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25 January 2017updated 30 Jul 2021 1:21pm

If you want to fix Britain’s economy, there’s one word you need to remember

And it isn't "infrastructure". 

By Ashwin Kumar

Since last Tuesday’s speech, the economic implications of Theresa May’s Brexit strategy have been the subject of furious debate. Will leaving the single market harm growth or will new trade deals with other countries make up the difference?

Polling by YouGov suggests 54 per cent of Leave voters would object to tougher immigration controls if it came at a cost to them personally. Switch on the TV and vox pops on BBC News show the opposite: voters saying they would happily pay an economic price for lower immigration.

But what is forgotten in this debate is that, prior to Brexit, our performance as an economy wasn’t good enough.

Yes, we had growth, but real wages have been stagnating for far too long. Yes, we have a good story to tell about the numbers of people in employment. But, for far too many, this means low-paid insecure work with little prospect of progression. The result is that 3.7 million households in poverty have someone in work.

Analysis by Matthew Goodwin for the Joseph Rowntree Foundation showed people with lower qualifications, earning less than £20,000 a year and those who live in lower-skilled areas were most likely to vote for Brexit. The vote was a revolt by those who have done least well against an economy they feel left them behind.

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The Prime Minister has seen this. On the steps of Downing Street, Theresa May highlighted the struggles of people just managing – working long hours, struggling with the high cost of living. In his Autumn Statement, the Chancellor recognised the need to tackle the UK’s productivity gap to ‘build an economy that works for everyone’.

But up to now, remedies to these problems have been rather traditional. The Autumn Statement saw a raft of measures designed to improve productivity, which focused mainly on research, development and infrastructure. Although there was talk about the need to improve the nation’s skills, expenditure on training announced in the statement was negligible.

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No-one should doubt that investing in technology and transport will benefit the economy as a whole. But what difference will it make to low-paid workers? After accounting for inflation, in the five years to 2014 the economy grew 10 per cent but wages fell 6 per cent.

Unless measures to improve productivity do more for people on lower earnings than others, they will do little to address the frustrations and anger behind the Brexit vote. This is why we need to take a different approach, taking action in four areas.

First, helping low-paid industries. Industrial strategies focus overwhelmingly on high-value sectors. Low pay sectors such as retail, care and hospitality constitute only 23 per cent of the UK economy, yet account for around a third of the productivity gap with leading Western European economies.  Closing the productivity gap in these areas will do more for the economy than elsewhere.

Second, supporting lower-paid workers. Many lack the basic skills to get on in work – five million adults lack basic literacy, numeracy and digital skills. There has been an expectation that businesses will invest in training for their employees, but workers in low-wage jobs in the UK receive less training than other European countries.

The focus in the Industrial Strategy on maths and technical education for young people will certainly help the economy in the future. But as the Green Paper acknowledges, skills cannot just be about schools and young people. We need to help people already working to develop and retrain as our economy evolves.

Younger low-paid workers say they do not know how to progress in work and feel they get no support from their employers to do so.  We know that many low-paid women working part-time feel they cannot look for new jobs – the best way of getting a pay rise – because to do so puts at risk the hours they have negotiated to combine work with family responsibilities.  The result, according to Tooley Street Research, is that 52 per cent of low-paid staff in retail feel their skills are not being fully used – which is a clear brake on productivity.

Third, boosting low-skilled areas outside of big cities. Tuesday marks the 100-day countdown to mayoral elections in Cambridgeshire and Peterborough, the West Midlands, Greater Manchester, Liverpool, Tees Valley and the West of England. Those with powers to improve adult skills must focus on low-skilled areas. Those not currently covered by devolution deals need the same powers and funding to ensure more places do not lag further behind.

Fourth, supporting low-productivity firms. Andy Haldane from the Bank of England has pointed out how, in every industrial sector in the UK, there is a small proportion of highly productive firms and a long tail of firms whose productivity has barely grown in recent years. So there is potentially a much bigger gain for the economy as a whole from spreading productivity around each sector instead of concentrating on a small number of already highly productive firms. 

Improving our management skills is part of this. John van Reenen at the London School of Economics has written about how the quality of management in different countries can explain as much as a third of their differences in productivity.

Now many organisations, including supermarkets such as Lidl and Aldi, have committed to being Living Wage employers. This only makes sense for a commercial organisation if they can justify the pay rise with higher productivity. So many firms have been looking at job design: reconfiguring jobs to give their staff more opportunity to contribute to their businesses. But too few are taking this approach.

Widening the industrial strategy to focus on people and places left behind will help both the economy but also the prospects of lower paid workers. Yet apart from Sir Charlie Mayfield’s task force on management, and the Industrial Strategy’s focus on maths and technical education, most of these issues have been absent from the debate.

It is too easy for improving productivity to be about the shiny and new: the big infrastructure projects, science parks and high skilled engineering, where some firms in the UK already do very well. Technology and infrastructure investment are necessary but not sufficient.

The government is serious about improving productivity and it is serious about people left behind by the economy.  The Industrial Strategy is an opportunity to recognise that how people are managed and treated at work, as well as how they acquire skills and retrain for a modern economy, are matters of vital economic significance. Otherwise, we will not have done enough to address the frustrations and anger that fuelled the Brexit vote or tackle low pay and in-work poverty.