A range of macro solutions have been offered by Government and others, including capital and financial investment in infrastructure. But it is now understood that these can only yield lasting improvements if workplaces are operating at their best. The way workplaces are organised, the part played by managers and leaders, and the role and involvement of employees can help deliver better outcomes for individuals, organisations and the economy.
In an ACAS paper published in February, Ian Brinkley remarked:
The macro-economists have tortured just about every dataset they can get their hands on in just about every way possible.
It is always possible that a new insight will provide the missing part of the explanation, but so far we are coming up short.
In other words, lots of very clever people have looked everywhere and still can’t work out what’s wrong.
There is a growing consensus that the bit of the productivity puzzle we cannot easily explain is based on what is going on in the workplace – in other words, there is a significant part of the fall in productivity shortfall that is attributable to employment relations in its widest context.
Or, as Tim says,“It’s the workplace, stupid!”
A recent paper by the National Institute of Economic & Social Research (NIESR) suggests they might be right. The productivity fall, say the report’s authors, has happened across the board.
The most striking feature is the widespread weakness in total factor productivity within firms, pointing to the importance of a common factor in explaining productivity weakness.
Commenting on the paper in the FT, Matthew Klein says:
Adding to our confusion is a fascinating new paper from the National Institute of Economic and Social Research, which shows the UK productivity problems aren’t concentrated in any particular sector and (mostly) can’t be blamed on the inability of good firms to grow at the expense of bad ones. Moreover, there is no noticeable difference in the performance of companies that relied heavily on bank lending before 2008 and those that didn’t, nor is there a significant difference between big and small companies.
Rather, all businesses experienced a big drop in underlying productivity since 2008.
So the collapse in productivity isn’t because of dependence on bank lending nor zombie firms taking resources that should go to better ones. The productivity problem can’t be blamed on the skill level of the workforce either. What we seem to be seeing is a general and sharp decline in productivity across UK organisations.
So what has happened? What has been going on in Britain’s workplaces?
The NIESR report makes a suggestion, though, tantalisingly, it leaves the discussion for another day.
[We conclude that other common factors, which we do not explore in this article, for example general demand weakness coupled with flexible wages, are likely to have been central in explaining the stagnation in UK productivity growth.
This goes back to the hand car wash argument, where cheap labour means that firms don’t need to invest in equipment. Instead, new and existing firms just find ways of profiting from the ready supply of cheap labour.
Some might argue that the labour market needs to be more flexible so that managers can push workers harder and sack those who don’t perform but recent IMF paper concluded that labour market deregulation does nothing to improve productivity and might even make it worse.
Research in the US and in the UK, France and Germany has shown that unfair dismissal laws encourage firm level innovation. by providing protection for employees to take risks and by encouraging firm to take risks on new projects.
A flexible labour market and stagnant wages, therefore, might have the opposite effect. When managers have more power, employees keep their heads down and their bosses get lazy.
As Gary Miles of Roffey Park said when the Beecroft proposals were announced, removing employment protection lets poor managers off the hook. It absolves them from tackling performance issues. If it gets easier to sack people without explaining why, you don’t need to spend time trying to understand the source of the problem, you just blame the worker, sack him and get someone else. Of course, Beecroft’s proposals were not enacted but the raising of the unfair dismissal threshold and the introduction of tribunal fees has had a similar effect. An employer’s risk of being taken to a tribunal is much reduced.
All this is circumstantial, of course but so far, every attempt to explain the productivity puzzle has drawn a blank. The UK’s stagnating productivity has come at a time when employment protection has been eroded, training investment has been in decline and non-regular employment, such as zero hours contracts, self-employment, temporary employment and part-time work, has increased. As I said earlier this year, the productivity puzzle leaves Britain’s managers with some serious questions to answer. With one of the largest graduate workforces in the EU and one of the largest shares of high-skilled jobs our productivity should be higher than it is.
Like ACAS, the UK Commission for Employment and Skills has been calling for improvements to management practices for some time. Yesterday, Sara Mosavi said that management needs to shift up a gear if Britain’s productivity is to be improved. She’s right but when cheap and flexible labour allows you to coast along on auto creep and still make money, why would you bother?