The Government is right to focus on low-productivity firms

Retail and hospitality sectors do matter if we are to right the wrong of in-work poverty.

A report by the Centre for Cities hit the headlines yesterday. It argued policymakers are wrong to think the ‘long tail’ of low-productivity businesses is the main cause of the UK’s productivity problem. Their prescription is that the Government needs to improve the productivity of exporters through investment in skills and infrastructure.

The report is right that tradable sectors do matter for growth. Research by City Evolutions also found that growth in export intensive sectors is correlated with growth in the other sectors of the economy. The Centre for Cities rightly argues that narrowing regional inequality will require growth in tradable sectors in our less productive regions.

But the report is too quick to conclude that this means the Government shouldn’t focus on the long tail of low-productivity businesses. Here are some reasons the long tail matters:

  • The report mischaracterises the long tail of low-productivity firms as mostly small firms and ‘hairdressers and restaurants’. True, low-productivity firms are concentrated in certain sectors, but these sectors also include some of our largest retailers, hotel chains and care providers. These firms play a really important role in our economy.
  • The report focuses on regional differences in the UK, but other evidence shows that the long tail of low-productivity firms is where the UK looks different to its competitors. As Andy Haldane has argued, ‘in a world of long and lengthening tails of low-productivity companies, the UK is a striking outlier’.
  • Our recent research showed productivity differences between the UK and its competitors exist across the whole economy, high- and low-productivity sectors alike. Raising productivity in low-wage sectors to the levels in Germany, France and the Netherlands would close between a fifth and a quarter of our productivity gap with them.
  • Even between cities and regions of the UK, the ONS found that it is differences in firm productivity within industries rather than the composition of industries that explain differences in productivity. Improving productivity in just a few sectors won’t be enough to close regional productivity gaps.
  • Finally, it’s a mistake to think not much can be done about productivity in the long tail. Productivity is about much more than capital investment and adopting the latest tech. Our research shows that the UK’s low-productivity sectors lag other countries not because of a lack of skills or investment, but because firms don’t use the potential of workers well enough. Investing in in-work training, improving management practices, and reducing the use of temporary contracts could shorten the long tail.

Attracting more high-productive, tradable firms to the UK’s low-productivity regions is part of the answer to closing regional imbalances. But we need to do much more than this to create an economy that works for all. That’s why the Government’s consultation on improving productivity in low-productivity businesses is welcome; they’re right to focus on the long tail. You can watch David Hindmarsh, Head of People for Retail and Supply Operations at Greggs, talk on a case study panel at a recent JRF productivity event about how Greggs have made changes that have led to positive benefits for their workers:

David Hindmarsh talking at JRF's recent productivity event.