The Government’s Productivity Plan

Debate between Iain Wright and Michelle Thomson

Tuesday 28th February 2017 Commons Chamber

[Mr Wright]

I will respond to the right hon. Gentleman in a moment when I talk about the structure of our employment market and how I do not think it deals with living standards, helps our constituents, or improves the long-term competitiveness of our nation.

It is little wonder, given the intimate link between productivity and pay, that Paul Krugman said:

“Productivity isn’t everything, but in the long run it is almost everything.”

Reflecting this, wage growth has been anaemic. In the period between 2007 and 2015, British workers suffered a bigger fall in wages than those in any other advanced country with the exception of Greece. Average pay fell in real terms by more than 10%. In the same period, real wages grew in France by 11% and in Germany by 14%. Median pay for workers in this country is still around 5% below its pre-crisis peak. There has been a lost decade of wage growth for our constituents, the British workers.

However, the headline nationwide figures for productivity, worrying though they are, mask the stark differences in regional productivity. Gross value added per hour in London is 32% above the UK average. The only other region with productivity above the UK average is the south-east of England, which is 9% above the average. The regions of the north and the midlands—including my own region of the north-east, and those of my fellow Select Committee members, the hon. Members for Cannock Chase, for Derby North and for Warwick and Leamington—have productivity levels between 10% and 15% below the UK average. In the nations of the United Kingdom, productivity in Scotland, which includes the constituency of the hon. Member for Edinburgh West, is 2% below the national average, while in Wales it is 19% below the average. Were it not for the performance of London and the south-east, the gap between ourselves and our major economic rivals, with whom we are competing for orders, trade and market share, would be even more dire.

[Michelle Thomson (Edinburgh West) (Ind)]

In this place, we habitually compare our productivity with that of the G7, but I recall a debate on this matter around this time last year for which I did some research into medium-sized countries such as Norway, where productivity levels are significantly higher than in any of the G7 countries. Is the hon. Gentleman going to explore how the scale of those medium-sized countries could be a factor affecting productivity?

[Mr Wright]

I am going to talk about scale in relation to the size of firms, as opposed to the size of nations, but the hon. Lady makes an important point.

This is not a dry and dusty economic treatise. I am talking about real, unsatisfactory productivity growth across the UK that is affecting the living standards of the constituents of hon. Members on the Committee and of Members across the whole House. That is why the Committee wanted to examine the Government’s productivity plan. This is not about dragging London and the south-east back; it is about moving the regions and nations closer to the economic performance of the capital.

The distinctive structure of our economy could also be acting as a drag on our economic performance. About four-fifths of our economy is made up of services, which is higher than in any other G7 country. It is clear that the service sector has driven the economic recovery since the downturn in 2008, but in the main the sector tends to have lower productivity than manufacturing. Moreover, in the past 30 years, we have seen a shift in the nature of jobs in this country. For every 10 middle-skilled jobs that disappeared in the UK in the 1990s and the first decade of the 21st century, about 4.5 of the replacement jobs were high-skilled and 5.5 were low-skilled. In Ireland, the ratio was 8:2 in favour of high-skilled jobs; in France and Germany, it was about 7:3. The nature of our economy and our skills set means that our major economic rivals are moving away from us and going higher up the value chain than we are. That is clearly having an adverse impact on productivity and living standards.

In addition, Britain is a nation, if not of shopkeepers, then certainly of small businesses. That is a great thing. In the 21st century, the number of businesses in the UK has increased by an average of 3% per year, to reach 5.5 million, which is 2 million more businesses than in 2000. However, the proportion of firms that employ people has fallen in the same period from about a third of companies in 2000 to around a quarter today. Micro-businesses—those enterprises employing fewer than 10 people—account for 96% of all businesses in the UK. The domination of small businesses in our economy has implications for productivity levels. They are unable to take advantage of economies of scale, they are more likely to face difficulties in accessing finance for new product, for process development or for scale-up activity, and they may find it difficult to find the time not merely to fulfil existing orders but to identify opportunities and secure bigger contracts for domestic and export markets. Those companies cannot afford armies of procurement and export teams.