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Inequality and how to solve the UK's productivity puzzle

Experience in the West Midlands demonstrates that the loss of manufacturing reduces wealth and opportunity.

Andrew Milligan/PA Wire
A welder at work

Inequality and productivity – the two great challenges that confront us.

Since the general election we’ve been in a state of stasis awaiting details in the Queen’s Speech setting out the Government’s legislative programme for the next parliament. One piece of legislation, the NHS Bill, neatly encapsulates the dilemmas facing the Government.

In particular, how to ensure a system believed by many to be a ‘national treasure’ is adequately funded to provide every member of society with consistently high levels of care?

Vastly increased productivity and improved service to patients using the NHS is regarded as being essential by the Government. However, whether a seven-day NHS is achievable remains to be seen. This would represent a major change in culture and working and is unlikely to be welcomed by NHS employees.

Many NHS staff think dedication to patient care is being sacrificed on the altar of change and the need to save money.

That the NHS has financial problems is beyond doubt. In the run-up to the election NHS England chief executive Simon Stevens claimed it will is likely to experience a funding gap of some £30 billion by 2020.

That this phenomenally complex and multi-layered organisation currently requires a budget of at least £100 billion to continue to provide basic care as well as innovate and research demonstrates the constantly increasing need for additional money.

The solution to the £30 million NHS shortfall, a combination of efficiency savings of £22 billion and an additional £8 billion from Government, though, is without criticism.

Cynics wonder where the additional money will come from given the stated intention of the Government not to increase taxation.

More pertinently, those who’ve analysed the NHS contend that creating £22 billion in savings through efficiency lacks credibility.

Whatever changes occur in the NHS, productivity and efficiency are absolutely fundamental to the government’s economic plan; particularly in addressing inequality.

Mark Carney, the governor of the Bank of England, declared exactly this recently when he stated productivity growth by “doing more with less” is essential to income growth and “our shared prosperity”.

Chancellor of the Exchequer George Osborne has announced he intends to publish a Productivity Plan before his summer Budget on July 8. In a pretty damning condemnation of education and training Osborne points to data showing the UK is one of only three OECD (Organisation for Economic Co-operation and Development) countries where the skill levels of those aged 16-24 are no better than those who are aged 55-65. This, Osborne believes, is “unacceptable” and he thinks we need to learn from countries that perform better.

Inequality and underperformance are addressed in a 2014 report written by Federico Cingano of the OECD, Trends in Income Inequality and its Impact on Economic Growth. This report shows that in the UK inequality, as measured in terms of a ratio of the highest ten per cent of earners to the lowest ten per cent, what is known as the ‘Gini coefficient’ is increasing after having declined between 2007 and 2011.

The Gini coefficient score for the UK is higher than the average for the 34 countries surveyed. It is probably no surprise that European countries including economic ‘powerhouse’ Germany have lower Gini scores. Significantly, though, the US, a country whose businesses and social practices we’ve traditionally tended to emulate, has a higher Gini score than the UK.

That the UK is one of the least equal of the world’s developed countries is not good. Cingano contends that inequality not only undermines social cohesion, but militates against potential for growth.

This is because of reduced propensity for those who become poorer to develop themselves; the phenomenon identified as ‘poverty of aspiration’.

The solution to improving inequality through increased productivity is seductively simple in theory but, as every government since the last war has discovered, almost impossible to achieve in practice.

Every government accepts we need better trained and educated youngsters. However, it’s important to remember that opportunities available through jobs created in recent years have not been terribly impressive.

Data published by the Office for National Statistics (ONS) show that for the first time since 1994 when it started to collect statistics on ‘quality of jobs’, the trend is negative. That data on quality of jobs is declining is believed to reflect the fact that too many new vacancies created do not require skills and are undertaken by those with levels of training and education not considered acceptable in other developed economies.

Allied to this is a problem that too many apprenticeships are not going to those for whom they are presumed to be primarily intended; the young.

Data collected by the Institute for Public Policy Research and commissioned by the Local Government Association shows that 42 per cent of all apprenticeships created in the last five years have been undertaken by people aged over 25. Businesses, it appears, are using funding to train existing workers rather than addressing the issue of chronic unemployment among those aged 16-24; something all-too-manifest in parts of this region.

We have an infrastructure that needs immediate upgrading. The NHS had billions spent on it in recent years though PFI (Private Finance Initiatives) is still unable to perform. Vastly increased spending on roads, railways (including HS2) and airports is needed though the question remains where will the money come from? Any belief that private providers are eager to take over challenging infrastructure projects with no guaranteed profit is undoubtedly a fallacy. Indeed, experience suggests privatisation is not a panacea. Look at what happened to British Rail.

The culture of ‘make do and mend’ practised in the Second World War continues. Too many companies in this country have avoided investment in plant and equipment that would vastly increase productive capability, instead preferring workers to operate with clapped-out machinery which undermines productivity.

Investing in state-of-the-art machinery will, it is believed, result in the virtuous cycle identified by quality guru Dr W Edwards Deming of improved efficiency, reduced costs and increased employment.

Perhaps one of the reasons that the productivity puzzle still exists is the imbalance between manufacturing and services. Productivity gains are always going to be easier to measure in the former rather than the latter in which the objective is frequently to sell services or, in the case of retailing, goods that have been made overseas.

In terms of GDP manufacturing currently contributes 10 per cent whereas service contributes 75 per cent.

Experience in the West Midlands demonstrates that the loss of manufacturing reduces wealth and opportunity; especially to young people who leave school with ‘less academic’ qualifications. This applies in terms of firms in every part of the supply-chain. In the last government there was a call for the ‘march of the makers’. This objective remains critical to long-term prosperity here in the West Midlands and the UK in general.

* Dr Steve McCabe is director of research degrees at Birmingham City University

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