UK productivity has stayed stubbornly low for years. Dare we hope for better?

The Bank of England foresees more demand, skilled workers, investment and innovation. Let’s hope it’s right this time

‘Doing more with less”: that was how Bank of England governor Mark Carney described productivity growth, at his quarterly press briefing last Wednesday. It’s not as controversial as migration, or as politically explosive as the prospect of Brexit, but Carney made it clear that he believes Britain’s productivity record will be the key to sustaining our economic recovery.

“In the medium term, productivity growth – doing more with less – is the key determinant of income growth. Our shared prosperity depends on it.”

So far, as the monetary policy committee’s analysis made clear, the recovery has been underpinned by a rapid growth in the size of Britain’s workforce – through increased net migration, the growing number of over-65s still in employment and the extra hours many existing employees have been willing to work. But the availability of this reserve army of workers has helped to keep growth in pay – and living standards – weak.

Pay levels do now seem to be to picking up: labour market data published last week showed that average weekly wages in March were 3.3% higher than a year ago, which is almost twice the 1.7% growth rate seen in the same month last year. For workers, that should mean the benefits of recovery are finally starting to be felt, easing the long-term squeeze on living standards.

But the wage recovery will only be sustainable – which means affordable for Britain’s businesses – if it is reflected in rising productivity; and as yet this has failed to materialise.

The MPC has repeatedly forecast an improvement in productivity growth over the past five years; each time its hopes have been dashed.

In Wednesday’s inflation report, the committee offered three possible explanations. First, the growing proportion of lower-skilled employees in the workforce has been bad for output per hour, as these workers tend to be less productive.

Second, rock-bottom interest rates, and “forbearance” by lenders reluctant to crystallise their losses by calling in loans may have allowed inefficient businesses to survive when it might have been better – for the country’s productivity record at least – if they had been swept away by the crisis.

Third, chronically weak business investment is likely to have slowed technological progress, and made firms less productive. Whizzy new kit can allow the same workforce to produce more output.

The Bank now believes that as demand continues to pick up, these factors will prove to be transitory: firms will start hiring higher-skilled workers – and retraining their existing ones. Investors will back the most promising and innovative new ventures, instead of propping up zombie companies. And this rising business investment will deliver innovation.

George Osborne believes he can help, too. He has long been keen on Thatcher-style “supply-side” reforms, aimed at boosting the economy’s potential growth rate. The “northern powerhouse”, which will include devolving economic decision-making to cities and improving transport links, is partly conceived as a bid to improve productivity. Planning reforms and increased investment in apprenticeships are in the same category; a rapid decision on runway expansion following the report from the Davies commission could also help.

Many of these measures should be welcomed, but they won’t fix our productivity problems overnight. And some economists believe other factors, including the hangover of debt from the crisis years, may also be at work.

Meanwhile, in the short term, anxiety about the looming Brexit referendum, and a fresh round of austerity, could restrain business investment, bear down on demand, and hold back Britain’s ability to “do more with less”.

Economists have struggled to explain our parlous productivity performance over the past five years, which means it’s very hard to be confident that a turnaround is here at last. As Carney put it: “Among the many uncertainties we face, the timing and extent of any prospective pick-up in productivity growth remains our most difficult judgment.” If living standards are to improve, we have to hope this time, finally, the Bank is right.

Pay squeeze goes on

Most company boards want to “do the right thing” on pay and conditions for their workers, according to the amply remunerated Lord Rose, chairman of Ocado.

If that’s true, then they seem to be going about it in an unusual way. Only about a quarter of FTSE 100 companies have signed up to the living wage, a measure of the amount required for people to live with dignity, based on research by the respected Joseph Rowntree Foundation. The Guardian and Observer are in the process of applying to be accredited.

Some of the UK’s most respected companies are missing from that list, including all the major retailers. Sports Direct has been vilified for its treatment of staff, the majority of whom are on zero-hours contracts. But others are involved in practices which should make their boards blush.

Next – a company led by a man compassionate enough to have handed his bonus over to staff more than once – is one of them. Ten staff at the retailer are holding out against its decision to scrap extra pay for Sunday working – a move that hit about 800 people.

The company deems those numbers a measure of how happy staff are to accept new contracts. But more than one worker affected by the change described how they were persuaded to give up their extra pay: they were taken into a “forced change” meeting and told that if they did not accept the new conditions, they were effectively resigning. All have worked at Next for at least seven years.

Campaigners say that many retailers are now ditching traditional benefits, such as extra evening or bank holiday pay, as companies try to reduce costs in the face of a still-tough consumer market. With no collective bargaining in companies such as Next, staff have little support. The costs and career risks of challenging the company at a tribunal mean few take that route.

Low-wage activists will be touring annual shareholder meetings over the next few months asking companies to improve life for their lowest-paid workers. Those boards that want to show their customers they really care about their workers will be listening carefully.

It is not just an issue for do-gooders. An estimated £11bn of taxpayers’ money goes towards “in-work benefits” to top up the wages of those on low pay. You don’t need to be an economist to realise that doesn’t add up any more.

Get ready for another banking whinge

On 8 July, George Osborne will deliver his first budget as chancellor of a government with a Conservative majority.

That will be a month after Stuart Gulliver, the boss of HSBC, has presided over a “strategy day” at which he has promised to spell out the criteria the bank will use for its decision on whether to move its headquarters outside London.

Gulliver has already blamed Osborne’s bank levy for making his life difficult. He argues the levy makes it harder for him to fulfil his promise to keep increasing the dividend to shareholders – and he will be able to deliver a new whinge just a few weeks before Osborne sets out his new budget.

In his last one, Osborne raised the levy for the ninth time. In his next one, he must resist any pressure from HSBC – or Standard Chartered for that matter – for a reduction or a rethink.

The GuardianTramp

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