Shaping things to come

Low-wages and low-added value services are contributing to Britain's productivity problem

The move from the “old” to the “new” economy will create startling productivity gains in British industry – at least that’s what some commentators would have us believe. The shift to a knowledge-intensive economy, so their argument runs, will diminish the importance of sectors producing tangible goods and bring to the fore the new intangible activities that add value and capitalise on the strengths of the growing numbers of highly skilled entrepreneurs and so-called “free workers”.

But the evidence does not support such claims. The new economy, however we define it, accounts for a tiny minority of Britain’s workers. Data from the Labour Force Survey reveals that the fastest-growing occupational groups in UK include hairdressers, shelf-fillers, drivers and care assistants.

The new economy may yet succeed in transforming the future world of work, but all the signs today are pointing to the emergence of an hourglass economy. The selective proliferation of highly paid jobs, whose incumbents enjoy substantial discretion over the hours, places and patterns of their work, has helped to spur the growth of low-paid, routine and unglamorous jobs in the very same sectors commonly associated with the thriving new economy. For every entrepreneur, software engineer and professional networker, there are thousands of support staff stuffing envelopes, stacking shelves and distributing products to people’s homes. This becomes a serious problem in a society that has still not managed to overcome the productivity deficit between it and many of the world’s other advanced economies. 

The government, the TUC and the CBI are now revisiting this long-standing problem. Productivity and the quality of Britain’s goods and services have been major concerns for previous governments, but the chancellor has put these issues at the centre of his strategy for revitalising the domestic economy. The Treasury, well aware of the superior relative performance of companies in mainland Europe, has started another review of what is preventing businesses in this country from performing to their full potential. 

What I mean by productivity is the value added per employee. I am not comparing how hard people work, but how much value they add in a given time. Clearly, this is less in service industries: a restaurant adds much less value per employee than a car factory. So the fact that we have a service-based economy immediately puts us at a disadvantage compared with our competitors. Having a low-wage service economy and a low-value-added manufacturing sector only makes matters worse.

Measuring the relative productivity of two firms, let alone that of two industries and several national economies, is fraught with difficulties. At issue is the relationship between the number and quality of people employed and their contribution to the value of the goods and services they help to produce. The quality and quantity of the management, machinery and technology used in support of their activities are also relevant to any comparison and are notoriously hard to quantify, so any set of statistical data should be viewed with caution. 

Even so, the evidence confirms a chronic problem. In the 1950s the UK failed to match the productivity levels achieved in the US, yet it still surpassed most countries in Europe. By the mid-1960s, the UK showed clear signs of relative underperformance. By the 1980s it recorded deficits of up to 40 per cent against Germany, France and Italy. More recently there has been a consolidation of past trends, with no evident gains for the UK relative to other countries. Nor is the problem confined to manufacturing. The UK underperforms in the rapidly growing service sector, which now accounts for 70 per cent of jobs.

This inferior productivity record directly translates into the lower relative living standards and wages that are regularly recorded in international surveys. And it has other adverse effects on work-life balance, the quality of business strategies and the potential for progressive relationships at work.

British manufacturers compete mainly with producers in Germany, France, Italy and Scandinavia by keeping their wage costs low and demanding longer working hours to produce the same level of output achieved in other countries by fewer people and paid working hours. Services appear to have followed suit and some of the key professions – for example, law, medicine and teaching – also report low morale and high stress. The long-hours culture, which afflicts both new and traditional professional/technical occupations, is exposed by new research conducted in the ESRC’s Future of Work Programme.

There are also problems with quality. Countless studies have found that UK producers tend to economise by producing lower-quality products with poorly trained employees. The problem thus becomes self-reinforcing. Unimaginative business strategies result in poor quality, low-value goods, low wages and a short-sighted demand for low-paid, poorly trained workers. 

In the past, trade unions were blamed for poor productivity – an argument that is no longer credible. With a new mood in employment relations and support for social partnership in evidence, it’s time for a fresh assessment of the British productivity problem. But merely exhorting managers to do better and employees to work harder will fail to tackle deep-seated structural weaknesses. The root of the problem is the systematic underinvestment in people, plant and technology.

However convenient personal services may be for some households, the presence of a growing proportion of employees engaged in low-added-value activities on low pay is not the way to promote a more productive, prosperous and fair society.