- Author: Professor David Spencer
- About the author: David Spencer is Professor of Economics and Political Economy at the Leeds University Business School.
Professor David Spencer writes about low productivity issues in the UK labour market.
The UK’s employment rate is at a record high. The latest figures from the Office for National Statistics show that unemployment in the UK fell by 60,000 between October and December 2015, with the highest number of people in work since records began in 1971.
But this masks several problems in the UK labour market. These include the problem of sluggish wage growth – the latest figures show that, despite lower unemployment, wage growth actually fell in the UK. Another major cause for concern is low productivity. The amount UK workers produce per hour remains stubbornly low and the latest government figures reveal the biggest gap with other leading western economies since records began in the early 1990s.
Much debated by politicians and talking heads, something that has been overlooked when it comes to solving the UK’s productivity problem is the imbalance of power that exists between employers and workers in the economy.
Low productivity in the UK is a symptom of a labour market and workplace in which workers are too weak and employers are too powerful. It reflects the dysfunctional nature of the UK economy where employers have the relative freedom to pursue low investment routes to higher profitability that are ultimately detrimental to long-term productivity growth.
To break the cycle of low productivity there is a need for more radical reforms that tackle the imbalances of power in the UK economy. Sticking with the status quo, by contrast, will perpetuate the current malaise of low productivity and sluggish wage growth.
The fear factor
Workers in the UK have faced a more buoyant labour market in recent times. Record employment levels have eased job insecurity for many. But there remains no great surge in workers' bargaining power. On the contrary, it continues to be thwarted.
There are reasons for this. At a broad level, years of economic crisis and now austerity have created a climate of fear for most people in jobs. There is an acceptance of hard times and a reluctance to push for higher wages and better working conditions. This environment has created the context for low private sector investment and low productivity.
At a more specific level, workers are facing acute financial pressures. As research from the Social Market Foundation think tank shows, more and more people are reporting increasing financial difficulties linked to high levels of debt. The research indicates how worry and anxiety over finances is leading to increasing levels of stress and to lower levels of concentration at work. The net effect of these factors is to blunt the UK’s productivity.
The short-termism of employers and the lack of sustained pressure to invest in new technology, skills and productive capacity help to explain why productivity has remained low in the UK. While employers can make profits by utilising a weak and weakened workforce, there will be no sustained improvement in investment and no long-term improvement in productivity.
Low quality jobs
Another problem is the proliferation of low quality jobs in the UK. Jobs have been added in sectors such as retail and hospitality – these are low paid, low skill, and low productivity. The march of the shop workers, hotel staff, and cleaners provides a another reason why overall productivity in the UK has remained low.
These jobs also have low or zero levels of unionisation and low worker bargaining power. They allow employers to sweat labour in order to improve profitability, rather than to upgrade production and improve wages. These jobs reflect and reinforce a labour market that is skewed in favour of employers. They, in turn, help to worsen the conditions for growth in UK productivity.
Creating a level playing field
Productivity will only recover, and be sustained at higher levels, once measures are taken to improve workers' bargaining position. The issue of ownership of assets matters here and the welcome move by the Labour Party to consider how workers might acquire assets speaks to the kind of measures required to tackle the low productivity cycle that the UK finds itself in.
The productivity problem in the UK, at root, is a reflection of unequal power. With the demise of unions, the financial fragility of many workers, and the ascendancy of the shareholder value model which privileges short-term profitability over long-term investment, there is a lack of strong modernising forces in the workplace.
A shift in the balance of power towards workers would help to block off low productivity routes to higher profitability. It would, in turn, encourage employers to look for more sustainable routes to higher profitability that are based on higher investment.
The quest for higher productivity requires a fundamental rethink of the UK’s political economy. It requires powerful vested interests being challenged and a move to an economy where the ownership and control of assets is more equally shared. It requires, in short, an economy that serves the majority, not just the few.
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