‘Solution’ to uk productivity puzzle is misconceived, study finds the blog pvan a level physics electricity notes


Efforts to boost the UK’s stagnant productivity by helping a “long tail” of unproductive businesses are misconceived and will fail to narrow the regional divides that lie at the heart of the problem, according to research by the Centre for Cities, a think-tank.

Productivity growth has slowed across much of the developed world in recent years but the UK — where workers’ output per hour was already low in absolute terms — has seen a much bigger deterioration. British productivity is no higher now than it was just before the 2008 financial crisis, and finding ways to reverse this slump is critical if the economy is to generate rising real incomes.

Low business investment, poor management skills, difficulties in measuring the new digital economy and loose monetary policy prolonging the survival of “zombie” companies all help to account for the UK’s “productivity puzzle”. One other explanation that has heavily influenced policy — highlighted last year by Andy Haldane, the Bank of England’s chief economist — is the fact that the UK has an unusually long tail of productivity laggards that pull down the national average.

Policies designed to boost this bottom tier of unproductive companies received backing this week from chancellor Philip Hammond, who announced £5.6m of new funding for the Be the Business Initiative, led by John Lewis chairman Charlie Mayfield, which works with family businesses and those in the hospitality sector. Mr Hammond issued a call for evidence on “why some businesses aren’t keeping up” and promised further collaboration between the government and industry to boost productivity at company level.

“This idea that if only we can make the bottom 20 per cent of businesses more productive . . . is a bit of a red herring,” said Paul Swinney, head of policy and research at the Centre for Cities. “The fundamental problem is that we’ve got a low productivity economy outside the South-East.”

His research looks at the composition of the long tail of unproductive companies, making a distinction between “local service businesses”, such as cafés, hairdressers or gyms, and “exporters” that sell beyond their local markets — like manufacturers, software engineers or marketing companies. Under this definition of exporters, the companies do not necessarily sell overseas.

Mr Swinney’s research shows that more than 90 per cent of private companies in the bottom third for productivity are local service businesses, which have very little scope to improve, due to the size of their markets and the nature of their work. These dominate the long tail in all parts of the UK.

Boosting their productivity is desirable, since they account for large numbers of low-wage jobs, but the Centre for Cities argued that it would be difficult to achieve and would make only a “marginal difference” to workers’ output per hour on a national basis.

Exporters are far fewer in number than local service businesses — accounting for 13 per cent of the total in the non-financial economy in 2015, and 27 per cent of all jobs. But they account for nearly a third of the UK’s most productive 10 per cent of companies, and more than half of jobs in this top decile.

The think-tank argues this variation is no surprise: high-skilled service exporters, which tend to be more productive, will pay higher rents to be based in a densely populated city centre with access to large numbers of graduates and a network of high-skilled businesses. Companies doing more routine work will seek out cheap land and office space and a pool of low-skilled workers.

This means that efforts to instil good management practices or help spread innovation from leaders to laggards, while valuable, are unlikely to eliminate regional disparities. Even efforts to pull in more productive companies from overseas — and embed their practices in local supply chains — will only go so far: Nissan, for example, assembles cars in Sunderland but locates design and engineering in London and Oxfordshire.

The focus for policymakers should be on improving regional skills and infrastructure to create a better environment for exporters, said Mr Swinney, because “there’s a broader issue in where higher productivity investors are looking to be based”.

Bristol’s Temple Meads railway station was the work of Isambard Kingdom Brunel, the giant of 19th century engineering innovation. Now its old engine shed serves as the focal point for a thriving cluster of technology start-ups, which have helped to make the city region the only one outside London and Edinburgh where productivity outstrips the UK average.

Bristol has many of the attributes the Centre for Cities found to be important in attracting the most productive businesses. It has a large pool of highly skilled workers, a third of whom are graduates. It has a compact city centre with fast transport links to London. Since 2010, Bristol has had the highest business density of any large urban area outside London — although Manchester now beats it on this measure.

But Bristol also benefits from well-established strengths in “a very broad mix” of high-skilled sectors, according to Nick Sturge, chief executive of Engine Shed, which houses a successful start-up incubator and provides workspace and networking for entrepreneurs.

There is also an aerospace cluster including Airbus, Boeing and Rolls-Royce. The BBC’s natural history unit and Aardman Animations, the creator of Wallace and Gromit, are the anchors of a film and television industry employing 3,700 people. Retail and financial services are strong.

“What that means is you typically have highly skilled people who move between those sectors,” said Mr Sturge — offering by way of example a recent collaboration between Aardman and Rolls-Royce, using the former’s animation techniques to track fluid dynamics in engines.