Why the Government’s Industrial Strategy must focus on investing in human capital
From Harold Macmillan’s National Economic Development Council to George Osborne’s Northern Powerhouse, all governments have followed a form of industrial strategy. But the political turbulence experienced in 2016 was a function of increasing anger among a population that have seen a flatlining in their quality of life.
Office for National Statistics released data earlier this month showing that while inequality in the UK has fallen to its lowest point since the late 80s, real wages for households at the bottom of the income scale have hardly risen in over two decades. Individuals between the fifth and 25th income percentile saw average real growth in pre-tax earnings of less than 0.5 per cent between 1994 and 2014 (individuals in the bottom fifth percentile saw large increases in real wages over this time due to minimum wage laws). Only once tax and welfare measures have been factored in do you see an improvement in disposable incomes for this demographic.
The reason for poor wage growth over time is very low levels of productivity growth. At an aggregate level, UK productivity actually grew at above average rates prior to the global financial crisis and subsequent recession between 2007 and 2009. This period of growth however proved unbalanced, with large advances in productivity growth in London while ex-industrial regions fell behind. Since 2009 productivity growth has slowed considerably, with few politicians or economists being able to explain the causes of it.
Existing theories stretch from the demise of UK manufacturing to low levels of capital investment and record high rates of employment. These theories may be true, and the Government’s Industrial Strategy Green Paper Consultation make steps in the right direction. Secretary of State for Business, Energy and Industrial Strategy Greg Clarke rightly reaffirmed the Government’s commitment to areas of excellence in the British economy “from automotive and aerospace to financial and professional services”. He also recognised the importance of making sure the UK is “one of the most competitive places in the world to start or to grow a business”. These are integral to future economic growth. But if the Prime Minister wants to use an industrial strategy to boost productivity across our economy, she should focus on productivity of workers in the bottom 20 per cent — individuals who have seen little wage growth in over two decades, and remain in insecure jobs with no prospect of in-work progression. The Green Paper raises this issue, and in his forward the Business Secretary states the importance of ‘closing the gap’ between the best performing and the less productive. The key to long term productivity growth should be more than just increasing capital investment, but improving the quality of human capital in the British economy.
To this end the Centre for Social Justice’s industrial strategy submission will prioritise steps to further improve capacity of the workforce to meet the demands of the labour market. We will advocate an improvement in schooling across the country, specifically supporting the growth and availability of vocational education through University Technical Colleges. In 2015/16 just 59 per cent of students surpassed the benchmark of A*-C grade in GCSE English and Maths, meaning 41 per cent of school leavers have been failed by the system. The reality is that different students have different ways of learning, where some thrive in an academic environment, others react better to experiential learning or ‘learning by doing’. By embracing more vocational routes through education, we can better prepare students with the skills in high demand by the world of work.
David Cameron’s pledge to create three million new apprenticeships was a valiant commitment, but Theresa May must ensure that these apprenticeships are high quality and treated as equal in value and esteem with traditional A-levels and graduate degrees. Research by the Sutton Trust found that many apprenticeships are of poor quality and offer little in the way of new and valuable skills. Then Chief Inspector of Education at OFSTED Sir Michael Wilshaw said in 2015, “Very few apprenticeships are delivering the professional, up to date skills in the sectors that need them most”.
Finally, the Prime Minister must continue to support in work training for existing employees. By helping employees get access to training, the Government will increase the stock of transferable skills across the workforce, improve labour flexibility as well as economic dynamism.
The Prime Minister clearly sees the need for a skills focus within her industrial strategy, and she is also right to include ideas on supporting advanced industries, research and development, the northern powerhouse and improving procurement. However, the Centre for Social Justice believes the driving theme of any industrial strategy that aims to attack the root cause of low productivity in the bottom 20 per cent should be a modern skills agenda that better serves many of the people who currently feel left behind.
