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October 2015
Welcome to the IPA e-bulletin. This month, we have a fascinating article from NEF and University of Greenwich, making
the economic case for trade unions. They argue that by increasing wages, unions can drive demand and growth in the
wider economy. Ahead of the release next month of some IPA research on employee involvement in transformation in
local government, we hear from Sir Robin Wales, Mayor of the London Borough of Newham on their innovative approach
to service delivery through small businesses. Finally, for those who couldn’t make it, you can listen to our recent event on
productivity and the workforce by using this link https://soundcloud.com/progressonline/ipa.
Making the economic
case for trade unions
Nita Clarke
Director
All the best,
As the Government’s Trade Union Bill progresses through Parliament, the New Economics Foundation (NEF)
and the University of Greenwich launch a new report, which examines the impact unions have on the UK
economy. It argues that – far from unions being a drag on growth – it is the decline in union membership over
the past thirty years that has had negative impact on national prosperity. The research claims that rebuilding
unions could inject £27.2bn back into the UK’s wage-led economy.
T
he controversial Trade Union Bill
currently making its way through
Parliament proposes restrictions on union
activity and strike ballots which would
have significant administrative and
financial implications. The Trades Union
Congress has said it amounts to the biggest
attack on unions in three decades.
Announced in the Queen’s Speech earlier
this year, the proposed legislation is part of
the Government’s stated objective of
making Britain “the most prosperous major
economy in the world by 2030”. And yet,
when exploring the justification for the
claims that restricting union activity would
increase national prosperity, researchers
have found a gaping hole where there
should be a body of evidence.
It would appear the claims are based on a
woolly assumption that unions reduce
national profitability because days lost
through strike activity are causing damage
to our economy. In truth, the number of
days per year lost to industrial action has
fallen dramatically over the last 30 years
and has today reached a historic low.
What’s more, as the new report makes
clear, there is evidence to suggest that the
bill is likely to have the opposite effect on
national prosperity.
Diminishing collective voice and the
declining wage-share
The research explored the impact of
unionisation on wages and growth rates
across Europe over the last 30 years and
found that overall, declining union density
has had a negative effect on national
income growth. In other words, the
weakening of trade unions has slowed
down our economy.
The reason for this is based largely on the
fact that wages and salaries are not just a
cost for employers, but also represent
demand in an economy. The assumption
that increasing wages means cutting into
profits might be true for an individual firm ignoring the productivity boosts resulting
from pay increases - but for the national
economy, higher wages create bigger
markets and can therefore increase
national income.
What is critical here it to determine which
of these effects outweighs the other, by
answering the question of whether an
continued on page 2 • • •
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economy is “profit-led”, meaning wages as
costs dominate, or “wage-led”, where the
benefits of higher wages are stronger. This
is done by measuring the cost of rising
wages against the level of market
expansion, on a country by country basis.
When we explored our own economy, our
research shows that the UK is a wage-led
economy: growth is driven more by wages
than company profits.
So, what are the implications of this for
trade unions and for the government’s bill?
The slide in union membership levels, from
half of the UK’s working population in the
1970s to around a quarter today, is a major
cause of wages giving way to company
profits. The fact that fewer people are in
unions has contributed to the drop in the
wage share of national income from 76% in
1976 to 67% today.
There are of course several other factors
that have contributed to the falling wage
share. Globalisation and technological
change have boosted profits – though by
how much is a contested question. A more
significant driver is our increasingly
financialised economy –meaning that we
produce and export less in the UK than we
used to, but spend more time trading in
financial markets – profits from which don’t
translate into wages.
Taking account of these other factors,
empirical evidence shows an effect that is
statistically significant between the
declining collective voice of the workforce
and the shrinking slice of the national
income pie that workers receive through
wages. Based on this we can estimate that
the decline in union density over the last
four decades has, through its effect on the
wage share, reduced GDP by £27.2bn at
current rates. This is a significant loss – and
contradicts claims that loading further
restrictions onto union activity would be
economically beneficial.
Counter-productive attacks on the
workforce
Since the 1980s the labour market and
workplace have changed beyond
recognition, and in ways that mean
employees are now less able to speak
collectively. Staff are more isolated, often
split across different types of contracts,
workplaces, even countries.
This has weakened employees’ negotiating
positions on wages and conditions, even
when collective bargaining and union
activities take place. These challenges
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require more support to the workforce, not
an assault on their rights and protections.
In August, even a watchdog made up
mostly of business representatives tasked
with scrutinising government proposals –
the Regulatory Policy Committee (RPC) –
deemed the Trade Union Bill ‘not fit for
purpose’. This was in part down to the
inadequate assessment of the costs and
disruption caused by particular elements of
the proposed legislation, as well as their
overall impact on the economy.
The RPC’s damning review added to the
long list of criticisms directed at the bill.
From human rights organisations noting
the infringement to the right of working
people to withhold their labour, to the
objections from Conservative MP and
former Shadow Home Secretary David
Davis on the grounds that it would
encroach on civil liberties.
These arguments have been well made,
but now we have another more direct
case: that the Bill’s rationale is faulty and
costly – it runs counter to the
government’s stated economic aim of
making Britain prosper.
Alice Martin, Researcher, New Economics
Foundation (NEF)
Employee empowerment and small
business delivery at Newham Council
As budgets are progressively squeezed, local government is having to adapt fast in order to
preserve services to local communities. In this article we hear from Sir Robin Wales, the
Executive Mayor of Newham, about how this East London Council is pioneering a new
approach to service delivery, based on spinning off small businesses which are
commissioned to deliver council services. He argues that the approach can enhance
employee involvement and ownership, and make the public sector more innovative and
entrepreneurial, whilst maintaining the values of public service, and protecting the
services that people value.
The union movement came together last week for TUC Congress
to discuss the challenges and opportunities that the coming year
will bring. Against a backdrop of austerity, the public sector has
embraced the language of commissioning. To maximise our
impact, we must first define the outcomes we want to achieve
and then locate the providers who can deliver them most cheaply
and effectively. Yet for many local authorities, commissioning has
been reduced to a restrictive choice between maintaining a costly
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October 2015 No. 144
status quo or deploying faceless multinational contractors.
With traditional internally managed services we benefit from the
enthusiasm and expertise of staff who have chosen a career in
public service, and retain the comforting certainty of service
continuity. However, this comes with the cumbersome machinery
of large organisations, and layers of management and
bureaucracy that can potentially stifle innovation – a point
identified in recent research by NESTA.
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Partly this may be cultural: cynicism, risk aversion and overly
complex processes can easily blunt the ingenuity of staff. It is
understandable that in large organisations lots of people will
have a stake in the big decisions, but sometimes this reality
can mask creativity and slow the pace of change. In part,
though, it may be down to the absence of suitable incentives.
driving down costs, they will stand to personally profit.
Similarly, the businesses have a strong incentive to innovate
and expand their portfolios of clients. Because the Council
would retain an interest as a shareholder, we would also
receive a share of the profit to reinvest for the good of the
community.
The predominant alternative has shortcomings of its own.
Outsourcing firms are not rooted in local networks, lacking a
thorough understanding of – and commitment to – the
communities they serve. Furthermore, there are legitimate
concerns that the increasing market shares of a small number
of firms may remove the element of competition necessary to
drive down costs. Above all, we want to incentivise innovation
and efficiency, but worry about creating perverse incentives to
compromise on standards and strip out profit rather than
invest in the future of the service.
An early success story is Newham’s Language Shop, which
provides translation and interpretation services in over 100
dialects to clients across the public sector. The business
originated as an in-house service, but today only seven per
cent of its business is with Newham Council. Increasing levels
of independence have enabled the Language Shop to thrive,
establishing itself as an award winning industry leader. This
success is built on a policy of identifying talented staff with an
entrepreneurial streak and empowering them. Last year, they
recorded 99 per cent customer satisfaction rates.
At Newham, we see this as an unacceptable choice. We have a
vision to support residents in building their resilience: we want
to give people all the skills they need to overcome barriers to
fulfilling their aspirations. That means delivering much more
than the statutory minimum, while also maintaining the
highest possible service standards across the board – all at a
time when our grant funding is plummeting. Following a cabinet decision in September, we will transfer all
relevant assets and contracts to the Language Shop. For now,
the business is wholly owned by the Council, but Phase Two
will see a majority interest transferred to an employee
ownership trust with employees on the board – a model we
describe as ‘stakeholder co-ops.’
Our solution is the Council’s Services to Small Business
programme (CSSB). Under the scheme, we aim to liberate
committed and experienced staff from the hierarchical
structures of the Council and allow them to flourish in
independent businesses. Council services are initially
separated into small, semi-autonomous business units – still
part of the Council but operating without long chains of
management and time consuming bureaucracy.
At the same time, we work to increase each unit’s commercial
viability by trimming waste and diversifying its clients. In other
words, we prepare it for life in the open market. A key
element is giving staff the tools necessary to take effective
ownership of the service’s future. Our CSSB team develops
detailed options appraisals that assess the strengths and
weaknesses of business units and suggest actions to move
them further along the path to independence.
Often, the key is to give staff a sense of their wider operational
context so that they understand the consequences of
decisions they make on a daily basis. That can be as simple as
appreciating the real cost of staff time to help reduce
unnecessary meetings, or as complex as remodelling the
entire customer journey. Staff value this process because they
know that one day they may be running the business as
owners. In addition, by independently reviewing what is being
delivered and its effectiveness, we can determine with much
greater clarity what we want to commission. This has led to
significant savings with minimal impact on residents.
A rigorous and objective process involving face-to-face
interviews ultimately empowers staff by cutting through
multiple layers of management. It enables us to construct a
rounded picture of the business unit and start to imagine what
it might look like as an independent company. Even where the
unit is not yet ready for externalisation, identifying road blocks
can help drive short term efficiency savings.
Crucially, this model will enable staff to become partial
shareholders in the business when it finally becomes
independent. If they can deliver contracted outcomes while
Success with the Language Shop gives us a model for wider
reform. The CSSB works because it aligns employee and
organisational objectives, but also because it empowers staff
in every respect. That’s partly about eliminating layers of
management and transferring ownership to staff. But more
than that, we give staff the time and support to leverage their
talents so that they can flourish in a competitive market. By
doing so, we are levelling the playing field with private sector
contractors, and thus changing the nature of commissioning.
If we follow this approach, we can reform the public sector so
that it is more entrepreneurial, innovative and ambitious – but
also ensure it remains far-sighted and rooted in the values of
public service. At the same time, we will provide employees
with more influence in their workplace – a crucial outcome if
we are to tap into their energy and talent.
Sir Robin Wales is the Executive Mayor of the London Borough of
Newham. The IPA will be releasing a report for the Local
Government Association on employee involvement in innovation
and change in local government in November.
ICE and Voice - Ten years on
A decade on from the introduction of the ICE regulations,
we’ve examined their impact on the British workplace. Join
us for the launch of our new report on ICE ten years on. Speakers include:
Nita Clarke, IPA (Chair)
Joe Dromey, IPA
Tim Page, TUC
Employee forum reps from Pfizer and HFT The event will be held on 16:30 - 18:00 on Tues 10th
November at One Birdcage Walk in Westminster. Reserve
your place by using the following link:
https://www.eventbrite.co.uk/e/ice-and-voice-10-years-ontickets-19248527865 or call 0207 759 1000 No. 144 October 2015
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hNews in Brief
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UK businesses losing out on £84 billion
a year due to poor management
CIPD’s new research, covering 3,500 business leaders and
2,200 HR practitioners around the world found that many
business leaders were seeking to enhance organisational
performance by rewarding high-performing
individuals ‘regardless of the values they demonstrate’. Their
research suggests that businesses are increasingly focussing
on the short-term without considering the long-term
consequences of their decisions.
CIPD’s survey showed that only 24 per cent of business
leaders were ready to make short-term sacrifices for the longterm benefit of the company and its people. Business leaders
also said that while their employees had the ability to
influence decision making, they did not consider it a priority with 75 per cent saying employees inputs ‘as either nice to
have but not imperative’ or as ‘applying but can be
compromised.’
CIPD chief executive Peter Cheese said: “This risks unintended
consequences when people try to cut corners or maximise shortterm returns without thinking about the consequences, and
communities, and, as we’ve seen in the case of VW, the
shockwaves are considerable and can significantly damage even
the biggest brands.”
Collaboration with employees crucial to innovation
The EveryDay Innovation Report, produced by Wazoku with Cisco, Waitrose, Great Places to Work and The Future Shapers covered
1,000 board-members, senior managers, middle managers and everyday workers within large enterprises across the UK to
identify organisational challenges to drive innovation. The study reveals that although most believed innovation to be crucial to
organisational success, most were faced with barriers and ‘ambiguity’ from implementing innovative policies and strategies.
More than half of those questioned said that their organisation is ‘full of people with great ideas’ - but that they did not have the
right platform to share them - while almost 60 per cent said that management did not take their suggestions seriously.
Cris Beswick, Innovation Expert and Founder of The Future Shapers said: “Building a culture of innovation isn’t rocket science but it
does require something more than a note on a board report or yet another senior team discussion. The ultimate goal is for every person
at every level throughout an organisation to embrace EveryDay Innovation. The challenge is for leaders to step up and make it happen.”
National Living Wage to add to
wage pressures in large employers
A survey conducted by PwC of over 100
employers with an average of 11,000
employees shows that they expect to pay
an extra £1.6m in wages next year as a
result of the National Living Wage - rising
to £11m by 2020.
Figures published by ONS earlier this
week indicated that in 2014, around six
million employees were paid less than
the Living Wage in the UK. This is the
figure calculated by the Living
Wage Foundation which reflects the cost
of living. At £7.85 and £9.15 in London, it
is higher than the National Living Wage
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raising performance
through workforce
engagement
of £7.20, which will be introduced in
April, becoming the new minus wage for
employees over 25.
The employers surveyed said that almost
one in four of their employees (23 per
cent) are currently on less than the level
of the National Living Wage (£7.20 an
hour) and nearly two in five (39 per cent)
are on less than £9 an hour - the target
rate for the National Living Wage in 2020.
To cover the overheads, around a third of
businesses that took part in the survey said
that they are planning to pass on the
increased costs to customers while over a
quarter said they plan to reduce their
workforce. John Harding, employment tax
partner at PwC said: “While many employers
should be able to afford the increase to their
wage bill, the disproportionate impact
on sectors employing a large number of lower
paid workers such as retail, transport and
logistics, healthcare and hospitality and
leisure cannot be
ignored...Organisations must have a plan to
deal with these costs, that isn’t simply passing
them on to consumers or reducing
headcount.”
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