We need higher UK productivity to deliver decent living standards

7th Jul 2017

To get families to a decent living standard, we must solve the UK’s productivity puzzle.

Yesterday JRF published research showing that working families with children are facing a worsening squeeze on their living standards. This comes on the same day that ONS figures show real net disposable household  income decreasing by the largest amount since 2011. Stagnating earnings, rising inflation and a freeze on benefits and tax credits are making it harder for families to get by. 

Part of the reason why so many families are struggling is that low pay is endemic in the UK economy. Despite the National Living Wage boosting pay at the bottom, one in five UK employees, nearly six million people, are low paid – more than many other countries.  Even worse, too many people get stuck on low pay, rather than moving on to better paid jobs as they gain experience.  

Yesterday the ONS published productivity statistics for the first quarter of 2017. Previous releases had shown that productivity growth has been very slow since the recession, failing to return to the pre-recession trend as happened after previous economic downturns. But we learned that productivity has actually fallen this year. The UK has been a poor productivity performer for a long time, but the situation has got worse since the recession. 

This low productivity underpins the UK’s low pay problem. Governments can create a pay floor, forcing employers to pay a minimum, but that isn’t the whole solution. Businesses need to be able to improve pay above this floor, and employees need to be able to improve their skills and move up into better paid jobs. That requires improvements in productivity.  

The UK’s productivity problem doesn’t come from its market leading firms, or most dynamic local economies. It comes from the parts of the economy that are lagging.

The biggest low pay sectors (for example, retail and hospitality) are also those with the biggest productivity gaps compared to the same sectors in other countries, and the most in-work poverty. There is also a long tail of low productivity firms in every sector, and parts of the country with particularly low productivity, such as Cumbria, Devon, Lincolnshire, East Wales and Sheffield.

Before the election, the Government published an Industrial Strategy Green Paper.  The post-election political turmoil has drowned out any serious discussion of how this will be taken forward – but it received a welcome mention in the Queen’s speech. 

This week’s figures on the living standards squeeze and productivity show both why it is so important and why the strategy must be improved. It must be widened beyond a traditional focus on high tech sectors and high-level skills to include a focus on improving productivity in low pay sectors and struggling local economies.

Our submission to the Industrial Strategy consultation highlighted ways this could be used to boost the prospects for low-paid workers and in turn productivity which will deliver higher living standards. This includes:

  • Strategies for low-paid sectors – the Green Paper makes sector deals open to all, but Government should proactively seek deals with low pay sectors. Sectors such as retail and hospitality constitute 23% of the economy, but account for 30% of the productivity gap to countries such as France and Germany.
  • Adult basic skills – meet all basic skills needs by 2030 by doubling the participation rate in skills programmes – such as night classes and workplace training - for digital skills, literacy, numeracy and basic English for Speakers of Other Languages. With 90% of the 2025 workforce having already left education, the need to increase adult skill levels is underplayed.
  • A strategy for struggling places – closing the gap between places requires growth in struggling towns and cities. As the UK withdraws from the EU, there is an opportunity to think afresh about how to combine funding, devolution deals and capacity building support to create more and better jobs in struggling towns and cities.

Alongside improvements in benefits, tax credits and skills, this will ensure that our economy becomes stronger, fairer and works for all. That will give working families a fighting chance of reaching a decent standard of living.