Solving the UK’s productivity puzzle

The great challenge for the newly elected majority Conservative government is to tackle the productivity gap between the UK and its competitors. To do so effectively will, simultaneously, tackle the so-called cost-of-living crisis – which is, in truth, a combination wage-rise lag – and the continued lack of growth in exports.

With more than 30 million people employed and economic growth looking sustainable at around 3%, most of the existing slack in the labour market has been used up. Of course, immigration remains a partial solution to this particular problem by adding to our skills base but, to take a significant step forward, productivity needs to be increased.

To give an idea of the scale of this particular problem, it is worth noting Germany’s economy is around 29% more productive than that of the UK.

Wages and salaries come into this equation at the point when increased productivity justifies bigger pay packets. This, in turn, increases consumption, especially if inflation is properly controlled. A similar argument applies to exports. Basically, increased productivity has a positive impact on a country’s ability to export – chiefly because comparative unit prices are driven down.

Again, Germany is a classic example of this.

The solutions

To address the productivity problem, several policy areas need to be developed. The most obvious is education and training. I highlighted this on my return to parliament in a recent debate I led on the importance of vocational qualifications. To date, important steps have been taken to tackle underachievement, unhelpful courses, spurious qualifications, poor teaching standards and inadequate school/college leadership.

Now we need to make a more direct link between aspiration, education and employment through bringing business and professionals much closer to the education system. Informed and timely choices in courses at every level need to be made in line with a clearer understanding of the labour market.

Two policies would create a better framework for this to happen. First, Local Enterprise Partnerships should be charged with calibrating the supply of skills to the labour market through being the interface between educators and employers, and, second, newly visible and accountable leadership of cities must become drivers for education excellence and, where appropriate, specialist research through linking higher education with business.

To help make this happen, consideration should be given to a form of ‘training and skills allowances’ (especially direct support for schools and colleges), just as capital allowances could promote investment in equipment.

A third policy area is about the definition and role of the firm. Too often, businesses in the UK – especially medium-sized firms – focus on the short term by concentrating on shareholders’ immediate interests and the value of the business in terms of an exit route.

Instead, we need a taxation regime to encourage longevity, investment and strategic planning. Such a regime would include capital allowances, research and development ‘discounts’, and, crucially, succession planning incentives.

It is not possible to easily replicate different business cultures but learning from the success of ‘Mittelstand’ in Germany would help to strengthen this essential ‘real economy’ sector.

Neil Carmichael is the Conservative MP for Stroud and was first elected to parliament in 2010.