreed though is that the productivity problem is clearly not straightforward. If we are to have a chance of tackling it, we need to look beyond the headline statistics and trends. We need to avoid the temptation to over-simplify. We need to work hard to understand properly what productivity means to people in different contexts, precisely where their specific challenges lie, and recognise that a one-size-fits all approach to productivity policy will not work. We also need to encourage employers and policymakers to think beyond productivity as being all about efficiency and cost savings, but also about adding value through human creativity and innovation. In short, it is time to sharpen our focus on productivity.

View all of the workshop presentations here.

Calling all researchers; a new PIN funding opportunity

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Thanks to all those who submitted project proposals to PIN’s Targeted Small Grants call. If you were unsuccessful, please look out for future opportunities advertised through our website, newsletter and Twitter. 

The aim of the Productivity Insights Network+ is to rethink the productivity issues facing the UK and develop new insights through a place-based lens. More than 18 months into the project, PIN with the support of ESRC, has commissioned more than 25 interdisciplinary teams to pursue research projects that challenge conventional thinking about productivity. These projects have primarily been addressing the gaps in research raised by the Co-Investigators all leading on a theme related to productivity. PIN’s thematic review of productivity examined the current literature across the themes of; work and employment, education and skills, investment, infrastructure, innovation and enterprise, governance and health and wellbeing. The previously funded projects addressing these gaps can be found here

In addition to the themes steering the research, the esteemed International Advisory Board also advise the network on important aspects of productivity that merit further investigation. Following this feedback PIN is now pleased to announce that the call is now open for the first Targeted Call.

Targeted Small Grants are available to support new interdisciplinary directions in productivity research across the social sciences that engage partners and deliver impact. PIN is seeking insights within specific research areas of productivity and invites proposals investigating productivity in relation to:

• sustainability;

• infrastructure and/or land use;

• UK business investment (including financialisation) behaviour.

PIN welcomes applicants from interdisciplinary and inter-organisational research teams from across the diversity of the above areas. Applicants can see further guidance on infrastructure, FDI and Capital Investments and PIN Co-Director Professor Philip McCann’s Productivity Perspectives Synthesis under publications. The guidance below is for further information only and should not been seen as an exclusive list of research topics that the network wishes to receive. Proposals that meet all of the criteria and that could lead to new and novel insights within the themes above but do not sit within guidance below are also welcomed.

Sustainability

• Clean growth and environmental/climate issues affecting productivity

• The production of new technologies

• Firm-level adoption/adaptation of new environmental technologies

• Opportunities for adoption/adaptation of new environmental technologies for the productivity-enhancement of sectors, cities and regions

Infrastructure and/or land use

• The causal linkages between the outputs of infrastructure investment and economic gains

• The causal relationships between transport investments and economic performance

• Potential links between those places where poor transport acts as a significant constraint on growth

• The role played by the real estate and land markets in facilitating/inhibiting productivity growth.

• Displacement versus additionality effects of land use and infrastructure and/or different impacts on the production of tradeables versus non-tradeables

UK business investment behavior

• The extent to which location impacts on productivity, and why some locations have more ‘leading/frontier’ firms compared to others

• What are the specific shocks effects of the Great Recession on UK productivity that has resulted in permanent changes in Total Factor Productivity (TFP).

• The motivations driving firms’ engagement in FDI and trade, and its impact on Productivity

• The role of competition, firm entry and exit (i.e., Schumpeter-type ‘churning’), past and future trends in globalisation and regulation, across sectors and spatial locations.

The call is open now and closes on Monday 30th September and further guidance including the assessment criteria can be found here. Projects are expected to run for 4 months and be up to the value of £10,000. Applicants that believe their project would take longer than 4 months (but no more than 10 months) and cost more than £10,000 should contact productivity@sheffield.ac.uk to arrange an informal discussion.

If after reading the suggested documents you still have questions, please get in touch via email to productivity@sheffield.ac.uk

 

 

Getting rich slowly: how to achieve sustainable earnings growth

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By Jonathan Boys
Labour Market Economist at the CIPD
j.boys@cipd.co.uk

Featured image © jfunk / Adobe Stock

Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it.

Albert Einstein

The latest labour market statistics from the ONS show that annual growth in average weekly earnings for employees in Great Britain increased by 4.0%. After adjusting for the increase in prices this comes down to 2.1%. It’s positive which is more than can be said for much of the post-crash era (see chart) but will it be sustained? And is 2.1% too trivial and amount to get excited about?

FIGURE 1: Total pay (real) annual growth since Jan-Mar 2001

Source: ONS: Average weekly earnings in Great Britain: September 2019

The rule of 70: or why compound interest is the eighth wonder of the world

Grabbing the odd year of positive earnings growth is good but what we need is sustained growth. This is when the magic of compound interest kicks in. If like me, you’ve forgotten the compound interest formula since GCSE or simply can’t calculate logarithms in your head then there is a nifty shortcut, the rule of 70. To estimate how long an initial quantity will take to double you take 70 and divide it by the rate of growth. So, if real earnings were growing at the current 2% it would take approximately 70/2 = 35 years for them to double. In the grand scheme of things, that’s not a very high growth rate and that’s not a very long time. The rule of 70 applies to growth, be it in pay, investments, GDP, or productivity. It’s the reason you are advised to start saving for a pension early, and the reason the communist party of China set such ambitious growth targets.

It’s also the reason that the last 10 years of poor earnings growth is so worrying. Small but steady rates of growth make a country prosperous. As the chart above demonstrates the post-crash experience averages out around zero which is why it is often referred to as a lost decade of pay growth. This challenges the idea that liberal democracies are a successful in generating widespread prosperity and that each successive generation will be better off than the last. It is popularly linked to the Brexit vote and polarisation of politics. It’s why the FT are asking Does capitalism need saving from itself?

Sustaining pay growth

The compound interest formula assumes a constant growth rate across the time period. This is may not be the case for pay going forward. The reason why we are so excited by a 4% nominal pay rise is because of just how rare an occurrence it is. The BBC reported that it was the highest rate since mid-2008. What we need is sustained pay growth. The current (and welcome) 2.1% real pay is due to a tight labour market and not an increase in employer’s ability to pay more. Record high employment/low unemployment are driving up wages as employers compete for workers.

To consistently pay more business will need to improve productivity. On this the most recent figures have been less positive than pay which ultimately means that pay growth is unlikely to be sustained. The important part of Paul Krugman’s overused statement that “Productivity isn’t everything, but, in the long run, it is almost everything” is the long run bit. The positive is that we have demonstrated that modest rates of growth can deliver big gains in the long run.

There are ample gains to be had on the productivity front. Productivity is not really a thing itself. It’s what happens when everything else is done right. When efficient transport networks make living and working in cities possible and when people are managed properly. The sum of a diverse range of good policy measures could add up to the modest change needed to kick start productivity growth and sustainable earnings growth.

Workplace focus

Of interest to us at the CIPD is the growing prevalence of workplace-based research and initiatives to tackle the productivity challenge. Workplace initiatives are attractive as they are more immediate and lower cost than things like skills and infrastructure. Our own People Skills programme launched in Birmingham to offer free HR support to small firms through consultancy. It is accompanied by a free online resource the People Skills Hub which contains essential HR and people management resources for small businesses.

Earnings are growing but let’s make sure that continues by focusing on productivity.

………………………

Post script – checking the rule of 70

When Fry was cryogenically frozen in futurama, the 93 cents in his account turned into $4.3 billion when he woke up 1000 years later. This is what can happen when you make time for compounding. For the purists we can check the rule of 70 using the simple compound interest formula on a more modest time scale.

  • P = Principal = 10
  • V = Value = 2P = 20
  • r = interest rate = 0.02 (2%)
  • t = number of years = ?

Using the rule of 70 it will take 70/2=35 years for the principal amount of £10 to double to £20.

Using the simple compound interest formula assuming discrete time and compounding once a year:

V = P(1 + r)t

To find t rearrange the following

20 = 10(1 + 0.02)t

2 = (1.02)t

t = log1.02 2 = 35.00

Factory (food manufacture) scene

Let’s talk productivity

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Featured image © ironstuffy / Adobe Stock

We have recently completed a Pioneer Project: “Unpicking the productivity narrative in manufacturing organisations”, a collaboration between The Universities of Strathclyde, Aston, York and Bristol.  The project was funded by the UK’s Economic and Social Research Council (ESRC) through the Productivity Insights Network (Reference ES/R007810/1), and set out to investigate if, and how, productivity is being talked about by workers in UK manufacturing companies.

We spoke to 40 employees from 19 UK manufacturing companies involved in the food & drink, aerospace, automotive and pharmaceutical sectors about their experiences of productivity, including how it was perceived and assessed, and the factors driving, constraining and enabling it.  We also talked to them about future challenges facing their organisations, the support they thought would help, and whether or not they felt a productivity problem existed.  We engaged throughout the project with stakeholders from industry, academia and the public sector including Make UK, Be The Business, CBI, EY, Scottish Life Sciences Association (SLA), Scottish Enterprise, Scottish Manufacturing Advisory Service (SMAS), Industry Strategy Council, The Scottish Council for Development and Industry (SCDI) and the Institute of Engineering and Technology (IET), sharing our thoughts and findings via presentations, social media, articles, blogs and academic conferences.

The findings contribute to the productivity puzzle debate by providing a much-needed real-life, company-level perspective about how productivity is perceived, discussed and experienced within UK manufacturing, and reveal a more complex picture than high-level statistics would indicate.  The key findings are as follows.

The productivity narrative within companies is diverse but overall we found a focus on efficiency rather than productivity.

Productivity comes in all shapes and sizes! How productivity is described varies within and across companies, as well as between companies and Government. The term productivity isn’t always used, and even where it is evident, there is little consensus except for being synonymous with metrics and/or efficiency. We also identified four different productivity narratives: (i) volume and output, (ii) meeting predetermined targets, (iii) efficiency and cost savings; and (iv) increasing output and value. However, conversations were dominated by a focus on efficiency and reducing inputs, with very little said about increasing business output and adding value – something that may have negative implications in the long term. Perhaps, this focus is unsurprising given that many of the companies have been through process improvement and cost cutting activities in recent years. However, whilst efficiency and productivity are related, they are not the same and, as we found out in this project, are often confused. More definitional alignment is required if policy makers are to use the correct levers to improve productivity.

There are a number of issues relating to productivity measurement, which have implications about comparability and consistency.

Common measures are in short supply. How productivity is assessed varies within companies, across companies, and between companies and Government.  Regional, national and sector reports using different productivity measures adds to the confusion. While earlier research has suggested that certain sectors are more productive than others, we would argue that it is not as simple as this and that we need to be careful drawing comparisons, and recognise that companies within sectors can vary hugely in the nature of their operations. This includes those involved in High Value Manufacturing (HVM), where companies compete on the basis of innovation, quality and brand, often leading to lower volume production but higher margins. Finally, there is also a wider issue of using labour productivity as a measure when looking at “the new economy” where apps and algorithms are adding value with very little direct labour. Such inconsistencies do not help with having a transparent conversation around productivity, nor in aligning the macro/micro measurements, therefore care needs to be taken with measurement and comparability. Further, a focus on productivity is not necessary helpful at the company level particularly if this creates an overt focus on what can be measured rather than what should.

There are a number of commonalities across companies and sectors about the factors that influence productivity.

There is a lot of agreement about the factors that enable and constrain productivity. Product and process design, the planning process, productivity culture, and good management are viewed as having a positive impact on productivity. On the other hand, slow legacy systems, large company size, many regulations about health and safety, slow changing organisations, customers changing requirements, waste within processes and bureaucracy are identified as productivity constraints. Whilst interventions and support can help address some of these, others are less easy to tackle.

The perception of a productivity problem is not widespread among respondents but there are recognised issues at the company and UK level. 

It is fair to say that the productivity headlines in the media do not resonate with many of the people we spoke to. The notion of a productivity problem is not very evident. However, some UK-level issues are mentioned (rising costs, remaining competitive, retaining manufacturing capabilities and workplace culture) as well as some company-related problems (automation and technology, skills, company culture, workforce engagement and company structural changes). We can see evidence of some of these being addressed by, for example, the Industrial Strategy and regional and sector support. However, issues around ownership, company structure and culture are less easy to address through intervention.

Our investigation found that the narratives around productivity within manufacturing companies are not necessarily comparable to those of the economists and politicians. The prevalent focus on efficiency and cost savings within companies, rather than adding value through innovation, is concerning and has implications for longer term sustainability including the locational stickiness of larger, foreign-owned companies. However, there are opportunities to promote a common understanding and language; create new ways of measuring and creating alignment; encourage a focus on innovation and value- added for the long term; and question the appropriateness of labour productivity in the new economy.

The economists might argue that “productivity isn’t everything, but, in the long run, it is almost everything” (Krugman, 1994). However, what we would not want to see is companies becoming too focused on productivity (or the wrong aspects of it) at the expense of looking to the longer term and investing in the future.

Pioneer Project team:
Professor Jillian MacBryde (University of Strathclyde)
Dr. Helen Mullen (University of Strathclyde)
Professor Peter Ball (University of York)
Professor Palie Smart (University of Bristol)
Professor Ben Clegg (Aston University)
Dr. Stella Despoudi (Aston University)
Dr. Donato Masi (Aston University)

Contact: Jillian.MacBryde@strath.ac.uk

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Thoughts on the PIN special sessions in Cambridge

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By Dr Neha Prashar
Research Fellow, Enterprise Research Centre

I was very much delighted to be invited to attend a special session hosted by PIN as part of the Regional Science Association International – British and Irish Section (RSAI-BIS) 47th Annual conference, held at Downing College, University of Cambridge. The morning kicked off with a welcome from Professor Philip McCann (University of Sheffield), introducing the PIN team and highlighting the current and upcoming project calls before leading onto a day of productivity related sessions. For full findings from many of the projects outlined below, head over to the PIN publications page. By clicking on the title of each presentation below, you will be able to download their slide deck. Videos from the presentations are also linked to throughout.

The morning session focused on the theme of “Productivity, Inclusive Growth and Wellbeing”, where the first presenter, Dr Joanna Yarker (Affinity Health at Work), explained her fascinating work (with Professor Karina Nielsen and Hannah Evans) on “Returning to and thriving at work following mental ill-health absence.” Mental health is often stigmatised in the work culture and the project’s findings show that there is a need for multi-level interventions to enable successful worker integration back into employment from managers, colleagues and firm policy that would allow greater flexibility for worker’s with mental health issues. This includes potentially tailoring the help needed on an individual basis, which could be difficult to implement in smaller firms where resources may not be readily available, however the benefit of doing so could save nearly £5.2bn lost from sick days taken due to stress.

This presentation was followed by a crucial evaluation undertaken by Professor Anne Green (University of Birmingham, with Carol Stanfield and George Bramley) on the long-term impact of the “UK Futures Programme”; a £9 million programme to boost productivity, which ran between 2014-16 before it was abruptly finished when the UK commission for Employment and Skills (UKCES) shut down. The programme aimed to support employer collaborative solutions to the workforce development problems that were innovative. Results from the evaluation showed that the programme did add value to businesses through engaging with projects and activities, which would not have occurred otherwise. Some businesses actually went on after funding stopped to secure further funding to either carry on the programme or start others. The added benefit of cross-sector learning proved that the programme had a mostly positive impact all round – a result that would not have been known without this long-term analysis by Professor Green and her co-authors.

The session ended on the important concept of wellbeing and inclusive productivity growth, delivered by Professor Leaza McSorley (University of Sunderland) who begs the question “Why has productivity been so low since the recession and also long-term when compared with other countries, such as, France, Germany and the US?” We know productivity is a regional problem when looking at the UK and there is a clear correlation between well-being and productivity. Professor McSorley rightly argues that looking at inclusive productivity growth, rather than just productivity growth, is fundamental to the development of the economy and investment into quality childcare and “soft” infrastructure can increase well-being which could, in turn, increase productivity. This notion of “soft” infrastructure should be “essential” as they underpin long-term productivity in the UK. This insightful presentation ended the morning session on an essential point that it is not just about focusing on one indicator of growth but rather a battery of indicators and how it all fits together.

After a short break, the next session, “Regional Productivity Policy” focused on productivity differences across the UK and started with Ben Gardiner (Cambridge Econometrics) presenting a report compiled on performance, productivity, sectors and resilience among businesses for Core Cities UK, which accounts for around 25% of growth in the UK. Their interesting results found significant differences in productivity using a variety of metrics, and as suspected, London is doing significantly better than the other core cities. Ben’s presentation called for governments to focus industrial strategy on building better infrastructure to connect the core cities and pull resources beyond the M25.

Paul Swinney (Centre for Cities) followed on from Ben’s presentation, highlighting the disparities we see even within a single company. Distribution centres which require low skilled labour, tend to be in the north of the country while the headquarters would be in the south so why is this the case? Paul explains that this is because of the relative attributes’ cities have to offer. The south has more knowledge and high-skilled workers but is high in cost while the north have low-skilled workers but it is low cost and so it makes sense for businesses to set up in this way to be cost efficient. The key focus for national and local strategy should be to try and reverse this pattern and try and get businesses to locate outside of high-skilled areas. This is a problematic task that needs more attention in policy in order to close the North-South divide. The middle section of the day ended on an insightful presentation by Dr Nicola Headlam discussing the Northern Powerhouse. Nicola discussed the success and potential improvements needed to be made in and by the Northern Powerhouse in order to create an atmosphere to breed highly productive and successful firms in the North of England.

In the afternoon, Dr Tom Forth (ODI Leeds) gave an excellent presentation on “How big data, open algorithms, new institutions are improving the UK’s productivity policy.” Tom explained in detail his project on looking at the impact of bad infrastructure on productivity, focusing on commute time vs scheduled times of Birmingham buses and how big data can shape future investments into infrastructure. An interesting project where the major infrastructure differences between cities in the UK vs the rest of Europe is highlighted. Policy aimed towards improving infrastructure within cities is key to increasing productivity in all part of the UK but particularly in the North. The following panel discussion with Professor Iain Docherty (University of Stirling), Tom Forth and Emma Fletcher (SmithsonHill) further underlined the importance of accurate and available data needed to undertake important analysis. A move away from a centralised government to give local government more autonomy on where to spend their money could help in building better infrastructure.

The final session of the day focused on “Measurement and new approaches”, beginning with Dr Stef Garasto (Nesta) discussing the topics of skills mismatch and job accessibility. Using a variety of different data sources, Stef looked at the gap between skill demands and skill supply in different regions of the UK, as well as, a range of job accessibility measures focusing on the West Midlands Combined Authority (WMCA) area. Stef’s results suggest that larger areas show a greater diversity of skill supply and certain areas of WMCA are more accessible than others. However, this is with some caution as issues can arise depending on which measurement of skills mismatch or job accessibility is used. Stef highlights that it is important to move to absolute indicators of skill demand and supply to produce more robust and accurate measures.

Elena Magrini (Centre for Cities) followed on with her presentation on “Regional variations in skills and training – what they mean for places” and focused on the importance of skills as a factor in determining economic outcomes for people and places. Elena’s presentation reiterated findings from her colleague Paul Swinney’s earlier presentation – the classic chicken and egg problem -that areas with a higher concentration of low-skilled workers will attracted low-skilled jobs. However, Elena also pinpointed the importance of education, both in schools and adult training, in contributing to this cycle. By providing quality education that prepares young people for the labour market, provide adequate training for current workers and re-training for workers whose jobs are at high risk of disappearing in the future, you can break the low-skilled equilibrium and increase productivity in these areas.

To end the session, Dimitri Zenghelis (University of Cambridge) discussed the importance of correctly measuring elements of “The wealth economy.” Initially, focusing on natural and social capital but eventually have a comprehensive framework that improves the quality of metrics used to advise policy and have a better understanding of quality of life through statistics other than annual income. This fascinating project rightly puts into question the accuracy of current measures of growth and wealth with analysis, thus far, showing that trust is fundamental to economic wellbeing and economic growth and should be one of many factors considered when steering policy.

Overall, the Cambridge special sessions displayed crucial presentations and projects that I personally hope will shape future UK policies and programmes. In particular, the use of big data cannot be emphasised enough in understanding regional divides in productivity and not only helps to shape future policy but also help in improving and creating key metrics that are more accurate to current times.

 

Blurry image of workers

Distorting Local Productivity Data? Reflections on Fothergill and Beatty

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By Maria Abreu (University of Cambridge) and Tim Vorley (University of Sheffield)

The existence of significant regional variations in productivity in the UK has become so established in academic and political debate it is taken as received wisdom, and so the publication of a report by Steve Fothergill and Christina Beatty (available here) that challenges this wisdom has understandably drawn wide interest. Over the past 18 months Productivity Insights Network has been working with BEIS and HM Treasury, as well as funding research, to rethink the productivity puzzle. A central aspect of our programme of work is the acute geographical nature of the productivity challenge faced by the UK. So Fothergill and Beatty’s somewhat controversial argument certainly merits greater scrutiny and review. Indeed it is increasingly evident that the answer to the productivity puzzle is not in the data, but reframing how the puzzle is understood.

In many senses more than a politically interesting (re)reading of the data, the report falls into the same trap as Chris Giles’s commentary piece on Britain’s Regional Divide – that is to say that the realities are more complex than presented. There is an issue with the way that the report draws on different geographical scales, including Local Enterprise Partnerships (LEPs) and NUTS 2 regions, which cannot reasonably be taken as comparable. Moreover, while the LEPs may be an appropriate unit of analysis for local political decision-making, they are not necessarily appropriate for understanding productivity variations, as some LEPs encompass very diverse areas (the Cambridge and Peterborough LEP being an obvious example). Arguably the report could have compared NUTS 2 regions across the whole of the UK, rather than relying on the LEPs in England, although this may have yielded different conclusions.

The perennial question of which productivity measure to use is also relevant in this report, although not discussed in detail. It is somewhat puzzling that Fothergill and Beatty start from GVA per worker, and then adjust for the distorting effects of demography, hours worked, and commuting patterns, instead of simply using GVA per hour worked, which is also the internationally-recognised best practice measure for productivity analysis. The use of GVA per hour worked would have obviated the need to control for age of the workforce, commuting, and other factors. The focus on commuting is also peculiar given that the key question in productivity policy is the workplace, rather than the residential location of workers.

The findings presented on the report were also peculiar in their focus on removing, rather than explaining, local sectoral composition. It is a long-standing and accepted approach of those engaged in productivity research to understand the differential contribution of different sectors to overall productivity growth. In much of the analysis contributing to the long awaited BEIS Productivity Review, comparisons across sectors are key. A disentangling of the reasons for the sectoral variations across regions, for instance, by comparing productivity in the same sector across regions, would have been helpful.

Related to this, it is puzzling to see a decision to capture the effective productivity of London workers, with the sectoral and occupational specialisation removed via a shift-share analysis. London is more productive precisely because it has a comparative advantage in specific high productivity occupations and sectors, that are located in London in order to benefit from significant agglomeration externalities. Relocating them to other parts of the UK, and expecting to observe the same productivity outcomes, is not a realistic prospect. It is worth noting, however, that other large cities outside of London do suffer from weak agglomeration externalities, and are underperforming relative to what we would expect (or punching below their weight)!

The Productivity Insights Network is all about challenging and changing the tone of the debate, however, this needs to be done in a robust and rigorous manner. The provocations from Fothergill and Beatty have generated media interest, although their conclusions appear to have confused rather than advanced the regional productivity debate. As opposed to spurious reinterpretations of productivity data, the emphasis needs to focus on solving the regional productivity puzzle. Better data at the regional level, particularly on regional price differentials, would help in addressing this gap. More than a market failure, flatlining and regressing productivity figures are better understood as a systems failure that needs to be addresses as such (see systems blog).  There is a need for new insights on how (sub)systems working nationally and regionally can be strengthened to improve UK productivity and reduce the regional inequality that has come to characterise the UK.

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