The Chamberlain News

Inclusivity or productivity – or both?

Increasing labour productivity has been the holy grail of government policy for many years. Despite a 0.9% increase to September 2017 we have so far failed to regain pre-financial crisis productivity levels, writes Beverley Nielsen. 

However, the measures used to determine progress, generally based around output per worker, have led to a widely held view that cutting out people actually increases productivity. But if we cut people, investing in automation and higher skills sets for those already in work, the question is how does this lead to inclusive growth?

In the UK, whilst unemployment has remained low at 4.7%, with roughly 33m in work and 3m either unable to work or claiming long term benefits, there remain enduring pockets of high unemployment.

This, coupled with worryingly high rates of youth unemployment, is affecting morale and quality of life and leading to cycles of deprivation, higher costs for the Exchequer in benefits and poor health.

In Wolverhampton alone, youth unemployment is stubbornly high at 27% and across the West Midlands at 15.5% is one of the highest in the country. It’s important to Mayor Street who’s pledged to eliminate youth unemployment by 2020.

In the West Midlands the Combined Authority (WMCA) has been focussed through the Productivity & Skills Commission on how to overcome a perceived ‘output gap’ between our region and the national average. GVA per head, or output per resident in West Midlands is stated to be £19,423, or £3,500 less than the national figure.

However, the West Midlands Economic Forum has calculated that output per worker in the WMCA area is closer to £45,000.

Are we really talking about a productivity gap or a failure to sustain growth? And is GVA per head the best measure to encourage everyone into work, helping to regenerate our most deprived areas and deliver the goal of inclusive growth?

The good news is that WMCA has, for the first time in my experience, admitted that the statistics need to be reviewed as, ‘we are always on the back foot in conversations with London’. They have spoken about industrialists speaking more of ‘efficiencies’ and ‘throughput’.

Industrialists in turn are focusing more on employing local people and sustaining local communities.

For the first time I have heard the view expressed in conversations with WMCA that one of the inhibitors to good data is the way data is arranged. This echoes the views of the businesses I have been working with for over 20 years who have persistently queried the value attributed to any output gap – which through FISIM calculations, consistently overestimates the output of financial services by as much as 50%, overestimates the input of areas with higher prices, and by taking into account where taxes are paid, favours places with a higher density of head offices.

Evidence from business through surveys by the IDEA Institute, at Birmingham City University, strongly suggests that rather than an output gap, the region is suffering from an over-utilisation of capacity, notably, but not solely, in connectivity and transport infrastructure.

This is combined with severe and growing skills shortages, too little linkage between education and employers, and a lack of any meaningful business support, leading to severe constraints on our ability to grow sustainably.

To improve the output and productivity potential of the region, we need to secure and realise much greater public and private investment in transport, connectivity, skills education and the social fabric – at least in line with other parts of the country, notably London and the devolved nations.

Until recently, however, WMCA and the three West Midlands LEPs had consistently agreed with government regarding an output gap of £3,500 per worker, whilst also agreeing to become ‘net contributors’ by reducing the net deficit – the difference between public money received in the region and tax contribution to the Exchequer. This would mean the West Midlands would lose around £4bn public sector spend, and only through increased tax take would public sector spend remain at current levels.

The impact of the assumptions lying behind becoming a ‘net contributor’ therefore had a substantial impact on the public funding scenarios anticipated as being due to the region in future and understanding these with greater clarity was essential.

To see these assumptions and statistics being questioned in a serious way even by some at WMCA is a huge step forward.

The next big step is to review our approach to where sustainable development is possible. At present this is done through a sectoral approach.  Businesses engaged through the IDEA Institute favour a more cross-sectoral approach, assisting as many businesses as possible by developing greater resilience through local procurement and creating value through brand and design.

However, whilst there has been too little coordination across sectors by the three WM Local Enterprise Partnerships, (LEPs), the WMCA has now clarified key sectors for the region whilst identifying LEP leads.

Seven key sectors are Advanced Manufacturing, Construction, Business & Professional Services, Creative, Low Carbon Technology, Logistics and Transport Technology, Life Sciences. Some concerns persist – is there still an overemphasis on a few large OEMs and too little on the SMEs making up over 99% of all businesses.

And there has, as yet, been no mention of intermediate technologies or areas where lower skilled workers can gain fulfilling employment – a focus for inclusive growth.

For example, to supply thousands of smaller producers in low wage markets calls for much less mechanised plant costing less than 5% of an automated installation. Naturally if fabricated in Britain the ‘intermediate technology’ equipment should be manufactured efficiently and to a high standard. Supply should be backed by thorough training and technical support services, ideally with UK’s Aid programme making a contribution to the costs. This was previously possible when this form of assistance was run by the ODA when part of the Foreign and Commonwealth Office before the creation of DFID.

As productivity or efficient use of resource tends to focus on what we have less of, a further and critically important form of productivity relates to road space and to public transport investment. Thousands of towns and cities experience traffic congestion, costing over £3bn annually in the West Midlands, the degree of which is affected by the proportions of the journeys to work made by public transport and by private car.

A well loaded bus or tram occupies a tenth of the scarce urban road space carrying the same number of commuters as single occupancy taxis or private cars. Reducing congestion by achieving modal shift to public transport improves the environment and productivity of towns and cities as well as the people making the daily journey.

The WMCA Productivity Commission work is to be welcomed. They have set out their stall from scoping and action plan development in Q1 2018 to taking evidence, co-designing and consulting and strategy development in Q3 later this year. A process to deliver Sector Action Plans has been set out – agreeing priority sector and sub sectors, engaging with business and sector organisations, consulting and reviewing work and identifying external research requirements.

However, many in business are concerned to see us moving beyond the strategy and review stage. Mike Leonard, CEO of Building Alliance states:

The challenge is to move on from high level strategy into delivery that deals with the current and future issues, including skills.  We must begin to make a real difference to the circular economy of the West Midlands region.

In producing these strategies there is too much focus on the larger firms and too little understanding of our supply chains and the critical role of smaller businesses. SME’s are the innovators and employers and are the the drivers of change. All too often they are not at the top table and their voice is not being heard.

Mike Leonard is also concerned about the definition of “Advanced Manufacturing” which seems to be all about automotive and aerospace and ignores our strong regional focus in other areas, such as building materials manufacture which is core to the Midlands economy.

We must not pursue this agenda at the expense of existing manufacturing businesses that would benefit from support, which will contribute much to the local economy, whilst providing a high return on investment.

When seeking to analyse productivity we need to compare “like with like” and focus on driving efficiency rather than simply looking to replace people’s jobs with machines. As we approach Brexit it is very important that we reduce imports as well as increasing exports and in doing so, start to turnaround an ever-increasing trading deficit.

The Office for National Statistics (ONS) published its ‘flash estimate’ for productivity yesterday. Output per hour – the ONS main measure of labour productivity – increased by 0.8% in Quarter 4 (Oct to Dec) 2017. This follows a 0.9% increase in the previous quarter (July to Sept) 2017. Output per worker grew at a slower rate of 0.2% – Ed. 

Beverley Nielsen is Associate Professor and Director of IDEA, the Institute for Design & Economic Acceleration, at Birmingham City University. She was the Liberal Democrat candidate for West Midlands Mayor in 2017.