Fundamental changes are required to skills policy to support economy-wide improvements in firm productivity, if ‘levelling up’ is ever to be more than a slogan.

As the UK continues to struggle through the pandemic, the Government is also seeking to meet the challenge of ‘levelling up’ growth and opportunity across the country, particularly in economically disadvantaged regions.

To date, there has been little detail on exactly how it plans to do this, however, these are expected to be set out in a white paper expected to be published in the new year overseen by Levelling Up Secretary Michael Gove MP.

Levelling-up white paper

The white paper is also expected to provide more clarity on how the Government will try and achieve its ambition for the UK to transition to a high wage, high skills economy which can help overcome rising skill and labour shortages. It is likely to build on and link to the UK Government's Plan for Growth and Innovation Strategy published earlier this year.

Economists are in agreement that improving productivity across regions will be key to all of the Government’s objectives as this is the only way of achieving sustainable and inclusive increases to people’s standard of living, but they vary significantly over where to focus efforts.

CIPD’s view set out in our recent paper Unlocking business improvement is that there is a need for a long-term strategy to boost productivity through policies that encourage and enable more firms across all sectors to invest in technology, people management capability and workforce skills development.

Where should policy makers focus their efforts when it comes to boosting firm productivity?

However, the Resolution Foundation in a recent joint paper with the London School of Economics argues that the focus for productivity improvement should be on making the most productive firms more productive rather than worrying about the long tail of low productivity firms in the UK.

Their report includes analysis which suggests that the Government could achieve more of a productivity uplift overall to the UK economy by focusing on trying to increase the productivity of most productive firms rather than the least productive. This is because if you increase the productivity of the top 40% of firms by 10% for example, there would be much more overall benefit to the economy than if you increased the productivity of the bottom 40% by the same amount.

Therefore, it suggests efforts to improve productivity in the UK’s long tail of low productivity firms are misplaced and that policies to support job reallocation where workers move from low productivity firms to higher performing ones should be explored.

The Centre for Cities (CfC) is another organisation that doesn’t think there is much productivity growth to be generated out of the UK’s low productivity firms in sectors like hospitality or personal care. The CfC argues that the underperformance of the UK’s big cities is at the heart of the North-South divide and that if the Government is to ‘level up’ the economy then it needs to tackle this major economic problem. The reason for this problem according to the CfC is that too many of our cities have not been successful at attracting high productivity, exporting businesses. These firms they argue are key as they bring money into an economy by selling beyond borders and are better able to absorb new innovations.

Instead, the UK’s regional cities have disproportionately attracted low-productivity firms such as hospitality, the arts, entertainment and leisure, which have very limited potential for productivity improvements, according to the CfC. Consequently, Government’s focus for boosting productivity should be on supporting and improving the productivity of higher productivity, high-tech, and ideally exporting firms where they believe greater innovation, and productivity potential can be unleashed.

This viewpoint also underpins the Government’s Plan for Growth which has a primary focus on supporting a relatively few high-tech sectors to develop and spread across the country, underpinned by investments in physical infrastructure, such as HS2, support for more devolution and more funding for research and development (R&D). It is also hoped that this approach will have positive spill-over effects for those workers not directly involved in advanced sectors.

Narrow approach on few high-tech and exporting sectors cannot solve UK productivity problem

However, the CIPD believes that while efforts do need to be made to enable more high-tech and exporting firms to flourish particularly in disadvantaged regions, there also needs to be a broader strategy that seeks to over-time, improve the productivity of firms across all sectors of the economy. This should not be an either-or issue; action on all fronts is required.

A focus on trying to boost the productivity of our already more productive firms as the RF/LSE paper suggests, overlooks the point that these firms are already likely to be working closer to the technological/managerial frontier in terms of adoption/best practice. Consequently, there are likely to be diminishing returns to efforts to increase productivity because they’ve already invested and reaped these returns. The laggards have much more scope for productivity improvement – and will characterise much of the economy in some of the UK’s most deprived regions.

In addition, low wage sectors are too large to ignore if the UK’s productivity gap is to be closed, according to the Government’s recently abolished Industrial Strategy Council. Its research shows that low wage sectors in the UK (defined as sectors where a quarter of average wages are lower than two-thirds of the UK median) account for almost one-quarter of the country’s value added and approximately two-fifths of all hours worked. The ISC’s analysis also finds that the regional productivity gap with London’s cannot be explained by the make-up of industries but instead is accounted for by the productivity gap within industries in each region between the lowest performing firms and the higher performing businesses in any given sector.

There is also evidence that it is possible to boost the productivity of firms in low wage sectors such as retail, hospitality and care for example. Analysis by the ISC cites evidence showing that productivity in UK low wage sectors is 20-30% below that of Germany, France, the Netherlands and the US.

Evaluation of the CIPD’s People Skills pilots where CIPD qualified HR consultants have provided a limited amount of free ‘pump-priming’ support to small firms also suggests that it is very possible to improve the productivity of SMEs regardless of type of business.

The view that there needs to be an economy-wide approach to boosting firm productivity is further set out in a recent paper for the Institute for Government by Giles Wilkes, who makes the point that increasingly sectors are hard to precisely define and are also often connected and mutually dependent. He concludes "A problem as large as the UK’s productivity shortfall cannot be solved solely with a focus on the cutting-edge industries championed by Boris Johnson and in the Treasury’s Plan for Growth. Ministers must also address economy-wide problems with management practices, slow adoption of technology, a lack of skilled staff, patchy infrastructure and access to finance."

This perspective is also advocated by the Productivity Institute which believes that a systemic and long-term approach across a range of policy areas is required to tackle the UK’s productivity challenge. It emphasises that efforts to improve firm-level productivity should be broad and will be inter-connected rather than siloed and exclusive, such as a narrow focus on boosting start-ups or growing businesses or attracting inward investment. 

It argues that in order to improve firm-level productivity in a given environment, there is a need to understand common and interdependent policy areas that together can do all of the following:

  • Encourage and facilitate the growth of new high productivity firms
  • Support productivity growth in existing firms through innovation and co-operation
  • Attract new firms who have higher productivity than incumbents

UK skills policy requires transformation

One area where there is desperate need for more systemic and longer-term thinking to help improve firm-level productivity according to both the Productivity Institute and the CIPD is skills policy. Successive Governments’ focus on skills policy has been to try and increase the supply of skills and qualifications for example by getting more and more young people through university on the basis of the increasingly debatable theory that this in itself will create more high skilled jobs and help boost firm productivity.

The current UK Government’s priority on skills is to improve the further education and vocational training system, including through much greater employer engagement with colleges and universities, as well as by making tweaks to some aspects of apprenticeship policy.

However, it is failing to take steps to address linked and arguably more substantive problems such as falling employer investment in skills, high levels of skills mismatch, and over-qualification in the workplace and poor use of skills within too many firms because of inadequate HR and people management capability.

CIPD’s view set out in our Unlocking business improvement report is that skills policy requires a balanced focus on both the supply-side of skills and the factors and areas of policy that influence employer demand for skills and how skills are used in the workplace over time.

The paper sets out how hard it is to encourage, incentivise and enable businesses at scale – particularly, but not exclusively, SMEs – to take steps to improve their performance and productivity. A combination of complacency, lack of knowledge about their own weaknesses (with people management a particular Achilles’ heel), and a lack of time and resources, can act to prevent too many business leaders from investing in (and improving) their companies. Even where there is the recognition of the need to act and the will to do so, achieving meaningful improvement is very difficult to achieve without effective support.

Consequently, it argues that there needs to be a fundamentally different approach to skills policy that recognises that employer investment in skills/use of skills is affected by a wide range of interdependent policy areas including innovation, growth/business support, labour market enforcement and employment relations. It sets out a range of recommendations that could over time support improvements to employment standards and encourage more employers across the economy to invest more in the skills, people management capability and technology needed to boost productivity.

On the supply side of skills there are also major changes including the need for much better quality careers advice and guidance and for reform of the Apprenticeship Levy into a more flexible training levy, just for starters.

What is clear is that the UK has to stop going back to the same old play book used by successive administrations and try something different. Otherwise ‘levelling up’ will remain just a slogan.

About the author

Ben Willmott, Head of Public Policy

Ben leads the CIPD’s Public Policy team, which works to inform and shape debate, government policy and legislation in order to enable higher performance at work and better pathways into work for those seeking employment. His particular research and policy areas of interest include employment relations, employee engagement and wellbeing, absence and stress management, and leadership and management capability.

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