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By Andrew Henley (Cardiff University) and Tim Vorley (University of Sheffield)

Across the world, as the Covid-19 pandemic is raging, the disruptive impact on small businesses has been without precedent. Immediate commentary documenting both scale and specific examples of this impact is not in short supply. This blog post offers some preliminary thoughts and reflections on performance and productivity for small businesses. While it is too soon to provide any hard assessment of the impact of the current crisis on business performance, so our purpose here is comment on some emerging themes based on current knowledge and ongoing responsive research.

The economic impacts of the crisis are likely to be multidimensional. These include differences between short-term and medium-to-long term impacts, variations across different sectors, the differential spatial impacts of the crisis. At the same time the resilience of small businesses and their ability to survive the crisis has demanded business models be redesigned. Many of the issues that small businesses face and their capacity to respond are determined by their response at the onset of the crisis – and so the immediate decisions of owner managers will have longer term implications.

In the short-term it is inevitable that productivity will take a further significant hit – a conclusion that is particularly unwelcome given the ever-widening UK productivity gap. This is because in a recession businesses generally attempt to retain employees with skills, especially if those skills are scarce or central to the firm. Employee absence due to illness or quarantining is hitting many SMEs, especially small and micro-businesses, very hard, since business-critical skills coverage is not “de-risked” across a large employee pool.

Labour hoarding sees the productivity numerator (turnover or value-added) fall more quickly than the denominator (labour input). If firms have flexibility to reduce hours, then the adverse impact on productivity per hour worked may be less severe than on productivity per employee. Recent emergency policy announcements on wage subsidies under the job retention scheme are specifically designed to maintain employee attachment and therefore indirectly to lower productivity.

These initiatives are likely to be more crucial to business survival for less well-capitalised, and less profitable SMEs, and speedy policy implementation here is of the essence. Survey data collected in mid-March 2020 by the University of Sheffield with Small Business Britain bears this out – almost three quarters of SMEs surveyed expected revenues to fall by over half.[1] One emerging recommendation relates to the urgency of making relief available: roll the policy out and worry about deadweight losses later, which might be partially recoverable through business and self-assessment tax systems.

Early research indicates that since the Government announced the measures available that there is considerable local variation in the administration and access to support. These difficulties are compounded by the eligibility, or perceived eligibility, meaning that not all micro businesses will benefit as intended and as entitled. This reflects another major perennial challenge for small businesses policy, which is encouraging the take-up of government programmes, as 82% of firms surveyed have not previously sought business support.

Some firms simply won’t survive. In the medium-longer-term, if the crisis persists beyond two quarters into late summer and autumn, the least resilient SMEs will shut down, that is those least well capitalised or those seeing the biggest falls in revenue. As recovery returns this shake out process could then see a productivity bounce, although this will have been at a very high price in terms of firm failures.

In the UK the most immediate distress has been seen amongst those businesses which provide non-essential face-to-face physical service delivery in leisure, hospitality, transport services and non-food retailing. In advance of the shutdown and lockdown, these sectors had already been earmarked for support by the Chancellor in the Budget on 15^th March 2020. As well as these sectors, places such as historic city centres and coastal resort towns have been hit hard, as the demand shock of ‘social distancing’ is seeing some consumers deferring discretionary spending on non-essential items. The societal importance of supporting these firms is important for safeguarding the efforts and livelihoods of small businesses through this crisis, and will help ensure the future vitality of these hard hit places.

However, despite the early and enhanced support for these sectors many are in the so-called ‘long tail’[2], and while making an important contribution to localities are unlikely to be the engines of recovery and future growth. Naturally, there are some firms are adapting to new realities by shifting their business models with and without the help of government support. The study highlighted that as well as those businesses already working online, many of whom have been less affected, many other owner managers have sought to take their businesses online. The shift from bricks to clicks presents an opportunity for productivity gains as revenue streams shift on-line, with online sales are twice as productive as offline[3] .

Even a cursory glance at the business pages of the news media reveals some significant changes to working practices and business models. At this stage, however, it is unclear to what extent these changes to working practices and business models represent temporary ‘work-arounds’ or whether they are genuinely new-to-business innovation. Where effective these reforms have the potential to promote future resilience and enhance productivity, especially if they result in significant and permanent reductions in cost associated with activities such as business travel etc.

At the other end of the spectrum knowledge based and services businesses, for example software development, are likely to be more resilient and may even see some productivity gains from costs savings associated with remote working and the of closing physical office space. What is as yet unknown is the extent to which SMEs are at risk from collapse in the supply chains in which they sit, especially in sectors such as manufacturing , construction or business-to-business service provision. This potentially threatens the so-called ‘tradeable’ as well as ‘non-tradable’ businesses.

Recent analysis by Brookings highlights the likely differential spatial impact of the crisis, arising from the uneven spatial distribution of SMEs by sector.[4] In the UK the South West, in particular, is exposed to distress in the accommodation, food and drinks sectors, accounting for almost 10% of private sector employment, although this sector is also relatively larger in London. Retailing is another low productivity sector that also accounts for a large employment share in the North and in Wales compared to the Midlands and London. On the other hand knowledge based and services businesses, which might be more resilient to disruption, account for less than 3% of private sector employment in the North East, North West, Yorkshire and Humber, East and West Midlands and Wales, but nearly 8% in London.[5]

So, to conclude, the short-term damage to productivity looks likely to be significant, and in the context of the UK’s persistent and widening productivity gap this is highly unwelcome. However, where micro businesses have the ability to transform and adapt there is the potential for enhance resilience and productivity gains over the longer term where they are able to implement permanent changes to ways of doing business.

[1] See https://www.forbes.com/sites/michelleovens/2020/03/20/strength-in-numbers/#258a80a84882

[2] See https://www.ft.com/content/f5e074ae-9734-11e8-b67b-b8205561c3fe

[3] See https://www.mckinsey.com/featured-insights/regions-in-focus/solving-the-united-kingdoms-productivity-puzzle-in-a-digital-age

[4] See https://www.brookings.edu/blog/the-avenue/2020/03/17/the-places-a-covid-19-recession-will-likely-hit-hardest/?utm_campaign=brookings-comm&utm_source=hs_email&utm_medium=email&utm_content=84875880

[5] Authors own calculations from ONS UK Business Count Data and ONS Business Register and Employment Survey, 2018.

By Jonathan Cook
SQW Ltd

There have been a significant number of changes to policies and programmes over the last 20+ years. But how far have these changes been material and what might we learn for the future of productivity policy, including in the context of the coronavirus pandemic?

Our chapter in the recently-published book, Productivity Perspectives, reviewed the changes in aspects of productivity policy from 1997 to 2018, a period which included the global financial crisis. This traced the overarching narrative associated with productivity policy, and focussed in on policies relating to innovation, business support, skills and regional development.

Our review identified significant change in programmes and policies, which often related to nomenclature or changes in targeting. We found that, whilst programmes and policies may seem to be new, they have historically not been much more than repackaging of old initiatives with some changes in the emphasis of branding.

Another aspect that we identified was the institutional churn over the period, and this coincided with changes in programmes. For example, consecutive waves of institutional reforms brought about regionalisation of programmes in the 2000s, a subsequent centralisation after 2010, and then (as we have recently experienced) a shift towards localism. As well as changes in the regional and local institutions, including the coming and going of Regional Development Agencies, we have seen significant adjustments to the skills landscape with a plethora of new and then disbanded or rebadged agencies.

But isn’t change good? Shouldn’t policy experiment and adapt? Yes, but experimenting and adapting are different from much of the change that we have witnessed. They are, or should be, about trying things, learning from them, keeping what works and amending things that don’t work. It does not necessarily require constant reinvention and institutional reform, and arguably such change works against the principles that are required for testing and learning. Churn is not good for maintaining institutional memory, nor for having a long-term perspective, which is important for many of the challenges we face such as productivity, and, in the coming months and years, supporting an economic recovery due to the coronavirus pandemic.

Our chapter did, nevertheless, identify some positive examples where there has been developmental change. One of these areas is the role of innovation programmes in stimulating solutions to market or societal challenges. Indeed, the current Industrial Strategy Challenge Fund programmes in part reflect the way in which innovation support has evolved since the 2008 Innovation Nation White Paper.

Productivity cuts across many issues and requires a policy approach that works across silos, and flexibility to take advantage of the intersections. In this way, it is a complex issue. Productivity Perspectives includes a chapter by Tim Vorley and Jen Nelles that discusses the role of a systems approach to conceptualising, designing and implementing productivity policy. As they argue, productivity policy has too often been developed as a collection of policies intended to stimulate productivity improvements: some policies on skills, others on innovation and technology development, yet others on infrastructure etc. However, these are all interdependent, and so the intersections need to be considered, understood (as far as possible) and policy developed in a way that can maximise potential synergies.

Therefore, in the coming months as the UK hopefully starts to turn its attention to industrial policy to support economic recovery, it needs to create the right environment for an adaptive policy response. This requires consistency, which means avoiding the constant churn and chopping and changing of programmes and institutions. It also needs to encourage comprehensiveness to integrate thinking across policy domains. Four key features to this are as follows:

• Patience and flexibility: policy makers and funders should manage their expectations in relation to short-term results. Addressing complex challenges often requires time to understand the issues, develop appropriate initial actions, and then test, learn and amend them. A failure of policy is to abolish something just as we have learned from its initial mistakes and developed it into a working solution.

• Longer-term funding: commitments of funding for longer periods of time give opportunities to consider actions with longer-term benefits (as opposed to looking just for the quick wins), and to adapt actions in response to early learning. Funding should also be sufficiently flexible to be used in ways that can cut across traditional policy domains.

• Appraisal and evaluation that is appropriate for systems change: by the very nature of complex challenges and systems approaches, complete and very clear assessments of the benefits are more challenging than for simple interventions. Therefore, it is important that appraisal and evaluation approaches, and the demands placed upon them, are appropriate.

• Appropriate decision-making and governance: structures should be in place that can help mitigate against the risk of the short-term decisions that can occur, for instance due to the length of policy and political cycles. Balanced representation of different stakeholder interests, and the role of independent bodies, can assist with this.

Featured Image: by Fusion Medical Animation on Unsplash

by Richard Harris,
Durham University Business School

The impact of the current world pandemic looks set to have an unprecedented impact on the world economy. The secretary-general of the OECD stated on the 23 March that a global recession looks “increasingly likely” in the first half of this year, “and we must act now to avoid a protracted recession”. According to IMF chief Kristalina Georgieva, the global economy contracted by 0.6% in 2009 as a result of the 2008 global financial crisis, but major emerging markets like China and India at the time were growing at a rapid rate; in contrast, some forecasters believe that the current the downturn could be 1.5%. Following restrictions on the opening of pubs, bars and restaurants (3 days ahead of the now even wider restrictions on movement announced on the 23 March), it was being predicted by the Unite union in that up to a third of the UK’s 3.2 million hospitality jobs are under threat.

What is likely to be the impact on productivity in the UK? Obviously, it is too early to make any definite or accurate predictions, so here the intention is to look to the 2008-09 recession as a possible benchmark for what is about to unfold. Chart 1 (see https://www.ifs.org.uk/publications/13302) begins with putting the 2008-09 Great Recession into historical perspective. It shows the growth of GDP per capita each quarter relative to the start of each major recession in the last one hundred years. While, the 1920-21 recession was deeper in the first year (noting that this took place in the immediate period after the post-WW1 flu pandemic of 1918-20 which killed between 20-40 million worldwide), the UK economy recovered to its pre-recession level after around 4½ years (18 quarters). However Chart 1 shows the 2008-09 recession impacted for over 7½ years (30 quarters). Given the comments of the OECD and IMF, this suggests the UK is facing perhaps a decade or longer to make-up ground on what is likely to unfold in the next few months.

Chart 2 uses a slightly different ONS dataset (see ONS 2020a, 2020b) to show the impact of the 2008-09 financial crisis. Labour productivity was growing at around an average of 1.96% p.a. during 1990-2007, and following the recessionary dip the trend has been closer to 0.5% p.a. on average. Thus, Chart 2 shows the extrapolation of what would have happened to productivity if the 1990-2007 trend had continued; by the end of 2019 a gap of around 17 percentage points had emerged in what might be considered ‘lost’ productivity in the UK economy.

Chart 2 also shows the two series that make up labour productivity (output per worker); the drop in productivity post 2007 was mainly due to a fall in the production of goods and services (as is typical of all recessions), accompanied by a much smaller fall in employment. Thus, what was different about the 2008-09 recession was the ‘hoarding’ of jobs relative to previous recessions, such that it has taken productivity much longer to recover to pre-2008 levels.

Chart 3 makes this clearer by taking just the recessionary period shown in Chart 2. Here can be seen the shallow dip in employment and its levelling off before a slow growth back to pre-recessionary levels, while output fell by significantly more and only returned to its pre-recessionary level in 2013 Q1. Consequently, productivity only fully recovered to pre-2008 levels by 2012 Q3, i.e., 4½ years (18 quarters) later.

Chart 4 shows this same recessionary period in terms of growth rates (Chart 3 is in levels); it is comparable to Chart 1. It re-emphasises that losses in productivity were mostly caused by output falls not compensated by cuts in employment. As stated above, this was somewhat unusual in that most recessions see the immediate fall in output later matched by employment falls, with the latter typically then having a greater ‘depth’ and lasting longer.  Indeed, many firms use recessions to ‘cleanse’ inefficiencies and introduce new (often labour-saving) technologies. In short, recessions typically impact in the short-run by reducing labour productivity, but in the long-run introduce structural changes that increase economic resilience. This did not happen post 2008-09.

Will the current crisis be like the 2008-09 recession or more typically follow earlier patterns where productivity levels recovered much faster (and usually to pre-recession trends)? Given that the immediate response of government has been (understandable) supply-side measures to try to protect jobs (through employment subsidies), and given the dramatic fall in demand for certain service sector industries (such as the distribution, transport, and accommodation & food sectors), it seems very likely that employment levels are likely to receive greater ‘protection’ than the production of goods and services, and the trends seen in Charts 1-4 are more likely to be repeated in productivity terms (albeit with greater negative consequences).

Indeed, Chart 5 shows what happened to productivity in the production (with construction) vis-à-vis service sectors, while Chart 6 shows separately the results for 5 sectors that were particularly ‘hard hit’ by the 2008-09 recession. The production sector took a larger hit earlier on, but recovered faster, while it took services much longer to return to pre-2008 levels. Chart 6 shows that in especially the arts & entertainment sector and transportation services, there was still an important gap over 5 years after the start of the recession (together with the fall in productivity having been much more severe in these sectors). Charts 7 and 8 show that most of the change in productivity was the result of output changes (while jobs were largely maintained at pre-recession levels, or saw only relatively small declines which recovered more quickly – that is, similar to the pattern shown in Charts 3 and 4 for the whole economy). And output only recovered to 2008 Q1 levels in 2013 Q3 for distribution (i.e., 5 years later), while it took until 2014 Q3, 2015 Q1 and 2019 Q1 for arts & entertainment, accommodation & food, and transportation services, respectively (an average of nearly 9 years for these sectors as a sub-group).

Summary

The impact on the world economy of the current world pandemic is predicted to be severe, perhaps 2 – 3 times more severe than in 2008-09. Using the 2008-09 recession as a guide of what might happen, where labour productivity moved to a new, much lower growth trajectory, and took a much longer time to recover to pre-recession levels compared to recessions that took place in the 20^th century, it seems likely that the UK will follow the same pattern as post-2007 but with deeper ‘cuts’ in productivity and a longer recovery time to follow. In part this is because the government (for clear and obvious reasons) is seeking to protect employment levels, which is the main feature of what happened to productivity following the financial crisis in 2008-09. Sectors like construction, distribution,  accommodation & food, transportation services, and arts & entertainment are likely to face the brunt of what is about to impact on the UK (and world) economy.

ONS (2020a) Labour market statistics time series. Available from: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/labourmarketstatistics
ONS (2020b) GDP output approach – low-level aggregates. Available at: https://www.ons.gov.uk/economy/grossdomesticproductgdp/datasets/ukgdpolowlevelaggregates/current

Featured Image as per the original post on medium.com

by Dr Ekkehard Ernst
Chief Macroeconomic Policy Unit, International Labour Organisation, Geneva

Dr Ekkehard Ernst provides a thought-provoking blog on the transformative force of the COVID-19 outbreak and how the current events might affect our economic system in the longer term.

Read the full blog post here:
https://medium.com/@ekkehard_ernst/the-return-of-the-fourth-horseman-how-the-current-pandemic-might-re-shape-our-world

Featured image as per the original article on “thearticle.com”

By Jim O’Neill 

Lord O’Neill, Chair of the Productivity Insights Network International Advisory Board, notes his reflections on the COVID-19 crisis.
Read his commentary in full, published on 1st April 2020 via the following link:  https://www.thearticle.com/lessons-of-covid-19