A smart answer to our productivity problem

This article originally appeared in Capx.co on 23rd February 2016.

The UK has a productivity problem. And the pursuit of productivity matters for the poorest. It is often considered a high-level topic, but tackling it properly will make the biggest difference to those from the most disadvantaged communities.

Prior to the financial crash of 2008, the UK consistently recorded productivity growth rates above international comparisons. This is not the case anymore. In 2015, the UK’s productivity lagged 11 per cent behind Germany, 12 per cent behind France, and 39 per cent behind the United States of America. Between 1991 and 2007, the UK averaged productivity growth rates of 2.38 per cent. Between 2008 and 2014, that figure is just 0.05 per cent.

It is proving particularly punishing for those at the bottom of the income distribution — households between the 5th and 25th income percentile have seen almost no wage growth in 20 years. While income inequality has fallen, this has largely been due to the tax and welfare system propping up wages in the bottom quarter of households.

Attacking the productivity decline nationally demands a range of policies that support capital investment, employment, trade and innovation. However, tackling the problem of low productivity growth among the bottom 25 per cent requires more targeted intervention as well.

The good news for the Government is that there is an increasingly large body of evidence that links investment in education and skills with long term increases in productivity growth at both an individual and regional level.

A Confederation of British Industry report on regional productivity has found that Trafford has above average GCSE scores compared with the wider North West and is also six per cent more productive. Conversely, only half the students in Blackpool managed the regional average at GCSE level, and the area’s productivity is 75 per cent of the regional average.

The same is true not just of academic attainment but the wider skills picture. A 2015 review from the National institute of Economic and Social Research concluded that “as the UK’s workforce becomes better qualified, the improvement in workforce skills emerges as one of the main factors currently boosting productivity in the UK”.

A joint Education and Business select committee report in 2015 came to the similar conclusion that “intermediate-level skills … make key contributions to absorptive capacity at firm level. Even if high-skilled employees such as professional engineers and scientists contribute disproportionately to firms’ ability to identify and acquire useful external knowledge, the successful application of this knowledge will depend in many ways on intermediate-skilled employees as well as on high-skilled employees”.

The bad news is that the UK has underperformed in both academic and vocational education for some time. Last year (2015/16) only 59 per cent of students achieved the benchmark A*-C grade in GCSE English and Maths, meaning 41 per cent of students will leave school without the key qualifications for getting a job. Regarding vocational skills, in 2012, 22 per cent of the UK workforce had a qualification at levels 2 or 3 compared to 35 per cent of the French workforce, and 55 per cent of the German workforce.

For a future workforce, this skills deficit matters. The Government’s Working Futures report predicts that in the future “more people with higher qualifications will be unemployed and higher qualified people will make up a much larger portion of the unemployed population”. All evidence, anecdotal, empirical and international, seems to point towards a future where intermediate technical skills in new age technology will be in high demand.

Among charities we speak to, working with school leavers and those without jobs, we repeatedly hear of the importance not of another GCSE or A Level, but the life skills and technical skills that will serve them in employment.

In the near term, the Government should continue to support the roll-out of high quality apprenticeships. Apprenticeships offer students and mid-career professionals the chance to learn in a working environment, something businesses increasingly prefer.

JJ Churchill Ltd, a family-run manufacturing business in the East Midlands hasn’t hired an entry level university graduate in over 14 years, choosing apprentices instead. Accountancy firm PWC have quadrupled their school leaver intake to well over 160 places by 2015.

But for the longer term the Government must also embrace the positive returns of vocational education to earnings and lower rates of welfare dependency by investing in the skills agenda before children leave school. There are plenty of real world examples of social organisations doing this already: working with young adults, at risk of falling into a cycle of low income and job insecurity, to build valuable skills.

For example, Young Enterprise have worked over with 3.8 million students across the country at all levels of the education system, helping them establish skills in small business management, financial literacy and how to get through a job interview.

By supporting better vocational education and high-quality apprenticeships for school leavers, the UK can help build a labour force with the skills base for the future. The Prime Minister’s industrial strategy consultation and the upcoming Budget statement will be great opportunities for this Government to support both vocational education and apprenticeships, and in the process, reaffirm their commitment to boosting both productivity at a national level and helping those communities that need a productivity boost the most.

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