Regional capital stocks – a missing piece in the productivity puzzle

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Featured image as per Cambridge Econometrics blog.

By Ben Gardiner 
Cambridge Econometrics

In the second in a series of blogs looking at uses of the European Regional Database. Director of Cambridge Econometrics, Ben Gardiner looks at how regional capital stocks can be estimated, how they compare and contrast across countries and within the UK, and how they relate to regional productivity.

Read the full blog post here:

Regional capital stocks – a missing piece in the productivity puzzle

UK – one of the most unequal countries when it comes to regional productivity

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Featured image as per Cambridge Econometrics blog.

By Ben Gardiner 
Cambridge Econometrics

Ben Gardiner (Cambridge Econometrics) looks at spatial disparities in productivity and how they compare across countries in the EU and within the UK in the first in a series of blogs looking at uses of the European Regional Database.

Read the blog in full here:

UK – one of the most unequal countries when it comes to regional productivity

Accounting for productivity

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Featured Image: as per the original AccountingWeb post

By Richard Murphy
Professor of Political Economy,
City, University of London

The Targeted Small Grant project, “Financialization and Productivity”, led by Professor Adam Leaver (University of Sheffield) and Professor Richard Murphy (City, University of London),  was completed in early-March. The Executive Summary, Full Project Report and Supporting Data have been published this week by the Network. You can read the documentation in full here:

To support this work, Richard provided an insightful blog which supports the work within the project and was published by AccountingWeb in February 2020.
Read the blog in full here:

All aboard the great high speed experiment

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Featured Image: by Clare Louise Jackson via ‘Shutterstock

By Professor Iain Docherty

After much prevarication, an inquiry, a dissenting report, a scurrilously timed last-minute leak, and perhaps most remarkably of all the first public spat between the Prime Minister Boris Johnson and his chief adviser Dominic Cummings, the government has made the decision to proceed with all of the currently planned phases of the High Speed 2 railway. The rail industry is delighted, having scooped the largest infrastructure investment in a generation or more: HS2 not only provides a continental standard high-speed line to/from London, Manchester and Leeds with trains running at up to 200mph, but it also releases huge amounts of capacity on existing routes that will no longer have to juggle intercity trains with local services and freight.

Impressive headline journey times like 67 minutes from London to Manchester do indeed, as one journalist put it, offer up the potential to change the mental map of the UK (or at least large parts of England). But as for all transport projects, there will be losers as well as winners. This is because of the ‘two-way street’ effect: putting Birmingham city centre as close to central London in terms of travel time as the outer fringes of the capital itself will certainly make it a more attractive business destination for some activities; equally, bosses in the London HQs of other firms might wonder whether they need to keep their regional offices at all when the majority of their clients will become accessible from London in the time it takes to do a tube trip across town.

Mayors of the biggest city regions such as Andy Street in the West Midlands and Andy Burnham in Greater Manchester think that on balance, HS2 is a significant net positive for their areas, especially given its leverage of other transport improvements such as the so-called Northern Powerhouse Rail upgrades that aim to radically improve east-west rail links across the North. But the main risk of HS2 is that it could become the biggest and best example of the truism that transport infrastructure investment is better at moving the economy around rather than growing it overall. Leaders in Merseyside and the North East will be especially worried that their regions will be at increasing competitive disadvantage as they get relatively much further away from London compared to those locations on the core HS2 network. Ask yourself this: as a young creative industries sector start-up company in Liverpool outgrows its first premises, how much more attractive is the move to a bigger studio in Manchester rather than one around the corner given the extra market access it would bring via its direct HS2 connection?

Then there is the further issue of getting to and from HS2 stations. Transport within city regions is perhaps the most obvious area on infrastructure in which Britain falls (far) short of the standards commonplace in its competitor economies. As Tom Forth’s work for PIN on the real effective size of Birmingham showed, the labour markets of British cities are much less extensive than might be assumed because of the time it takes to make the kinds of everyday journeys that dwarf the longer distance trips HS2 will accommodate. Much more prosaic interventions such as support for better, more frequent and reliable bus networks might turn out to make more of a difference to the UK’s productivity than a £70bn railway.

© Adam Marika

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.

Getting rich slowly: how to achieve sustainable earnings growth

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By Jonathan Boys
Labour Market Economist at the CIPD

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