Download The Government`s Productivity Plan

The Government’s Productivity Plan
Submission to the Business, Innovation and Skills Select Committee
Chartered Institute of Personnel and Development (CIPD)
September 2015
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Background
The CIPD is the professional body for HR and people development. The not-for-profit
organisation champions better work and working lives and has been setting the
benchmark for excellence in people and organisation development for more than 100
years. It has 140,000 members across the world, provides thought leadership through
independent research on the world of work, and offers professional training and
accreditation for those working in HR and learning and development.
Our membership base is wide, with 60% of our members working in private sector services
and manufacturing, 33% working in the public sector and 7% in the not-for-profit sector. In
addition, 76% of the FTSE 100 companies have CIPD members at director level.
Public policy at the CIPD draws on our extensive research and thought leadership,
practical advice and guidance, along with the experience and expertise of our diverse
membership, to inform and shape debate, government policy and legislation for the benefit
of employees and employers, to improve best practice in the workplace, to promote high
standards of work and to represent the interests of our members at the highest level.
Introduction
The CIPD is pleased to submit written evidence to this Select Committee inquiry.
Increasing our productivity growth should be the number one economic priority for this
Parliament, not least because it would make management of the public finances easier.
The CIPD welcomes this early statement of purpose from the Government. In our view,
there are some shortcomings in the plan as published. In particular, we believe it does not
give enough attention to productivity in the workplace. It is vital that the skills and
experience of people are used effectively in their work, especially when many measures of
workforce skills suggest that the UK lags behind some of its main competitors.
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Response to the Inquiry
Do you agree with the Government’s assessment of the reasons for the UK’s
productivity slowdown (as outlined in the Annex to the Plan)? Has the Government
acknowledged all of the main causes of the UK’s poor productivity growth?
The Annex sets out a concise summary of long-term trends and why the UK now lags
behind the USA, France and Germany (measuring productivity as output per hour worked).
The five factors outlined as potential explanations for the post-financial crisis slowdown in
productivity capture most of the various possible explanations, if read together with the
following two sections covering investment and a dynamic economy.
Our research leads us to offer a number of observations on the productivity slowdown that
provide a little more context and, in some cases, depth to the Government’s commentary.
1. We need to recognise that the financial crisis triggered the deepest recession since
the inter-War period. The ability of the financial system to channel resources to
productive use was impaired (and may still be today). Some businesses will have
been discouraged from investing because of the cost of capital, or its lack of
availability on acceptable terms. But the very large fall in output during 2008/09 and
subsequent uncertainty over future growth also discouraged investment. It was
2013 before we started to see sustained output growth. In the intervening period,
many businesses responded to increases in demand by making more use of labour
(by adjusting hours or taking on more people, perhaps on a temporary or zero hours
basis) in preference to investing large sums in capital equipment that might have
little residual value if the increase in demand turned out to be short-lived. This may
well help explain why it has taken so long for business investment to recover to its
pre-recession levels.
2. Our latest productivity research, based on data collected from employers in June
2015, suggests the recession has indeed cast a long shadow through its effect on
investment behaviour.1 A fifth (21%) of organisations described their experience of
the previous two years as one of being in “survival mode”, unable to invest in major
improvements to the business. Another 19% had focused on reducing cost and
making the business leaner. A further 29% had been able to invest but in a onesided way, focusing on either equipment and technology or skills, but not both.
Only 25% had followed a balanced investment strategy. For private sector firms,
our research also found a very strong association between these different forms of
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investment behaviour and their relative productivity, even when allowance was
made for other variables including product strategy and output growth. Firms that
had followed a balanced investment strategy were most likely to rate their
productivity highly, whereas those in survival mode were least likely to do so.
3. Our research also suggests these differences in past mindset could persist and
continue to act as a brake on growth and productivity improvement for some
organisations. Organisations accounting for a third (34%) of employment saw the
coming two years, to the middle of 2017, as a period in which they would continue
to perform well, based on their past success. Another third (33%) saw the coming
two years as an opportunity to make up ground on competitors by investing more in
equipment and technology, or in people. However, we found a fifth (19%) who saw
themselves as performing poorly and unable to invest in either the finance, or the
skills necessary to improve their performance.2 This latter category is
disproportionately made up of organisations that have been operating in survival
mode. Thus, to a large extent, both high and low performance are selfperpetuating. Organisations performing poorly may lack the ambition and vision to
change and improve, as well as the money and skills required.
4. The consequences for aggregate UK productivity are magnified, because the
process of “creative destruction”, or “churn”, in both product and labour markets
appears to have declined in recent years. Low performing firms are less likely to go
out of business or contract (releasing resources for other uses), and high
performing firms are less likely to attract additional business and resources.
Similarly, the decline in job-to-job moves means that fewer people are moving to
jobs that make better use of their skills. Turnover also generates positive spillover
benefits, because new hires bring different ideas and experience to a business.
5. Recent work by the OECD, cited by the Government in its plan, highlights a slowing
down in the rate of diffusions of innovation (“creative destruction”) and skills
mismatch (exacerbated by low turnover) as potential reasons for the productivity
slowdown seen in many advanced OECD economies to varying extents.3
6. These trends were already beginning to emerge before the recession. The decline
in “creative destruction” appears to pre-date the recession, according to Nestafunded research4. Aggregate labour turnover rates began falling in both the UK and
the USA around the end of the 1990s.5 While the recession and its aftermath
certainly had an effect on both these processes, we cannot assume that stable
growth will be enough on its own to ensure they make a bigger contribution to future
productivity growth. In part, this may be because memories of the impact of the
financial crisis colour the attitudes to risk of consumers, employees and companies,
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as discussed by Andy Haldane in his recent speech Stuck – consistent with our
recent productivity research.6
One pillar of the Government’s Plan is to increase "long-term investment". It
outlines eight areas with specific measures to increase productivity.
a. Why has the UK’s long-term investment been so low up to now?
b. How can we ensure that the measures relating to long-term investment in the new
Plan will contribute to productivity growth?
As the Government’s analysis points out, when discussing the UK’s investment
performance, we need to distinguish between tangible assets such as plant, machinery,
buildings and computer hardware, and intangible assets such as knowledge, brand value
and intellectual capital. Most investment statistics focus on investment in tangible assets.
When investment in intangible assets is included, it seems the UK’s performance on
business investment is less out of line with its major competitors.
These statistics, however, only cover business investment. Individuals also invest in their
own productivity (for example, by sacrificing time or money for education or training). We
must also consider the level and effectiveness of productivity-enhancing public investment
in education, research and infrastructure, as well as public expenditure that stimulates
additional private sector investment (such as support for private sector R&D through the
R&D Tax Credit and various technology programmes managed by Innovate UK).
According to the Office for National Statistics, total public sector capital investment was
broadly flat during the last Parliament. However, much of what we would regard as
productivity-enhancing investment – such as in education or in the people required to
operate research facilities – is treated as current expenditure.
It is crucial our investment in the UK’s human capital achieves effective returns for
individuals, employers and the wider economy. Our recent discussion paper on graduate
over-qualification and skills mismatch raises shows that the supply of graduates in the UK
has consistently outstripped the creation of high-skilled jobs since at least 1996, and while
this trend is prevalent across the OECD, it is particularly pronounced in this country and
has some negative consequences which need to be considered.
One of these is the very high level of graduate over-qualification. The report finds that
about 58% of UK graduates are in non-graduate jobs, the second highest proportion in the
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OECD. The report also found that when you compare UK graduates to non-graduates in
the same type of job, in the majority of instances there is no resultant change to the skill
requirement for that job, meaning that any skills premium, if it exists at all, is simply
wasted.
These findings raise critical questions about the balance of public investment in education
and skills, in particular, between higher education and vocational education and training,
including apprenticeships.7 We would also draw attention to the OECD’s recent analysis
of productivity and its conclusion that the UK could increase average labour productivity by
5% if the degree of skills mismatch in the UK – above average when compared to other
OECD member states – was reduced to a best practice level.8.
In response to these structural flaws in the education and skills system and the labour
market, the CIPD believes there should be a review of higher and further education
funding. We also need a fundamental review of UK skills policy, with a stronger focus on
employer demand for skills and skills utilisation, encouraging more workplace development
and investment in skills, and encouraging the building of the high-performance workplaces
the UK needs in order to succeed on the global stage.
This review would inform a strategy focused on generating more high-skilled jobs. This
would require employers to also step up their efforts. Better engagement with academic
and vocational education providers – right the way up from school to university – would
help the education system to inculcate and develop the knowledge, skills and attitudes that
employers say are lacking in those leaving full-time education. We also need more
organisations where employees are able to develop and grow along with their jobs, rather
than the job description being a strait-jacket. This means more investment in developing
leadership and management capability building more progression routes, improving work
organisation and job design so that people’s ideas and skills are used more effectively in
the workplace and – perhaps most important of all – building a culture and ethos based on
trust, respect and the willingness to take and accept risk.
An important part of such a strategy would be much improved human capital reporting by
organisations to increase focus and understanding among investors and business leaders
of the value of investment in human capital and its link to sustainable business
performance. The CIPD believes there is a strong case for for government to set voluntary
human capital management reporting standards for FTSE 350 organisations on core
agreed human capital measures such as overall cost of workforce investment, recruitment
costs, total investment in training and development and employee engagement scores. A
focus on improving the consistency and quality of HCM reporting by organisations has the
potential to, over time, provide trend and benchmarking data which can provide valuable
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insights into the link between investment in human capital and sustainable business
performance.
In addition, government can lead by example by ensuring that consistent HCM reporting is
embedded in the annual reporting of all public sector organisations as a means of
providing more insight into how the public sector invests in and manages its workforce to
improve resilience and drive value for service users and tax payers.
Improvements in how organisations generate and analyse human capital data can provide
greater transparency into whether corporations are led responsibly for the long-term and
useful insights to help improve workforce investment, business performance and ultimately
UK productivity.
The second pillar of the Government’s Plan is to encourage a "dynamic economy".
It outlines seven areas with specific measures to increase productivity.
a. What are the main weaknesses of our economy, in terms of dynamism, which are
suppressing our productivity?
b. Do the measures introduced under in the plan address those weaknesses and are
they appropriate?
In many ways, we have a very dynamic labour market, one that is good at finding people
employment and in providing a degree of flexibility for both employers and employees. We
do not think there would be major productivity gains from labour market deregulation – or
from more extensive regulation.
The relative weakness in the UK labour market is in providing opportunities for people to
progress once they are in work, and thus improve their productivity and that of the
economy.
In our judgement, the actions set out in the Plan contain some significant omissions.
There is a strong focus in the Plan on welfare reform, designed to encourage those
currently out of work to find work and encourage in-work claimants to increase their total
earnings. To the extent these policies are successful in increasing labour supply, there
may be a positive effect on total GDP – through the increase in the total number of hours
worked – but we are not convinced they will have much impact on productivity if this is
measured by output per hour worked. Indeed, they could even reduce average labour
productivity if any additional labour supply is largely low wage, low productivity work.
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The Plan points to the introduction of the National Living Wage as a policy designed to
raise productivity that will help people out of a low wage, low skill trap. Average
productivity could increase if employers react to the National Living Wage by reducing the
level of employment, but that would hardly constitute an improvement in economic
performance. Experience with the National Minimum Wage suggests that employers are
most likely to adopt short term coping strategies, such as absorbing the cost or passing it
on to customers, where they can or through offsetting cost savings like reducing non-wage
benefits or narrowing differentials with higher paid staff. With the National Living Wage,
employers will also have the option of employing people aged under 25 at the relevant
(lower) National Minimum Wage.
Lying behind this is a failure by the Government to give any real consideration to
productivity in the workplace, and to the demand for workplace skills. Without change
here, pushing more people into the labour market, while raising the minimum wage for
some of them, may simply make progression opportunities even scarcer to come by and,
possibly, increase unemployment.
Another potential source of productivity improvement not mentioned in the Government’s
Plan is the part-time workforce. Our autumn 2014 Employee Outlook survey found that
over 40% of people working part-time regarded themselves as over-qualified for their
current job. The so-called “part-time wage penalty” is a significant factor contributing to
the overall gender pay gap. A significant proportion of the workforce, mainly but not
exclusively women, are employed in jobs that do not make full use of their skills.
Furthermore, it appears to be the case that, after a period working part-time, many people
find it difficult to achieve their full potential and reach their career aspirations, even if they
return to full-time work.
Legislation already exists to prevent explicit discrimination against part-time workers, in
matters like pay and benefits, and the right to request flexible working is a vehicle that
enables people of all ages to access flexible working whatever their domestic
circumstances. Hence, we do not think this is an issue necessarily requiring further
legislation. What is needed is a culture change within organisations which means that
part-time or flexible working is not seen as a lack of commitment or ambition, with highquality jobs available for people wishing to work flexibly. The Government could,
therefore, be more active in championing change, especially in its role as an employer.
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Overall, does the Plan adequately address the main causes of low productivity in
the UK (as discussed in question 1) and will it have the desired results?
Proposals in the productivity plan to increase the number and quality of apprenticeships
and simplify and streamline the professional and technical education system are of course
welcome, but only scratch the surface on solving the skills part of the UK’s productivity
problem.
The UK has a high a proportion of people in low-skilled and low-paid jobs by international
standards and an equally high degree of over-qualification with too many employees
unable to use the skills they have because of factors such as poor leadership and people
management, inadequate work organisation and poor job design. We also have a perfect
storm of falling public and employer investment in further education and training.
The introduction of an apprenticeships levy on large employers is not sufficient in itself to
addressing some of the structural problems facing the UK economy and skills system
highlighted in this response. In addition, an apprenticeship levy, if introduced in isolation,
risks taking employer investment away from broader investment in workforce
development, for example investment in leadership and management. The CIPD believes
that solving these problems require a team effort involving government at national and
local level working closely with businesses, particularly SMEs, which are responsible for
60% of private sector employment in the UK. It is to be welcomed that Sir Charlie Mayfield
will be leading a drive among large employers to boost workplace productivity but there
needs to be much greater emphasis on the provision of high-quality low or no cost support,
advice and guidance to help small businesses improve their people management and
skills development capability and recognise the value of workforce investment. They also
need help to access available public skills funding and high quality training to get the most
from their people and grow.
The Plan also pays insufficient attention to productivity in the public sector. The public
sector still accounts for almost a fifth of total employment in its own right, and its efficiency
and effectiveness have knock-on effects on private sector productivity. The public sector
appears in chapter 16 of what the Executive Summary refers to as a “fifteen-point plan for
productivity”. It is very much an afterthought, at just over a page in length, and with little
guidance on where the Government expects future productivity improvements to come
from (beyond the production of Single Departmental Plans as part of the Spending
Review).
As the Government notes in this chapter, the ONS estimates suggest that productivity in
the public sector, adjusted for service quality, increased in 2011 and 2012, although more
up-to-date data is not yet available.
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Our most recent research on productivity finds a very clear difference between public and
private sector organisations in terms of their aspirations and expectations for the future.
Whereas just 6% of private sector organisations expect to be producing less goods and
services in the 12 months from June 2015, the proportion of public sector organisations
expecting this to happen is 15%. Almost two fifths (38%) of public sector organisations
expect a lack of finance or skills to restrict their ability to improve their productivity and
performance in the coming two years (compared with 14% of private sector organisations).
Effective change and improved productivity usually requires investment in people, as well
as in technology and systems. Our survey results suggest that many public sector
organisations are lacking the resources, skills or confidence to reap the rewards of a
balanced investment strategy.
The productivity returns from cutting costs and more intensive use of existing assets will,
at some point, diminish – if they have not already begun to do so. Long-term productivity
improvements will require transformational changes in service design and delivery, work
organisation and adoption of technology. Our concern is that the public sector’s ability to
deliver change on the scale required may have been weakened by a lack of investment in
technological and workforce capability. In our submission to the Spending Review, we
therefore said that all plans for major changes to the organisation of public sector
organisations and the delivery of services should be accompanied by a statement setting
out the implications for Human Resources, and how these will be managed – backed up
by realistic funding to facilitate change, where this is deemed necessary.
1
CIPD (2015). Investing in productivity: unlocking ambition. London: CIPD (forthcoming).
Some organisations did not answer these questions or replied “don’t know”.
3 OECD (2015). The future of productivity. Paris: OECD.
4 Mason, G., Robinson, C. and Rosazza Bondibene, C. (2014). Sources of labour productivity growth at
sector level in Britain, 1998-2007: a firm-level analysis. Nesta Working Paper No. 14/09.
5 See CIPD (2013) Megatrends: has job turnover slowed down? London: CIPD and Gregg, P. and Gardiner,
L. (2015) A steady job? The UK’s record on labour market security and stability since the millennium.
London: Resolution Foundation.
6 Haldane, A. (2015). Stuck. Speech given at the Open University, 30 June.
7 CIPD (2015c) Over-qualification and skills mismatch. London: CIPD.
8 OECD (2015) The future of productivity: policy note. Paris: OECD.
2
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