Scottish Affairs Committee
Oral evidence: Sustainable employment in Scotland, HC 762
Wednesday 11 January 2017
Ordered by the House of Commons to be published on 11 January 2017.
Members present: Pete Wishart (Chair); Deidre Brock; Mr Christopher Chope; Margaret Ferrier; Mr Stephen Hepburn; Chris Law; Ian Murray; John Stevenson.
Questions 89-166
Witnesses
I: Professor David Bell, Professor of Economics, University of Stirling and Professor Graeme Roy, Director, Fraser of Allander Institute.
II: Robin McAlpine, Director, Common Weal and Professor Mike Danson, Jimmy Reid Foundation.
Professor David Bell, Professor of Economics, University of Stirling and Professor Graeme Roy, Director, Fraser of Allander Institute.
Q89 Chair: Could I welcome our witnesses today and wish them both a happy new year from the Scottish Affairs Committee? It is our first session of this new year and we are very fortunate to have Professor David Bell and Professor Graeme Roy. For the record, if you could tell us which interest you represent and if there is anything by way of a short introductory statement. We will start today with you, Professor Roy.
Professor Roy: I am Director of the Fraser of Allander Institute at the University of Strathclyde. As a short opening remark, just to say that I welcome the Committee’s look at sustainable employment in Scotland. There is quite often a lot of focus on the headline economic measures: what is happening to unemployment; is it up or down in the quarter or the level of employment? I think that looking underneath at some of the issues that your inquiry is looking at, about the nature of employment, long-term trends, what the challenge is, what the opportunities are, is very useful and I am really interested in having a discussion this afternoon.
Chair: I am grateful. Thank you. Professor Bell?
Professor Bell: I am David Bell from the University of Stirling and I am happy to go with the questions that the Committee wants to put.
Q90 Chair: Excellent. Short and concise as always, so thank you for that. As a general question to get things started then, Scotland’s labour market has obviously changed quite significantly over the past 20 years. Could you outline what these major changes have been and have you identified who have been the winners and the losers? We will start with you, Professor Bell.
Professor Bell: I have been studying the Scottish labour market for considerably more than 20 years. During that time, one of the big changes that we have seen has been a very significant decline in employment in the production sector broadly defined, particularly in manufacturing, and a growth in the service sector. We have seen certain parts of the service sector do particularly well, notably financial services—although that has come to a halt in the last few years. We have also seen the industries associated with tourism doing quite well, and we get some occupations that have been growing very rapidly due to changes in the structure of demand, which is true for the UK as a whole. One of the most notable and the one that has grown most rapidly is the caring profession, which is the provision of social care.
It is also important to realise that the gender balance of the Scottish labour market has changed a lot in the last couple of decades, with many more women being employed, many of them part-time employed but many more women than was historically the case. We are now in the situation where Scotland has around 2.5 million people employed. There is a wide variety of modes of employment within that, but that is the highest level that we have good statistics that that has been the case.
Another final thing I would mention is growth in self-employment. Self-employment has grown very rapidly in the UK as a whole. We are one of the countries with the highest rate of self-employment. Scotland follows a bit behind but, nevertheless, there has been a pretty significant growth in self-employment in Scotland.
Q91 Chair: I am grateful. In your evidence to us you say that the 2008 recession is probably one of the longest and most sustained that we have had within the United Kingdom. You also make the point that this has had less of an impact on employment and more of an impact on output than previous recessions. Why do you think that that has been the case, and has the reduction in output had any direct impacts or effects on the labour market in Scotland?
Professor Bell: This is very true that output has had a stuttering recovery in the UK since the great recession of 2008-09, although employment has grown very rapidly. Part of that is due to the so-called flexibility of the UK labour market, so there are not all that high fixed costs of employment—it is relatively cheap to employ people—and partly that is the nature of the kinds of jobs that we are making available. A lot of these jobs are relatively low skill so it takes less time to train someone for these jobs and less investment in training necessary for these kinds of jobs.
The corollary of that is that productivity now lags way behind most other industrialised countries. One argument may be that because labour is relatively cheap, relatively flexible, employers have invested less in new technology, new machinery and so on, but rather have gone for hiring more people.
Q92 Chair: Can I clarify: in your view there is a relationship about declining output or stuttering output, quality of employment and levels of employment that we have in Scotland?
Professor Bell: Yes, I think that is the case. There is this pretty broad argument—and the Scottish argument is not a UK argument—about the changes in the nature of jobs and production. Part of that is that you are getting what is described as a polarisation, which means that many of the jobs that we may have had 20 to 40 years ago were skilled manual jobs, foremen, that kind of job. Now many of these jobs have gone. They have gone because of technical change, the introduction of computer-controlled machinery, computers themselves and so on. What you end up with then is at the bottom end of the labour market a lot of jobs and at the top end of the labour market a lot of jobs that cannot be easily replaced by information technology and—
Chair: Like politicians perhaps?
Professor Bell: Indeed so. But for those at the bottom the argument is that—at the moment at least—it is difficult to substitute jobs that involve an interaction between you and me. As yet there are not that many machines that can deal with that kind of situation. A good example is caring. The country that probably faces the greatest challenges as far as that is concerned is Japan. They are now experimenting with robots as alternatives to carers because they have huge difficulties with their ageing population.
There is a widespread view that this has been happening. One thing that I should have said in my previous response is that the UK has had the biggest hit in real wages over the last eight years or so. Other than Greece, none of the industrialised countries have had such a big fall in real wages. Real wages have been slow to increase, if at all, and the net effect of that has been that that makes labour cheaper.
Q93 Chair: We certainly want to unpack some of these things that you have said but I want to come to Professor Roy, and it is basically the same question: in the Fraser of Allander Institute’s view, what are the most significant changes that we have seen? I said 20 years and Professor Bell has obviously been a bit more generous when he has applied that timescale. What have you seen and who are the winners and losers in your view?
Professor Roy: I agree with everything that David has said. One of the interesting things as well, when you look further back, is just how much the Scottish labour market now resembles the UK labour market a lot more than it did 20 to 30 years ago. If you go back to the 1960s, the 1970s and 1980s there was quite a gap between Scotland and the UK in terms of unemployment. Particularly since the late 1990s, through devolution, Scotland’s labour market has caught up with the rest of the UK. If you are comparing unemployment in Scotland and the UK, there is not really that much difference, particularly within the statistical margin of error. That was not the case a few decades ago, so that is quite a significant change that has happened over time and the interesting thing is how that will evolve in the years ahead.
One of the reasons for that is the structure of the Scottish economy has changed quite significantly over the years, as David mentioned, away from things like manufacturing and heavy industry to being a service-dominated economy, very much like the rest of the UK. That in turn brings its own challenges but also its own opportunities. The type of work that is in a service economy is quite different from what was there in a manufacturing economy in the past. It is likely to be more non-standard working. There are issues around training and career progression. All that type of stuff comes through in the labour market now that we did not have in the past.
Then looking forward some of the key issues will be how do we deal with this growing trend towards things like automation and technology but also deal with a labour force that is ageing, the demographics of it are changing and that will in turn have some impacts. One of the things we have been seeing over the last few years is quite a substantial rise in people who are above 65 in the labour market. That did not happen so much in the past but a large chunk in employment growth recently has been from older workers. On the one hand that is a positive. It is people being flexible and making a positive choice, but it could also be a negative choice to lower incomes than they might have had and what are the indications then for younger people in the labour market? There is a whole host of different issues in there that I think are worth talking about.
Q94 Deidre Brock: Professor Roy, Fraser of Allander suggests that Scotland’s growth rate is one-third of that of the UK as a whole. Can you clarify why that is, in your opinion, and do you think that is within the normal range of difference or is there something more significant going on there?
Professor Roy: If you look at the last six months of last year and the last 18 months as kind of barometers, Scotland’s growth rate has been about one-third of the UK as a whole. That is relatively unusual, particularly in the last few years where Scotland’s growth rate has pretty much matched the UK as a whole. We think the key reason for that, if you look at the underlying data, is what has been happening in the North Sea. Oil and gas is technically outside Scotland’s economic statistics, so the actual output of the oil and gas sector does not appear in the headline of Scottish economic statistics but we know it has a massive impact into the supply chain and the north-east economy. If you look at what has been happening in the labour market, some of the sharpest increases in unemployment and claimant count have been in the north-east, and that has a spill-over effect into retail sales and manufacturing. If you look at the composition of what has been happening to manufacturing in Scotland, it has been the sectors that are most closely tied to the North Sea and some of the manufacturing and some of the metal industries have taken quite a significant hit.
There are potentially some other reasons for why Scotland has been lagging behind the rest of the UK. There have been a couple of large manufacturing plant closures over the last year. There is also the continuing adjustment within financial services that may also be having an impact, but by far I think it is what has been happening in the North Sea. The outlook remains uncertain of what the effects will be. The immediate future of it being an area that is going to create a lot of new jobs is probably quite unlikely. However, the evidence that we have seen from our surveys tends to say that a lot of companies have made quite significant adjustments and the next few years will be really crucial to see whether there is any further decline or shedding of jobs, but they are potentially almost waiting and seeing. They have made their adjustments and they will be looking to the future as to what happens next.
Q95 Deidre Brock: If you strip out London and the south-east of England from those figures, how does Scotland compare to the rest of the UK there in terms of growth?
Professor Roy: Again, it varies depending on what timescale you look at. In some of the more recent statistics some of the significant growth that you have had in the UK has been from the different regions in the UK, so from the north and so on. There are a couple of things I would say about that. One is that there are the short terms issues about what is happening to growth in Scotland over the last year and what might happen over the next year. There is then to put Scotland in the context of where it is on a level against other parts of the UK aside from the growth. Scotland typically comes in about the third or fourth richest or the third or fourth highest part of the UK regions and nations, excluding oil and gas.
There is also a debate about whether you include oil and gas in these numbers and it obviously gets quite a bit higher when you do, but if you just look at the onshore economy that is where Scotland typically comes in.
Q96 Deidre Brock: It is third or fourth. That is interesting. You have also predicted that the rate of unemployment, as you have touched on, is likely to increase over the next couple of years. Can you go into a little bit more depth about why you think that is and would you expect to see a similar increase across the whole of the UK?
Professor Roy: Our forecast for the next year is essentially saying that we think Scotland will continue to grow over the next two or three years but that growth will be below trend. There is a key reason for that and that is, like many other forecasters, we think the impacts of Brexit will have an impact through into the Scottish economy. A large part of that potentially is not just the uncertainty about Scotland’s trading relationship with the rest of the EU but also through the effects of the higher exchange rate feeding through to inflation, leading to an impact on consumption, but also the fact that we know that the UK is Scotland’s largest export market, so if the UK is growing more slowly that will impact through into Scotland.
We forecast Scotland. We don’t forecast the UK but if you compare our forecast for Scotland compared to the average for the UK as a whole, we are close to the rest of the UK in our forecast but slightly slower. The key reason for that is we think that the effects of the oil and gas slowdown, while not as bad as we thought back in the summer, will still act as a bit of a headwind in Scotland relative to the rest of the UK and that is the explanation of why we think it will be slightly slower over the next few years. That in turn means that relatively slower growth, in our view, will probably lead to a slight uptick in the levels of unemployment.
Q97 Deidre Brock: I think at one point the Fraser of Allander Institute suggested productivity rates were dire.
Professor Roy: Yes.
Deidre Brock: Again, if you strip London and the south-east of England out of those as far as you can, given that you focus on Scotland’s numbers, how do we compare on that?
Professor Roy: There are a couple of things on that. First, yes, you are right—just building on David’s point—Scotland is not different from the UK and if you go back to our growth in productivity since the last recession it is dire. It has essentially been relatively flat going forward. Interestingly, though, Scotland has caught up with the rest of the UK quite a bit in terms of its productivity—that is the UK as a whole. If you look at our productivity ratio to the UK, it was about 91 or 92 at the start of devolution compared to the UK being 100. It is now closer, up to 98 or 99 compared to the UK. It is pretty much a catch-up over the period of devolution but, as David was saying, in some ways it is maybe not that Scotland has caught up, it is we have done not as badly as the rest of the UK in that regard. I guess ultimately what happens to productivity over the next few years will be absolutely crucial for, first, our ability to create jobs and, secondly, the ability for these jobs to generate earnings and better outcomes for individuals.
Q98 John Stevenson: A question for both of you, which is actually a different question. Can I start with you, Professor Roy? Economists don’t have a particularly good reputation as we speak, and you have just made a few forecasts. Should we take them with a pinch of salt?
Professor Roy: I think you should take every forecast with a pinch of salt. What we are trying to do is set out our view of what the best judgment of the key issues is. We are quite clear—and we have been quite clear ever since Brexit—that there is a wide variety of uncertainty there. We will always say that if you look at our forecasts we publish a range of things. This range gives you, in our view, the balance of probability—
Q99 Chair: Fraser of Allander predicted a 2% to 5% fall in Scottish GDP due to Brexit. Is that correct?
Professor Roy: Yes. There are two things in here. One is there is the short-term forecasts where I think there is significant uncertainty around at the moment about what may happen. That can be the timing of issues around Brexit—
John Stevenson: The economists have already got it wrong.
Professor Roy: I think there is an issue about timing here. I would argue that we would defend our forecast. If you separate our forecast, there are a number of different things you could look at in there. First, there is: what are the long-term potential implications of something like Brexit? There you will probably find that with most economists there is a consensus that if you become less integrated with your major trading partner, if you limit movement and so on—
Q100 John Stevenson: I don’t want to pursue this too long, but the reality is that the economists got it badly wrong twice.
Professor Roy: I don’t think so. No, I disagree.
Q101 John Stevenson: We will beg to differ on that. Professor Bell, you made a very interesting comment about how it is cheap to employ. Two things: could you explain exactly why that is in your view and could it be argued that is potentially a good thing?
Professor Bell: If the kinds of jobs that you are creating are jobs that do not require much training and the UK does not have high payroll taxes, then—
Q102 John Stevenson: Sorry to interrupt. Payroll tax, how do we compare with our European—
Professor Bell: Much less.
Q103 John Stevenson: Even at 13.8% you are still sure about that?
Professor Bell: When you take everything into account, our costs of employing people are lower. To give you an example, one of the big problems about Greece, Portugal, Spain is the build-up of rights to redundancy payments as you spend more and more time in a company, so those who are on the inside are in a sense favoured and then companies become very reluctant to hire.
Q104 John Stevenson: I understand exactly what you are saying and I accept your point, but thinking ahead is it potentially not a good thing that it is cheap to employ provided that we make sure that there is the ability to train and upskill the labour force?
Professor Bell: It cannot be a good thing if labour is expensive and we are substituting capital all over the place. It is exactly that question of what steps people take after they get a job. Having a job is a huge advantage but maybe it is the case—I don’t want to make a prediction about this, I am just speculating—it is more difficult now to progress through a career than was the case 30 years ago.
Q105 Ian Murray: I want to ask you a couple of questions about under-employment, but can I just pick up on John Stevenson’s point there, which is really interesting? Do you think the UK or even Scotland—but the UK being broadly similar—has it about right on wages? I remember huge discussions before the last general election where there was an outcry from the business community that we would have the audacity to even think about an £8 national minimum wage and then the national living wage comes in—which of course isn’t a minimum wage—at the level and the terms they brought it in and everyone seemed fine with it. Is the balance about right? Are we too much of a low wage economy or could we be doing with finding it somewhere in the middle?
Professor Bell: The key to this is productivity. From productivity flows the wage that you will get. If the jobs that you are creating are inherently jobs that do not create a lot of value added, then the consequences that follow from that are that you will have relatively low paid people. You will have a significant proportion of the workforce potentially in poverty. We do have quite a lot of working poor people now, much more so than was the case, but I think that Graeme alluded to that the key is to have higher levels of productivity, both for Scotland and for the UK as a whole.
Q106 Ian Murray: That leads me on to the sort of response since 2008 and the worldwide crash and recession. You said quite clearly, either in one of your written responses to the Committee or in one of your publications, that there has been a massive increase in the number of people who are looking to work more hours.
Professor Bell: Yes.
Ian Murray: Is that a consequence of low pay? Is it a consequence of lack of productivity? Is it full-time or part-time and what are the trends here?
Professor Bell: I have done a lot of work on this with David Blanchflower. We noticed that prior to the great recession, if you looked at the British labour force then the number of people who were saying that they would like to work more hours was pretty much balanced out by the number of people who said they would like to work fewer hours. After the great recession that changed and the balance switched much more towards those who wanted to work more hours.
A couple of things about that: one is that it is typically the young who want to work more hours and it is typically the old who want to work fewer hours. Secondly, it is typically people on part-time jobs. Indeed, I have recently shown with unpublished work that those on zero hours contracts are especially the kind of people who desperately want more hours, so they want to increase their income for whatever reason. They are willing to do so without an increase in their hourly wage but they are not getting the hours that they would desire.
Q107 Ian Murray: So, zero hours contracts, casual employment, gig economy. It is not full-time workers who are looking to—
Professor Bell: There are still quite a lot of full-time workers who would be prepared to work more hours. That is certainly the case. The change in the economy that has taken place means that the notion of paid overtime has been watered down a lot. When you were in the typical old manufacturing jobs you had very strict hours set and anything over and above that was time and a half or double time. That kind of concept has changed a lot as far as normal working practices are concerned now.
Q108 Ian Murray: If have a question about the health of the labour market. You have talked about zero hours contracts and things, but the Fraser of Allander Institute said that politicians and the public in the main tend to see it as a great success if unemployment rates fall. Indeed, the best way to get rid of the claimant count was to not have anyone claiming. The massive reduction that we have seen over the last few years is to restrict people’s claiming ability and that brings the rate down. If all of that is merely a small component of what a healthy labour market looks like, what should we be trying to measure to show what a healthy labour market is?
Professor Roy: It is a very good question. I think that the types of things that you are looking at are exactly the types of things that we need to understand a lot more and communicate a lot more to people about: this is what the health of the labour market is. It is about the type of work that is being created, not just in terms of the number of hours you are working, which is important, but it is: what is the security around it? How do people fill in there? What are the work practices that go around all of that? What is the career progression for people coming through? Care is one example that we know is going to grow and be quite a significant employer in the years ahead. It is one of the parts of the labour market where we know there are big challenges about career progression, work standards and all that type of stuff. I think that understanding much more about what a healthy labour market means becomes absolutely crucial.
There you get into some quite difficult issues very quickly about the quality of the data, not just at a UK level but particularly at a Scottish level. I can understand why we always focus on unemployment and employment as being the measures of how healthy the labour market is because they come out monthly and they are useful to use, but we need to understand a lot more about what is underpinning this, and the questions and issues that you are raising.
Q109 Ian Murray: Do you think politicians understand that, Professor Bell? Do you think we get it?
Professor Bell: I am not sure if you do.
Ian Murray: I am not sure you are covered by parliamentary privilege, but—
Professor Bell: Just to reinforce Graeme’s last point there, the quality of the data is really important and what we all rely on now is the labour force survey rather than the claimant count, which has, as you said, changed for all kinds of reasons. It is increasingly difficult to get responses, to collar people and get them to answer the long list of questions that the labour force survey includes. Basically, you used to have around 90,000 people per quarter interviewed in the labour force survey. That implies about 9,000 in Scotland, and if 5% of that 9,000 are unemployed that is only a few hundred people. A small change in the number of people who happen to respond, “Yes, I am willing to work and could work” will suddenly switch the commentators—perhaps the politicians—from optimism to pessimism or vice versa. I don’t think people realise how important it is to get good quality information and how difficult it is now to get that information.
Q110 Ian Murray: If we are talking about a healthy labour market and there is a whole plethora and a very complicated matrix of what makes a healthy labour market, how much of an influence should Government intervention have on that? There would be an argument to say, “Leave it up to the market. The market will decide”. That never works in my view. There always has to be some kind of Government intervention, and there will be others who say that the Government have to intervene wholly in the labour market in order to be able to manage a healthy labour market. Where do you see the balance?
Professor Roy: There is a variety of different things in there. We have moved away over the last few decades from Government trying to demand manage the economy, and even monetary policy, and trying to create jobs. Yes, you can do that at particular points at time. Where there is slack or where there is a recession or where there is uncertainty Government can definitely intervene, but I think that people are becoming more and more cautious about thinking that Government can radically shape the overall levels of employment.
Interestingly, in the sorts of issues you are talking about—the health of the labour market—I think that is where Government can potentially have a role, both in some of their interventions but also some of the leadership they show about what their employment practices are and how they interact with people. We know that the Government are large employers. The public service is a very large employer. Care again is an example and is one where the public sector is heavily involved. There is a real opportunity for them to shape the work practices and the fair work that has been going on in Scotland, starting to think about these issues, about the types of jobs, how you interact with people, levels of qualifications and management. We know that is one of the key reasons that the UK productivity has been bad.
It is not just about labour market things and how you can make labour better. It is about how you can become more productive. It is about how you improve the levels of management within businesses and organisations. It is about how you improve workplace innovation. If you look at countries like Germany, one of the reasons they are so successful is because they have really high levels of innovation from their workforce involved in the process. It is how government could potentially come into that through investing, through leadership, skills, training, and that is where the greatest role for government potentially is.
Q111 Ian Murray: They can also shape things. Minimum wage floors were brought in by Governments. There is a big problem with zero hours contracts. Should there be a more robust public policy intervention? Those kinds of issues around the sides need some kind of Government intervention to be able to sort them.
Professor Roy: Yes.
Q112 Chair: Isn’t Scotland a bit unusual in that we have interventionist policies from two different Governments? We now have Scotland that have a whole role of devolved responsibilities, impacts on the labour market. They can help stimulate it, while we still have a whole range and suite of powers that are here within the UK. Is there any conflict that you observe between the two types of interventions that both Governments would seek to deploy in the labour market?
Professor Bell: In fact there is also a third layer that may disappear in the short run. If you remember, the working time directive was a European piece of legislation and, indeed, in response to the last question I was thinking about the way that the European Union has affected the discussion or the debate on state aid. During the early 1970s we had Governments that were picking winners, particular companies for support. That was ruled out by the way that the European Union decided to open up the single market. One of the big questions I think that has not been explored in relation to Brexit is: what is going to happen in relation to state aid rules post Brexit? Will the UK end up with a more interventionist kind of approach to the economy than is currently feasible within the European state aid rules?
Q113 Chair: I suppose what I am getting at is, given that we are subject to different types of Government interventions from Governments that take an entirely different approach when it comes to these issues, I am trying to see in your view what difference that has made to the Scottish labour market or if it has made any difference at all. Is there a view that because we now have the suite of powers available to Scotland, there has been improvement in the condition of the labour market?
Professor Roy: It is difficult to find a hard amount of evidence, and I am not too sure of any specific research that has gone in to see whether that has had a particular definite impact.
If you take a step back, one of the key arguments for devolving these powers in the first place was that you can set them to local conditions and local preferences. That is ultimately what the key aim of devolution is, and if you can try to marry that between the policies that are best set at the central level and then the policies best set at an Edinburgh level then you can get the best interventions.
You do see differences around skill strategies and education policies and these types of things happening in Scotland so, from a theoretical point of view, this should lead you to better outcomes. Of course, for that you have to have the caveat that that needs to make sure that there is the right join-up between the devolved policies and the reserved policies and the two Governments are working effectively on that.
That is ultimately where I think some of the interesting things are coming through with the new devolved powers coming down the line, particularly around employability and how you can potentially link them much more into the skills system in Scotland and the education system, and give people a much more coherent journey through the process from leaving school and coming into the labour market or, if you come out of the labour market, how you can get back into the labour market at a much more local level.
David may correct me but I think that there is no really strong evidence to say that there has been anything significant yet. That is not to say that that will not be able to come through with these devolution of powers.
Q114 Chair: Would you see a difference given that the Smith commission powers are starting to come on tap now? It does open up another range of interventions that the Scottish Government can make. Do you see that this will make a significant difference to the labour market in Scotland?
Professor Bell: There is a real issue and also a point of interest in trying to separate out the effects of the fact that the Scottish economy is so closely linked to the rest of the UK economy. It is difficult to sort out what the effects are on the Scottish labour market due to the fact that it trades a lot with the rest of the UK and, therefore, the companies being cross-border companies adopt the same kinds of practice.
An interesting comparison is between Ireland and the UK. It is also quite closely tied in, in terms of companies and so on, but obviously has a different Government that can follow their own employment labour market policies, and Scotland, as Graeme was saying, has a changing situation as far as that is concerned. This is one of the areas that we are very keen to study: how Ireland relates to the UK in comparison with how Scotland relates to the rest of the UK.
Q115 Margaret Ferrier: Professor Bell, you mentioned about zero hours contracts and it is something that the Committee has looked at previously. Are there any other examples of precarious employment that you can give us and is it still as prevalent?
Professor Bell: I don’t think there has been much change in the prevalence of these kinds of contract recently. The UK does not have as large a proportion of the workforce who would describe themselves as temporary employees as is the case in continental Europe where those people who have not got in and got the rights are largely on temporary contracts. In terms of the zero hours effects, it is clear that some workers do value these kinds of contracts but many do not. An interesting and related issue, which we really have not got a grip on due to data problems more than anything else, is the use of self-employment.
Q116 Margaret Ferrier: I was just going to come on to that. There is a growth around that area, but is it really false that a lot of people don’t have the skills when they enter into self-employment and then eventually they fail, which could be very discouraging? They go into self-employed but further down the line it drops off because of either lack of finance or lack of skills to keep it going.
Professor Bell: The evidence here is scant but there is this phenomenon of involuntary self-employment, people who feel that they have no option to working for themselves. There are the other set who may be encouraged to become self-employed. The status, for example, of Uber drivers is the sort of thing that we might be talking about.
One thing to say about self-employment is that the UK, particularly London, has relatively high wage inequality for employees. Wage inequality for self-employed is greater. There are quite a lot of self-employed people who are on low wages and there are quite a lot of self-employed people who are doing very well. There are more at the extreme ends of the spectrum than is the case for the employed. Of course, the self-employed are effectively self-insuring. They have nothing to fall back on in forms of insurance—maternity pay, sick pay, holiday pay—that other workers have.
Professor Roy: One of the interesting things you see in the data around self-employment is that a certain part of the increase is coming through from older workers moving into self-employment as well. Also, there are some people who are using it as a second job, so again that gets into some of the wider issues about what is driving these trends in the labour market, if it is people whose earnings may not be growing as quickly if they are in employment. They might feel they are in a precarious position in their employment, so what they are doing is looking for other opportunities. You are doing some self-employment to either boost your income or give you some security. That, increasingly, if it is coming through in older age, brings into question not just the labour market but wider issues around pensions and incomes and stuff like that, which open up a whole host of different issues in there.
Margaret Ferrier: Is it true to say then that a lot of people have more than one part-time job to make ends meet because the one job is not enough? You did mention previously there are now more women employed although they are part-time. I know a woman in my constituency and she works two jobs. They are both part-time because she cannot get enough hours in one of them so she has taken that on. She goes from one job to another, which is quite tiring and stressful for her.
Q117 Chair: I think the self-employment issue is a really important one, and we will probably return to this in the course of this inquiry, because there does seem to be quite a number of issues around the poverty that is there and the insecurity that seems to be part and parcel of being self-employed, particularly at the lower end of the scale. Is there anything that you should be looking at particularly when it comes to these new trends in self-employment in Scotland?
Professor Bell: Picking up on Graeme’s last point about older workers, I think it will be important for the Scottish labour market—and, indeed, for the UK labour market—to encourage people who like me are over 65 to continue to work. One of the findings from the English Longitudinal Survey of Ageing is that the relatively well off and those who are pretty poor are the ones who retire early. It is the ones in the middle of the income distribution who continue to work longer. It may be the case that workers who have been in relatively low skilled jobs most of their lives are more likely to have health problems and may not have the opportunities for self-employment that others may have, and the relatively well off are able to retire because they have built up a pension pot.
Q118 Chair: I don’t know if it is evidence from you, Professor Bell, but one of the things that has been suggested to this Committee, when we look at the unemployment figures, is it is not so much a matter of people moving into employment, it is people who are disappearing entirely from the labour market. What is behind that trend and does this fit into this pattern that you are starting to describe to us?
Professor Bell: There are people inactive and there are a whole host of reasons that they give for being inactive, and disability is one of those. Looking after their family is another and caring is another. I haven’t looked at the trends recently. What I do know, though, is that this is a huge concern for the US where, particularly, male workers have been leaving the labour market at a very substantial rate, much more so than is the case in the UK. There is a big investigation in the USA trying to understand this. The US labour market is a very flexible labour market too but, nevertheless, large numbers of particularly middle-aged men are dropping out of the American labour market.
Q119 Margaret Ferrier: Do you think that some people are taking advantage of early retirement? Is that something that—
Professor Bell: I think that is less the case. Put it this way: the average age of retirement has been increasing for quite a while. That is partly because it is becoming more and more expensive to buy a pension. Early retirement, where you could confidently expect an income that was a pretty big proportion of your income prior to retirement, I think these days are behind us and will continue to be behind us because I don’t think returns—basically interest rates—are heading up for a long time to come. It is very important for the individuals themselves and for the health of the labour market that we have people who are able to continue to work—that means healthy, apart from anything else—going forward from this point for the foreseeable future.
Q120 Chair: In the evidence you gave us in the population demography—which we are obviously very grateful for—you suggested that Government policy tended to favour those of pension age or those who are perhaps old in the labour market. What you seem to be saying now is that those good days seem to be coming to an end and there is going to be not so much the opposite impact but there is definitely going to be a revisiting of some of these policies. If that is the case this will have a huge impact, won’t it, particularly on the more elderly range of the labour market?
Professor Bell: The effective age of retirement has been below 65, and I guess I was talking about the benefits that have been made available to those aged 65 and over, and that group—as I have said in my previous evidence—in terms of the benefits they receive, have done pretty well. In fact, that is an inducement to retire and it is getting this average actual age of retirement up towards the state pension age and, indeed, as the state pension age rises, to get it to continue to rise is a real challenge. It is a policy challenge, and you have to think about how the tax system and the benefit system work together to try to encourage people to stay on if at all possible.
Q121 John Stevenson: Both of you have mentioned productivity, which is clearly a significant issue and there is a balance between labour and capital. We are hearing a lot now of the rise of the robots and so on. What are your respective views on the implications for the labour market with this sort of technological advance, Professor Bell?
Professor Bell: I don’t want to make a forecast, but it is a really interesting development, the so-called disruptive technologies. We have seen it in things like Airbnb, Uber and you see the use of the smartphone. I think what this does is not to effect huge change in the way that the economy works that, say, the motorcar or the introduction of trains or the steam engine made. It makes the economy work a bit more efficiently, so you are more likely to make the appointment that you pencilled in or you can get a taxi when you want it at a cheaper price, taking you from point A to point B.
One of the arguments that is being raised is that part of the reason why production has not increased dramatically—and this is many of the developed countries that we have been talking about over the last few years in terms of their stagnating—has to do with the fact that these disruptive technologies often are single companies that amass huge amounts of money and then don’t reinvest that money. Apple would be an example of that kind of thing, and Uber to some extent. You end up with companies that save a lot of money and also they are making the economy more efficient—for example, Airbnb probably reduced the overall level of investment in hotels—because you are using the space more effectively.
This increase in saving and reduction in investment causes the economy to slow down a bit, so these technologies may be part of the story why the economy—this is the argument of so-called secular stagnation that Larry Summers has put forward, and we can see that some of these technologies are clearly labour replacing and doing so in ways that we did not predict 10, 15 years ago, like effective—
Q122 John Stevenson: I will come back to that in a minute. I would be interested in Professor Roy’s view.
Professor Roy: If we take a step back, to an extent, a lot of the potential employment and productivity will be growth enhancing as well. If you look at history over a very long period of time, there have been lots of jobs, of placement. There have been lots of improvements in productivity. There have been lots of changes in society and change in our economy, but we still created jobs, wealth and income. To a large extent, a lot of these changes will be disruptive and will be challenging but with them comes opportunities, new benefits, new potential for growth, new opportunities for employment and so on. Where it becomes really crucial is how you help that adjustment. There will be people whose jobs will be replaced by automation. I think accountants are at the top of that group to be replaced. How do you think about changing the employment structures or training to help to put into particular—
Q123 John Stevenson: That is a very interesting point, so I will ask you how do you advise policymakers on how to deal with that transition?
Professor Roy: There are potentially two areas. There are the points that David was mentioning earlier about the types of jobs that we know that machines will not replace, the cognitive jobs versus administrative jobs. It is the jobs that require interaction with people and the jobs that require strategic thinking. It is about how we look at where the opportunities will come to create new employment opportunities, building on the opportunities that will come from things like automation and the high capital investment there. I think skills and training become absolutely crucial in there as well.
Then you get into things like: what do you do potentially if work practices are changing? If it has become disruptive, that people’s careers are changing or the types of job that they are in are different, what other work environment opportunities come around that as well? If you are moving to working in, say, two or three jobs or you are moving to working in a new sector, how does public policy help you move into that world and how does it evolve to that new structure?
I think the third part then comes into redistribution. That is ultimately a much more political choice but it is about if you have situations where employment growth might not be as big in the future, that the levels of employment might be lower, or the amount of hours worked that you are operating are lower, or if the benefits of these changes to automation and productivity are going to be concentrated in certain groups of people or certain companies or certain sectors, then what can you potentially do to redistribute that wealth and economic benefit across the people who might be displaced?
There are a whole variety of things in there about the labour market, training and skills and ultimately about redistribution.
Q124 John Stevenson: Professor Bell, on that point just quickly, what would your advice to policymakers be?
Professor Bell: I would follow with a lot of what Graeme said there. Interestingly, in the last few years the areas of major growth in employment in Scotland include professional technical services and health-related employment, and these are highly skilled jobs many of which—not all of which—are unlikely to be replaced in the short run by technology. It does have to start at the very beginning, in terms of the education system and the education system having a clear understanding, it seems to me, of the kinds of skills right down to the lower levels—like numeracy and ability to code, that sort of thing—which it perhaps does not have quite so adequately at the moment, but policies like that tend to be slow burners and it will take some time.
Q125 Chris Law: I want to turn to Brexit and in particular speak to you, Professor Roy. The Fraser of Allander Institute highlights potential adverse implications as a result of leaving the EU. They are quite shocking figures: up to 80,000 jobs could be lost, reduce GDP by up to £8 billion and cut average pay by up to £2,000 per person. Should Brexit be relabelled “Regretsit”, and what does the UK and Scotland’s departure from the EU mean for employment opportunities for Scotland?
Professor Roy: Essentially, what this modelling does is look at two states of the world. One is where in the long term there is no change in the trading relationship between Scotland and the UK and the European Union and one where there is a change in that relationship. If you look at the academic evidence that shows the different types of trading arrangements you can have and integration, that then leads through to exports and imports. You can then look at what the potential changes and implications would be for moving from these two states of the world. What we then do is simulate that to see in a world in the future where Scotland and the UK are part of the European Union what would the economy look like? What would the scenario look like if Scotland was not part of the European Union? The impacts from these studies would feed through to exports and imports. That is essentially what we do.
What you get is a reaction within the economy as it adjusts to changes in export structure, import structure, wages and various other factors as well. Taking a step back from that, what you see is in a world where taking the assumptions that we put in, in a world where we are less integrated with a major trading partner, then you will have a lower level of output than you otherwise would have had. One point to make, just to be clear about this, is that the economy will still grow. It will just be smaller—taking our modelling, taking our assumptions—than it would have been if Scotland and the UK had remained in the European Union, and that is where you get the different impacts.
The 80,000 you mention is under one scenario where Scotland and the UK are completely outside any form of trading relationship with the European Union. We have other scenarios in there where you might be part of some so-called softer Brexit where you might be a member of the customs union but not the single market and so on.
Q126 Chris Law: Thank you for that. You also mentioned earlier there is a consensus growing among economists now. We heard last year from some hard Brexiteers that we are no longer to listen to experts but I am very pleased to hear two very eminent experts here today. But you also sense consensus among other economists. Do they share this view?
Professor Roy: Yes. Coming back to the point I was trying to get back to with Mr Stevenson, which was if you look at what economists are saying, they have quite strong evidence that in the long run becoming less integrated with your major trading partners is not good for the long-term health of the economy because it has an impact on exports, imports, investment and also skilled migration. That is absolutely crucial for Scotland because we know that without the immigration from the European Union in the last few years our working population would have declined. If you have a declining working population your economy will be slower. I would say most economists because there obviously is not a consensus about that. Other economists will be different. A smaller number of economists have a different view.
If you just look at that then, in the long run if these effects were to happen then the economy will be smaller than it otherwise would have been. Where there is more uncertainty is what happens in the short to medium term to get there, and that is where there has been a lot of discussion in the last few months about what economists said might happen immediately after Brexit and the fact that the economy was expected by most—including ourselves—to slow down more quickly. It has been more resilient to that, but that does not take away from the long-term challenges that come through. There is a whole variety of reasons why the economy has been more resilient in the short term: it was stronger than we had thought at the start of 2016; the stimulus from the Bank of England has had an impact; we don’t exactly know yet when Brexit will happen, and so on. But if you believe our long-term modelling and the long-term assumptions and analysis economists have done over a number of years—it isn’t just us saying that, it is a wide variety of evidence—in the long run these effects will start to feed through to the economy.
But to come back to my other point, which is that the economy will still grow; it will just be smaller and face a bigger headwind than it otherwise would have done if Brexit had not happened.
Q127 Chris Law: The Scottish Government have published a plan. In fact, it is the only Administration in these islands to have done so and we still await one from the UK Government. Can you tell me what could be done to mitigate the adverse impact we are expecting on Scotland?
Professor Roy: There is a variety of different things in there that you can start to have a look at. What we are very clear on in our analysis, in our modelling, consistently since we published it, is we are looking at the impact of Brexit in isolation, so holding everything else constant and that is really crucial. It is saying, “What happens if you just look at the impacts of Brexit?” What kicks in is what you might do differently to respond to something like Brexit. What other trading relationships might you have with other countries, for example, to try to boost your exports and grow your economy that way? What might you do with some of the key issues that might be part of the negotiating settlement around Brexit?
For Scotland, one of the issues I mentioned was access to skilled workers. In sectors like the university sector, where 15% of employees are from the European Union outside the UK, that becomes really important. There are a lot of issues in there at a macro level you can look at. A lot of issues that you get a specific level you can look at as well.
Q128 John Stevenson: It does concern me a little bit that you made predictions, which you are obviously fully entitled to do but I felt you were talking about the predictions that were made before the vote and then what happened after. You appear to be making what I would call excuses. You made assumptions beforehand, which proved to be incorrect and, therefore, you were trying to revise history a little bit. Isn’t that the danger of forecasting, that you revise your history but you keep getting the future wrong?
Professor Roy: No. I don’t think that at all. I think what I am saying is that essentially there are two effects happening here. One is what is happening in the long term. There is no way we would move away from what we think will happen in the long term, if you look at what the potential impacts for Brexit would be. I think what you are talking about is what happens in the short term. We were quite clear at the time, both before the vote and after the vote, that there is a high degree of uncertainty about what might happen to the economy in the short term.
John Stevenson: You got it wrong. Your predictions pre were wrong.
Professor Roy: No. If you look at what we said repeatedly is that there is a high degree of uncertainty. On balance, if you ask us to give a level of probability we would say, “This is what is happening” but I don’t think in any way we would depart from that. Even now we are saying if you look at what is happening in the next few years then there is still a high degree of uncertainty. The economy could continue to power on and grow at 2% or 2.5%. In our view—if you ask us—the probability is that we think that will be less likely to happen than a slower level of growth.
Q129 Deidre Brock: Further to your comments about the importance of EU migrants to the Scottish economy, have you done any forecasting yet on the reports that we hear that the Immigration Minister has suggested a possible levy of £1,000 on every EU worker recruited by UK employers after Brexit? Are you thinking about doing that at some stage, what your thoughts are of the impact of that sort of policy?
Professor Roy: As I mentioned, one of the big challenges—particularly for Scotland, potentially less so for the UK—is the access to skilled EU migrants coming in because it has an impact at a macro level. The key issue is what it means for sectors. I mentioned the university sector but if you look at hospitality, for example, about 9% of total employment in Scotland are workers from outside the UK from the European Union. There will be differential impacts on sectors as well, so anything that potentially has a long-term barrier to access to skilled workers will potentially have a negative impact.
Professor Bell: Could I just chip in that I am a bit concerned that, post-Brexit, there will be increased bureaucracy for employers associated with immigration. Unless we have visas for travel to Europe, and vice versa, the effective control over whether migrants are working or not will have to be done at the level of the employer and that will mean extra bureaucracy.
Chair: We will have to leave it there. We are very grateful to both of you for giving us evidence this afternoon. As usual, Professor Bell and Professor Roy, if there is anything further you have to contribute to this inquiry we will be more than grateful for any further submissions. Thank you for your attendance this afternoon.
Examination of witnesses
II: Robin McAlpine, Director, Common Weal, and Professor Mike Danson, Jimmy Reid Foundation.
Q130 Chair: I will start by welcoming you to the Scottish Affairs Committee. I believe it is the first time we have had you in attendance in this august hearing, so it is a great pleasure to welcome both of you. Just for the record, tell us who you are and anything by way of a short introductory statement.
Robin McAlpine: Robin McAlpine, Director of Common Weal, which is a Scottish think tank. I have nothing to add to the submission.
Professor Danson: I am an economist. I am Professor of Enterprise Policy at Heriot-Watt University and today I am representing the Jimmy Reid Foundation.
Q131 Chair: I am grateful for those very short introductions. We are very interested in your written evidence and we want to press you on some of the issues that you have raised with us. You obviously know the nature of this inquiry is looking at the shape of sustainable employment and some of the current issues that we are dealing with. You heard the conversation we had with Professor Bell and Professor Roy. Maybe you could help this Committee about the quality of interventions we see from both the UK and Scottish Governments to stimulate the labour market. In your view, what type of value do they have? Does it make a significant difference about the type of outcomes that we have in terms of employment and sustainable employment? We will start with you, Professor Danson.
Professor Danson: A lot of the submission we put in was about in-work poverty among the self-employed, and you have spoken quite a lot about that. In many ways that growth in self-employed, as we have analysed, has been almost passive, almost unrecognised, unknown. It is interesting that ONS were meant to do a big survey in 2015 of the self-employed across the UK and abandoned that because of the difficulty of doing the research, of identifying people who were self-employed and so on.
If you look at the analysis we did—and I am sure we will go on to talk about it—it suggests that there are major problems with that growth in self-employment. It is not sustainable. The vast majority of people who are self-employed, who are entrepreneurs according to stats, are in poverty. They are in poverty now and they are building up major problems for future decades. There are also macro effects because they are in poverty and, therefore, they are not paying tax or national insurance.
Robin McAlpine: I don’t think we intervene enough. The point is I don’t think we actually do intervene. What we still tend to do—and this is a large part of the problem—is everything is about the top macro level. If we take some of the questions earlier on, Scotland has fallen behind the UK average in wage recovery since 2008, since the great recession, except it is better than every part of Britain except for London and the south-east. So we have just about recovered wages, with only the UK region, apart from London and the south-east, that hasn’t.
But then if you go within Scotland, what we tend to do still is take actions that appear to deliver top-line outcomes. One of the things that I think is badly lost in this is the difference between national aggregate and place. What we tend to do is say, “This action will appear to grow the economy because, for example, this large multinational employer will make more profit out of Scotland”. That is not the same as getting good economic impacts in Scotland. For example, you could appear to grow GDP if you have more of the food market captured by supermarkets. The likelihood is this will depress wages. It will depress city centre employment. It will act as a drag on supply chains, which would create productive employment. I think that is a large part of the problem.
I am not anti-expert, let me be clear about this. I think we should always look at data. We should always look at numbers, but we should use them to derive an analysis and follow the analysis not the numbers. If what we think is we want higher wages the question is: how do we create higher wages? Create an analysis and follow that wherever that takes us, but trying to sail by quarterly statistics means that we follow the wrong indicator and, bluntly, we don’t intervene. For example, investment in Britain as a whole is virtually zero at the moment. If you take away depreciation and expansion of people, we have an investment rate in Britain of virtually nothing. It is more or less zero. Government can intervene to help with investment rates but they tend to see investment to be a market mechanism and so, broadly, they don’t.
Q132 Chair: In your submissions you say that the industrial policy impacts on Scotland and that it favours big business and the financial sectors, and you say it does not do enough to support the productive industries. Why do you think that is the case and what alternative strategy would you endorse and deploy to alter that situation?
Robin McAlpine: One of the primary problems is that those who favour benefiting low pay, high volume, big multinational corporations have a very powerful political voice, which you do not get from small producers. To give you an example—and Mike is the expert because he has done the work, but he has told me so I am just going to pilfer it—the micro brewing sector is a model for Scotland. Rather than buying poor-quality, bulk-imported, foreign lager in giant big tankers, we have been making smaller, higher quality craft lager locally and selling it locally in to local markets. The nature of pubs and publicans means it is a little easier to do that because they have the distribution mechanism.
Just to give you one example, Scottish producers cannot get market access to Scottish customers because the distribution systems are now large. They are monopolised by supermarkets and you can have a situation that happened where East Lothian farmers were being paid 10p per kilo for potatoes that were being sold less than 10 miles away for £1.20 and the only thing that happened in between was the supermarket put them in a plastic bag. If we are thinking about—rather than the top level—how do we just increase the GDP and we think about the nature of the type of jobs that we would like to create and how we create them, you would probably follow a slightly different path. I am going to emphasise production for consumption not just production for export.
The more we make of what we consume in the country the more highly skilled jobs and well paid jobs and economic benefit we retain in the country, so let’s have a look and see what else we can do. Where else can we get the micro-brewery effect in Scotland? Is it local cheese production? Is it better dairy distribution? Production generally? Is it clothing? In what other areas can we substitute cheap imports with high quality domestic production?
Q133 Chair: That would suggest a total restructuring of the economic base that we are currently working under. Is this something you believe is achievable? When you talk about micro-brewery, we see the example of that. How do you apply that to manufacturing, to actually making stuff and producing services?
Robin McAlpine: We do quite a bit of work with small producers and the three basic things they say are, first, finance—as a small producer it is hard to get long-term sustainable finance that helps you grow. The second is shared services—big corporations can have entire departments protecting their IP, managing their exports, doing the legal work and so on. Small companies cannot do that. If we were helping groups of small companies come together to share that kind of infrastructure they would be better able to export, better able to protect their IP. The third is straightforward market access. It is extremely hard, if you are a small producer, to get direct access to Scottish consumers without having to sell into a supermarket and, while they are better under consumer pressure to produce more domestically, you are still competing with cheap imports from large industrialised plants outside of Scotland, outside of the UK.
Those are the three factors that people say. We are not going to turn it around overnight but we have seen that it is possible for specific industries to grow if they can get these things right.
Q134 Chair: Is this a view that is shared by the Jimmy Reid Foundation?
Professor Danson: Yes. The simple answer to your question is it would not start from here. If you think of our nearest neighbours—Ireland, the Nordic countries and France—in France every local community will have its own cheese, its own wine, its own bakery, patisserie. They have kept all those. In the UK we have gone for much bigger production systems, imported, which led to lower prices in many cases, greater variety in the local area and so on. Those are the benefits, but it means we have destroyed a lot of the supply chains locally, and it is therefore very difficult—as Robin has just described—to put various elements of that back into place.
It is not that we are all bad, it is just we are starting from quite a different place from what our nearest neighbours are. If you look at the Nordic countries, they also tend to get quite a lot of monopolisation, for instance, in some elements of the supply chain but they are Norwegian or they are Danish or they are Swedish. They have retained those but they have also tended to build and are not say just because they are mundane and so on, doing furniture production in Denmark, for instance. They are actually saying, “These are traditional skills we will build upon and we will use technologies and we will become a leader”.
Q135 Chair: In a lot of the work that both your foundations do there are lots of references to the Nordic countries, and the examples we see from Denmark, Sweden, and Norway, in particular, can be characterised as high-wage, high-skill economies. How do we transition from where we currently are now, with the range of policy options and the suite of policies that have been deployed throughout Scotland, to get to that situation and get to that position?
Professor Danson: First, we have to recognise that it takes a long time. It needs to be done slowly because it is about building up—what the Germans call “Mittelstand”—those middle-sized companies. If we look across the river there, the old GLC building, the London industrial strategy from the earlier 1980s was much about that. At the time when London was deindustrialising the argument was that we need to protect those medium-sized firms, which should be the mainstay of the London economy looking forward.
In many cases we don’t have those medium-sized companies in Scotland. We have lots of very small ones. Almost all of those are self-employed and they are not going to grow. People don’t want to grow into being a small business, never mind medium or big. It is about trying to identify where can we start to build medium-sized companies and protect them from being taken over, hostile or otherwise, to start to rebuild an indigenous economy.
Robin McAlpine: Anchoring strategies are crucial. This is to say we have an ownership problem. Far too much of the Scottish economy is owned outside Scotland. That makes it likely to move come a downturn. It makes it less likely to have supply chains in country and so on. The ownership of companies in Scotland is poor; they are not owned in Scotland. We need to anchor more Scottish companies in Scotland.
If we could, we should take a more aggressive approach to acquisition and merger because these have been very bad for Scotland. I use the example of disposable contact lenses for speckies like me. After a night in the pub, it was great, you just threw your contact lenses away. Developed in Scotland using Scottish Government money, employing 1,000 people in Livingston at the time at which it was purchased by an American corporation and moved over to I think it is Oregon now that they are based in. They are still making disposable contact lenses. Folks’ eyesight did not get better; it is just that Scotland does not get any of the jobs or any of the wealth. That is the perfect example.
Every so often we will see in a newspaper in Scotland, “Great success, a Scottish company sold”. I scratch my head and say, “How is that a success?” Why are we considering it to be great that the ownership and potentially the very existence of a success story in Scotland is now going to be taken out of Scotland? In UK economic policy, the suggestion that you might see merger and acquisition as being a negative rather than a positive is so far outside the basic doctrine that we tend not to talk about this.
So, anchoring more jobs in Scotland. As Mike points out, if we did this only through market levers, it would take quite a long time to get there. I think there is also a role for some more aggressive direct intervention: public procurement, using public procurement to build up domestic industry bases wherever you can. The best way to do that is simply to put conditionality on them—if we come out of the European Union, we will have a lot more flexibility on this—and also to look at how you do some of the things that you already do. For example, housing is an area where we could have a national housing company that is deliberately creating, for example, German-style house factories to make pre-fab, high-quality houses. You could be doing that in a nationalised or mutualised industry sector, which enables you in a few areas, renewable energy and other ways, to stimulate medium-sized enterprises through direct state intervention without having to wait for longer-term markets. If you got that right, you can drag supply chain with you. The timber industry or electrical industry or construction and other technologies can be dragged up with that, and we do need to keep using our universities.
Q136 Ian Murray: Can I follow up on his question before I ask my own? One of the most successful indigenous industries, of course, is the Scotch whisky industry, which mainly now produces product for export. The supply chains are relatively solid in Scotland. Are you suggesting that what you want to try to do is to find other industries—of course, Scotch whisky cannot go anywhere else—that do that? They are indigenous to Scotland; they stay in Scotland; the supply chains are in Scotland. They have progression in the workplace and are highly skilled. How do you achieve that and do you need significant government or public policy intervention to make that happen?
Robin McAlpine: I am going to let Mike mainly answer that one because we were just talking about this beforehand and he knows quite a lot more than me. I would strongly contest that the Scotch whisky industry is a model we want to follow. I know people who are in the industry who say that if Scotch whisky had followed the growth trends of virtually any other drinks industry in the same sector, it would have grown at 10 times the rate it currently does.
Almost all the Scotch whisky industry is now owned by multinational corporations who make the vast majority of their profits from cheap vodka, which is on the shelves six months after they begin the process. Scotch whisky has turned into a bit of a loss-leading brand leader. It is not loss but it is much more of a brand leader. It is the prestigious side of some of these big multinationals. I would strongly argue that the whole point is that the Scotch whisky industry would be employing many more people and it would have grown substantially if the investment had gone into that in the same way as it had into those same businesses’ vodka industries. That is an example of why if these companies had been whisky companies making whisky in Scotland we would have seen a sharply greater rise in the output and economic impact in Scotland. I want Mike to explain the difference between—
Q137 Ian Murray: What do you base that on? How can you make that assumption?
Robin McAlpine: You have to remember that the whisky industry is virtually the most powerful and well-funded lobby in Scotland and puts around an awful lot of statistics. There are a number of reports, and I would be happy to follow some of them through. BIGGAR Economics has done a good one. Donnie Blair, who is a former whisky industry expert, has written on this as well and has done a lot of the numbers on this. Scotch whisky has not really grown. It is about 60% profitability. It is a very profitable sector, but it has not grown much and almost every other drinks industry has grown substantially more. 75% of all investment that it is made into the Scotch whisky industry is made in London because most of the investment goes into the marketing and distribution, not the production. Whisky is an example whereby if we had had 20 specialist whisky manufacturers in Scotland owning the same industry, over the last 20 years I am confident we would have seen a better growth trend in the whisky industry.
Q138 Chair: I have just had a quick look here at what the Scottish whisky industry claims it contributes to the UK economy. It says it is one of the biggest exports, which I am pretty certain you would challenge, but it contributes something like £3.8 billion to our trade balance. If it is making that amount of money and is contributing that much in terms of exports, it is surely doing something right.
Robin McAlpine: About £400 million of that relates to Scotland. The vast majority of that is trading profits out of London. If you look at the economic impact of the Scotch whisky industry in Scotland in terms of supply chain, jobs and reinvestment into Scotland, it is more like £400 million.
Q139 Chair: Your contention is that all this money is obviously contributing to the UK balance of payments and trade, but very little of this economic activity makes its way through to Scotland?
Robin McAlpine: £400 million is not very little, it is just small compared to what you would want it to be. You can make a fairly strong argument that the Scotch whisky industry has made an awful lot of money out of Scottish heritage and put quite a lot less back into Scotland.
Professor Danson: I did appear in front of this Committee about 15 or 16 years ago on the Scotch whisky industry following a study we did jointly for the Scotch Whisky Association and the STUC.
Chair: You did.
Professor Danson: I think I would take a slightly different view of the industry and how it has evolved since then than Robin. One thing that is very important is that it is dominated now by two huge multinationals, who also make almost all the gin and vodka and other spirits in the world. Gordon’s London Gin is made in Scotland, for instance. As with Scottish trade in general, some of these figures we have to be very careful about as to where the value added accrues to and so forth.
Q140 Ian Murray: On Gordon’s Gin, is that the point you are making? If you are going to make gin, it is better to be made by highly skilled people in Scotland and selling it into the London dry gin market than for them to make it in Sussex?
Professor Danson: Yes. Scotch whisky has to be made in Scotland and then it is matured and so on, and because it is dominated by these two huge multinationals, they have offloaded their other spirit production to Scotland. What our report said 15 years ago was we could get rid of almost all of that and it would hardly have any effect on the Scottish economy because there are relatively few jobs. The big beneficiaries of that sector are the shareholders, huge profits, and the Chancellor of the Exchequer in Westminster. The benefits to Scotland are limited, as Robin said.
Q141 Ian Murray: But the Chancellor of the Exchequer filling his coffers in the UK Treasury is not a zero-sum game to Scotland.
Professor Danson: No, indeed, but relatively the two big beneficiaries are these two. One thing we did suggest back then is it would be much better, as Robin alluded to, to have a growth of the malt, promote that in a way it had not been done for a century. In effect, that is what has happened in the interim, not because of our report, and we have seen this explosion of gin distilleries as well. Again, there are certain analogies there for how you can grow local businesses and so on, based on our strong Scottish heritage and skills and universities and the like.
Q142 Ian Murray: I understand that the reason that a lot of Scottish distillers are making gin at the moment is because it takes you eight years to get to—
Professor Danson: Indeed, yes.
Ian Murray: So they have to do something in the meantime. I want to ask you about something you said in 2014. I think, Professor Danson, you told the Scottish Parliament that to restructure the Scottish economy in the way that you have described, the Scottish Parliament would need a significant addition to the powers that they have. Since the Scotland Act and since 2012 and 2016, are there enough powers there now for Scotland to at least take a step towards some of this restructuring of the economy?
Professor Danson: Some small steps. Scotland has always had a much more co-operative, consensual approach to economic development, at least since the Second World War. The development agencies that grew up in Scotland were literally world leaders and things have changed in a variety of ways. So, those elements were there already.
The ones under the Scotland Act are a small step. I think the important ones, which we talk about in our submission, are about employment rights one had, particularly to address elements of public procurement on the one hand and self-employment on the other, and social security benefits. The ones that are being devolved do not include the major unemployment benefits. It is more disability and so on. We have argued that elements of those two are essential to restructure the economy or start to put it into a period of transition that would support other elements.
Q143 Ian Murray: Can you give a practical example if you know about what could be done with an unemployment benefit? What could a public policy intervention be for an unemployment benefit that would allow you to then restructure the economy in the way that you have been talking about?
Professor Danson: I did some work with somebody who used to work for Glasgow City Council. She ended up drawing up the legacy programme for the Commonwealth Games. A key part of that legacy programme was to get more local Glasgow and Scottish businesses involved in the supply chains for the buildings, facilities and so on. Despite this belief that state aid rules and so on stop it, in retrospect the lawyers now think they could have bumped up the weighting given to the community benefit clause to, say, 20% of the overall scoring and they are confident that would not have been against state aid rules.
One reason for that is because the best and most efficient and effective contracts were also the ones that had the highest proportion of community benefits in them—there was market failure, big companies would win a contract but then not know what to do. Putting in place ways to support small businesses to get into the supply chain was highly effective. That was almost all on a voluntary basis. For the other 80% or 90% of the contract, if they were able to say, “This is a public procurement contract. You must use local labour. You must have a certain proportion of apprenticeships. You must involve the local supply chain to a high degree”, that cannot be done if the employment law and so on is retained in Westminster, for instance.
Q144 Ian Murray: But some of that is. Apprenticeships and public procurement is all controlled from a Scottish perspective.
Professor Danson: Yes, but other elements of employment rights, that you must be trade unionised, for instance, social security, unemployment benefits. If it said you had to employ somebody—
Chair: We will come back to some of these issues because we are quite keen to explore that with you.
Q145 Deidre Brock: Further to that, Mr McAlpine, in your evidence to us it seems that differential policy on the remaining reserved issues for Scotland and the rest of the UK is unlikely to be achieved. Could you clarify that for us a little bit and also perhaps tell us whether, if it was possible to achieve that differential policy on the remaining reserved areas, it is desirable to do so?
Robin McAlpine: The more that I look at this—and I have had a chance to spend a bit of time in the north of England of late as well—the more I am becoming aware that it is not so much Scotland versus England, it is most of the UK versus London and the south-east. If you look at some of the macro policies that have benefited the City of London, they have been worse for south Wales than they have been for Scotland. They have not been good for Scotland, but some places like south Wales have probably not done very well out of this at all and there is the same issue in parts of the North Sea to the midlands.
My view is I am sympathetic to the argument that there are quite a lot of powers that the Scottish Parliament could use—I do not believe the Scottish Parliament has yet used potential economic powers to the extent that it should have. In terms of the new powers that have come, I do not think they add much. It is more like procurement, finance, planning law, land use, industrial development and support. We have that. We should be using those better. I do not think tax is crucial at all. I do not think a penny here or there in taxes is the big point.
Then there is a bunch of other things. For example, it would be very difficult. You could not have different monetary policies on either side of the border. That affects the cost of money and the nature of borrowing. You cannot really have a differential within one economy or one currency zone. You could have different policies on employment rights, trade union law, mergers, acquisitions, monopoly, these kinds of areas. I think it is unlikely. The UK is not usually very good at breaking these policies up. Certainly, at the moment the trends are not just to unify these across nation states but between nation states. The European Union project has largely been about trying to get these things levelled. I am a bit sceptical about how much you can do within one area.
I would love to see Scotland able to veto mergers and acquisitions. I think that would be a great thing to be able to do. I would love it if Scotland could set a minimum wage. It would be great if we could say we would rather favour businesses that are already higher paids. That would be a good thing to do. It would be great if we could deal with tax credits and integrate it into a social security system in Scotland. There are a number of areas like that that you could have differential policies on. It would be sharply against the direction of current travel.
Q146 Chair: Again, you are suggesting that there is more that the Scottish Government and Scottish Parliament could be doing with these powers just now. Could you identify an example of how they could possibly use these powers to better effect and create some of these situations?
Robin McAlpine: I am going to say procurement. £11 billion spent in Scotland and virtually everyone we have ever spoken to feels that it favours companies who are not Scottish. I do not want to name the company because it is in one of your constituencies and I do not have permission to name them, but it is a Scottish company that employs around about a dozen people in Scotland manufacturing a core industrial product. They just bid for and lost a contract that has gone to a company that is importing them from China. You could have had a number of conditionalities that went on that contract, which would have made it much easier for the local company to compete. The amount of forms you have to fill in and the size of the bid could have enabled that company better to compete. I struggle to understand why we are so resistant in forming procurement policy in a way that gives Scottish companies the maximum capacity to bid.
Chair: You now have us all wondering which company it is within one of our constituencies.
Robin McAlpine: I will tell you afterwards.
Chair: We will have to try to figure that one out later and we will question you about that once we are outside this meeting.
Q147 Chris Law: I am really quite excited about the question I have here. It is for yourself, Robin, with regard to Common Weal, which has argued that there should be a national investment bank to stimulate investment in the Scottish economy. What is the case for the Government taking on the role of private investors?
Robin McAlpine: We have a kind of finance system that has now become extremely profitable. One of the largest sources of profit in this country is the use of finance in areas such as speculation and fast returns. What this means is that most of the big banks are always keen to look for fast returns on investment and are broadly uninterested or more uninterested in solid longer-term returns. Likewise, if you look at smaller enterprises, there is not anything like as much interest in giving a small enterprise financial support over a 10-year period because you need an awful lot of them and they are higher risk and so on.
If you look at other countries, even in the US I believe that—and I am trying to remember this—80% of the loans that go to small businesses do not come from the big banks. They come from small mutual local banks. It is a similar situation in Japan and Germany. There is a consistent pattern in the world now that big finance makes big money on big, fast-turnaround investments, not out of investment into longer-term productive industry.
For it to be legal, a Scottish investment bank under European Union rules would have to have a mission different than the other banks, otherwise it would be seen as state aid for a competitor. But if you say the role of this bank is not to generate profit but to sustain the development of industries, and particularly certain industry types, you can do that. Again, people say it is easy to get finance. Yes, it is if you do not mind the terms. We have just seen what happened in the RBS case where I am going to be careful and say there is substantial speculation about whether they were really sustaining businesses or whether they were really profiting from the assets of businesses they lent into.
This is quite a common thing that we hear: yes, I can get a loan, but the terms of it are so risky for me that I would not do it. What you have in a lot of countries is a bank the purpose of which is a development bank. We are not here to profit, we are here to give loans for a specific mission to grow parts of the economy in a much more patient and long-term way. If you do that along with local development banks—again, it is very much the German model and the Japanese model—and you have big national investment—and, incidentally, this would greatly benefit the public sector, too. The public sector are borrowing LOBO loans at rates that do not make sense. If you do that, you can benefit the big international players and then you can have small supportive banks in local areas that develop the old-style, long-term relationships. It is not about replicating banks. It is about creating a bank that is doing something different than the commercial banks that we currently have.
Q148 Chris Law: Just on that note, as you talked about local development banks, is Handelsbanken, for example, something like that in that model? What they are doing, for example, in my constituency of Dundee is they have a local branch. You come along and they want to know everything about you, the person, the borrower, and your local situation environment. It is also an opportunity for local investment as well.
Robin McAlpine: There are a whole bunch of interesting investment models that take that even further. For example, you can have the golden share type of model whereby the bank gets some of its return from the growth of the company, which instantly means that the bank’s interest is the long-term health of the company, not the short-term repayment of the loan. This is how it used to work. One of the things that I think we forget is Scotland’s finance sector is globally renowned because in the 1960s, 1970s and 1980s it was seen as long-term, sensible, very much about relationships, very much about a long-term partnership with customers. Part of the reason the Scottish finance sector came a cropper when it did is because it moved away from that long-termism towards the speculative economy stuff in the 1990s.
Q149 Chris Law: Just a last question on that: is there a comparison between Scotland and the rest of the UK when it comes to private sector investment? Is there data to show there is a difference?
Robin McAlpine: Again, London distorts everything on this. We have a report coming out probably next month on this. The data that we had was largely about the broad UK picture. One other thing I should just mention and point out is we have another paper coming out soon, which is called “Scotland’s Data Desert”. Part of the problem is Scotland is one of the least reported and measured or analysed places that I can think of. We do not know what Scotland’s balance of trade is. I remain startled. We do not know what we export. You will have heard that the UK is the largest export market for Scotland. I have now spoken to a range of macroeconomists just to find out exactly what is contained within that and nobody knows. There is substantial data loss. Scotland in these things, as far as I can tell, does not look massively different than the UK as a whole. We are not investing a lot into the economy.
Q150 Chris Law: Assuming we accept the case for a national investment bank, should this be operated by the UK or Scottish Government and how would it be funded?
Robin McAlpine: I am a fan of the mutual model, which is to say that you have different partners governing a bank. It is a good way to make sure that the bank is following a broad mission. The problem with it, if it is just the Government, is if it does well there is always a future incentive towards perhaps privatising or doing something political with it. I think there is a lot of interesting work on how to govern institutions that is about just now, which helps to root the mission of the institution into its governance structure. If you have mutual governance where, for example, industry representatives, trade union representatives, Government representatives, local authority representatives, social enterprise sector representatives and independent people are all involved in the governance of it, you are likely to get a better balance of strategy in the governance of the company. The model that we have put suggests that for reasons of capitalisation it would be fundamentally owned by the Government but ownership and governance do not have to be the same thing.
Q151 Chris Law: Scottish Enterprise already owns the Scottish Investment Bank, which co-invests with private investors in Scottish small and medium businesses. How would this differ? How would a national investment bank be any different?
Robin McAlpine: The current model is a bit more like a grant fund, an investment fund, rather than a straightforward bank. It is a matter of scale and size and, crucially, it is a matter of running it like a bank. A bank does not operate by saying, “Here is a pot of money that we can use to co-invest. When that pot of money is dry we are done”. A bank says, “As long as we can keep the demand and the returns, then we can expand”. A bank means that you can keep giving to more good projects. There is no zero sum. You do not get to the end of your pot of money and the next person that comes along you say, “Sorry, we have no more money for this”. You have a system that is substantially larger, demand led, and it also creates an economy. It is a large bank in Scotland that then can pursue and develop its own strategy and its own approaches.
Grant funds like that and the proposal that was in the SNP manifesto for additional support for business or, as I say, loan guarantees, these are all fine but what you are then doing is still basically relying on the commercial banks, which you can match fund, and you get back into the problem of whether you can deal with the commercial banks’ terms. It may not be what is suitable for a lot of economic development in Scotland.
Q152 Chris Law: A last point on this. At a local level, if I was a depositor let’s say in Dundee, in my own constituency, and I deposited in this bank, would I have a sense or an immediate relationship with local businesses that would be benefiting from that investment?
Robin McAlpine: It depends how far down our proposals you go. We have two papers on this. One suggests a structure with a national bank and a range of local development banks. In those, you would probably have local development banks where you could have private customers who put their money in and, yes, the money would stay local.
Interestingly, one of the things about the national investment bank is that we are not very good at recycling. There are large chunks of money that kick about Scotland that we do not recycle very well into Scotland. Pension funds and credit unions are sitting on £0.5 billion that they are not allowed to put into risky investments. One of the joys of our Scottish national investment bank is it is low risk. It is perfect for pension funds and credit unions. It gives you a way to recycle money that is sitting there back into the economy in ways that pension funds cannot put it into riskier bank lending. Credit unions are not allowed constitutionally to put it into riskier bank funds. A national investment bank at a local level, yes, you can create local economies and you can have people in local economies feeding back into that economy in a virtuous circle. At a national level it unlocks big pots, big chunks of money that are currently not being reinvested. It is almost like a conduit for reinvesting money that is there back into Scotland as long as you have enough enterprises and initiatives who can absorb that money.
Q153 Margaret Ferrier: I would like to come to you again, Professor Danson, to talk about the self-employment issue. I think you have raised concerns about people who are self-employed but basically are in work poverty. What is the reason for that? Is it lack of skills, as I think I said in the previous session, or is it lack of finances? One of the areas that you could touch on is people who used to be employees but then find themselves on contracts. Why are companies doing that, having contractualised labour? Is it to save them maybe paying for national insurance contributions and things like that?
Professor Danson: I will not go into great detail about the numbers, but we estimate there is something like a 250,000 unregistered businesses, self-employed, owner/manager enterprises in Scotland. According to work by the Social Market Foundation, the Royal Society and Richard Murphy, somewhere between three-quarters and four-fifths of those earn less than the national minimum wage. They are in poverty. Just think about that. This means about 180,000 entrepreneurs in Scotland are in poverty. Where do they come from? There has been a huge growth. Those numbers have doubled in the last 15 years and they continue to grow. I think it was David Bell who said earlier that we have some of the highest proportions of self-employment in the developed world.
In the paper, we identify two major sources. One is those who are threatened with sanctions or believe they are threatened with sanctions. We have case studies in the wider report, some quite tragic, people with learning difficulties. There is one person, John, who thought he was going to be sanctioned so he became self-employed cutting grass because somebody said, “I will give you a fiver”. You don’t cut grass in the winter; you don’t get many people asking you to mow their lawns. He would be in absolute poverty, but he stays with his parents and they look after him. He also has medical needs and so on, but we have free prescriptions.
I will use my daughter as an example. She has a degree. She works 55 hours a week. She has never got anywhere near paying tax because all of her work is contracted out, not from companies but from the public sector. In days gone by, she would have been a tutor for the local authority, she would have been ComEd or whatever, just tutoring from literally babes in arms up to 80 year-olds. From all the feedback, she does excellent work. If she wasn’t living with us, she would be in poverty.
Those are two of the extremes. They have both health needs and so on. Neither of them are paying national insurance contributions because they are self-employed. They have no maternity or paternity or sick pay rights, no training. It is not about skills: you have somebody with a degree getting fantastic feedback for the work she does. It is not a skill issue, it is to do with the way we have restructured the labour market and restructured it in a way we don’t see elsewhere in the European Union, for instance.
Why do employers do it? It is to save costs. They are not paying national insurance contributions or pension contributions. Neither the guy, John, nor my daughter are building up a pension. Let us look forward a couple of decades or more. If my daughter became more ill, if John’s parents go, who is going to look after them? There is a huge cost to the state and these people are going to be in absolute poverty.
Q154 Margaret Ferrier: Is there a case then for a universal basic income, do you think?
Professor Danson: Yes. I am a trustee of the Citizen’s Basic Income Network Scotland. We have written on that. If you think back to what David and Graeme were talking about earlier and the destruction of a lot of the traditional jobs, the capitalist system is then under threat. If people do not have effective demand, if they don’t have an income to spend the money, who is going to buy the things these robots are making and so on? Also a lot of the jobs that are self-employed are the sort of the jobs that cannot be done by robots, because they are about sharing and caring and teaching and so forth.
I taught for 24 years at the University of the West of Scotland and one of the courses I taught was careers guidance. We went down the technology route a few years ago, “You don’t need careers advisers, you just sit at home with your parents, you go online”. Total disaster. You need somebody to sit down and talk to you as an individual, eye-to-eye, “What are your aspirations? What do you want to do?” That is about that human interaction that David was talking about.
Where does this huge expansion of self-employment come from? It is from people who are threatened with sanctions, whose benefits are coming to an end and so on, which includes women returning to the labour market because they wouldn’t be entitled to benefits because of the household income. On the other hand, it is contracting out the services especially from the public sector as well as the private sector. Those two things have gone on under the radar. I am a professor of enterprise policy. When we spoke to other people who do research on enterprise and entrepreneurship, they had not noticed it, and this is right across the UK. It is not just Scotland.
Q155 Chair: Do you have any figures? We are all fascinated by your evidence about self-employment. This has emerged as an issue in the course of this inquiry and I think today has been really useful to try to explore some of this. Do we have a sense of how many people are in—I don’t know if you would refer to it as bogus self-employment—the poverty levels of self-employment? What sort of people are in there?
Professor Danson: The numbers, there are about 361,000 enterprises in Scotland. As I said, 250,000 of those have no employees, so that is self-employed. Some of them—the sort David was talking about—are retired, they are at a young age, they have skills and can get further work, consultancy, some ex-MPs for instance. They do very well out there. But the figures from the Social Market Foundation, the Royal Society, Richard Murphy said if you take the mean pay as £20,000 a year, then 91.5% of self-employed people earn less than that. The link is in the submission I gave. If you take two-thirds of the mean pay as the measure of poverty, then it is 84%.
Chair: They are staggering figures.
Q156 Margaret Ferrier: Mr McAlpine, going back to my question about universal basic income, just briefly what are your thoughts on that idea? Would that take pressure off the benefit system in a way if it was tax free and not means tested?
Robin McAlpine: People often talk about it being a generational and crossroad to a generational split. We are there in global economics just now. One of the key things is that the assumption that we can keep replacing these jobs with new kinds of jobs assumes that we can keep increasing both demand and supply of natural resources. We are getting to a point where that cannot happen anymore. We lost big industrial jobs and we largely replaced them with service sector jobs, as people owned not four pairs of trousers but 12 pairs of trousers, which is more or less kind of very loosely what happened through the industrialisation, we went to a consumer society. The prospect of owning 36 or 400 pairs of trousers, you cannot just keep expanding the number of clothes you own and you buy, so we are going to see a demand limit, we are going to see a supply limit, we are going to see a large change in technology, and particularly the automation stuff.
In the short term, we have a problem in the West with productivity, with a whole range of areas that are becoming problematic. In the long term, we could shed a large number of jobs. The assumption that you can retrain a lorry driver to be a robotics technician is daft. When people say, “Oh, we will just retrain everybody”—as what, to do what? Somebody said to me that nobody who starts now as a lorry driver will finish their career as a lorry driver. In the next 40 years, nobody will drive lorries. They will all be self-driving electric vehicles. We are seeing massive change.
To put it as simply as I possibly can, one of the reasons why I think the basic income is really important, that is effectively to socialise wages, I can see only three options. Either we socialise the robots, we socialise the wages or we build very high walls and we hope that we are on the right side of the walls, because it is not obvious what source of nutrition and shelter the new economy will create if we do not circulate wealth through employment. There is a serious chance that we can create massive wealth with no means of circulating it to people. A basic income is one mode that you could do that.
Q157 Margaret Ferrier: Going back to what you said about the sectors, would you be in favour then of looking wider rather than us focusing on one particular sector? You have both mentioned that we have gone away from manufacturing and making things. Should Scotland be a nation that actually makes things and go down a different pathway and have a combination?
Robin McAlpine: Absolutely. High-skill services and productive employment are the two areas where skills are a large component of the additional value that is created in the activity in the enterprise. If it is human input that is creating the value, then that creates larger rewards. If it is your skills that are creating the wealth, you get paid more, whereas if all you are doing is taking things out of a box that was imported from China and putting it on a shelf, it is the corporations that are taking the profit from the consumer.
One thing I would say is that Britain has tended to have this thing—and Scotland has followed—where it does either macro stuff, so it will do the one button, “We will reduce tax and everything will rise” but that is not true. People say we don’t pick winners. Yes, we do. We have picked the financial services sector as a winner for the last 30 years and we have thrown all of our policy at it. We have done the same with housing. We have not done it with manufacturing.
One of the things that I like to use as a wee catchphrase is, “The only thing that matters is everything you do”. One of the examples that I give is in Scotland in the 1970s and in Norway in the 1970s, the timber industry was people chopping down trees with axes. We got obsessed by finance and spent the next 30 years growing the finance sector, and today Scotland is still chopping down trees with axes. In Norway, that sector was developed and it is now an advanced materials sector in which they can create cross-laminated timber beams that are almost as strong as steel. The world goes to the Nordic countries for timber products because they are the best at it. The lesson that I have taken from that is there is no industry sector which does not have the potential to grow and become better.
Cleaning, domestic services, care: people think these are just dumb areas, but if you look at even something like retail, if you look at how we do large retail in this country, we tend to have automated brand managers that will manage a whole sequence of big stores and everybody there is just an automaton, putting things on shelves and collecting money. The same companies in the Nordic countries have restructured their workforce so that each floor manager was responsible for stock in their floor. They manage much more of the shop internally. That is because if they have to pay higher wages, they structure the way that they do their business to get the value from the people they are paying higher wages for, whereas we use people like a disposable commodity. They are cheap; we do not need skills; we will structure the skill out of work and we will not pay.
There is no part of our economy that we can be complacent and say, “That is fine. That is just selling cornflakes to the local customers. We won’t even think about that”. That is a delusion. There is nothing that you cannot do better, or perhaps even better. There is no sector that if you will allow co-production of policy, if you will allow sectors to be involved in policy development more effectively, there is nothing that you cannot make better. I am a fan of the concept of no sector left behind. There are just no Cinderellas in the economy.
Q158 Chair: Surely it should be in every Government’s interests to create that type of dynamic economy, to have a productive, high-skill economy? Why aren’t Governments doing it? I have seen in some of your submissions that you believe this is some sort of political choice. Why would Governments choose to put forward policies that would create a low-wage, low-skill economy?
Robin McAlpine: There are a whole range of reasons for this. The upfront headlines are always great, “300 jobs”. The fact that a supermarket creating 300 jobs destroyed 500 jobs in the economy isn’t talked about when you are cutting the ribbon. There is a straightforward easy wins, great stories.
But probably the more fundamental reason is if you look at where profits come from. Profit doesn’t really come from investment in the way it used to. The concept that you take money, resources and people, you combine them and you create something better by combining them and then you sell or trade the thing that you create and that is where your profit comes is not the primary model nowadays. Even the big corporations are largely using their reserves in what is really financial speculation. What we have done is said for paying for public services, large profits from the City of London—a lot of which is illusory, just profits on nominal trades—you get big returns from that and you can sustain comparatively high spending on public services in a comparative economy.
Q159 Chair: We are doing this deliberately then?
Robin McAlpine: Yes. I would particularly pick the 1990s when the Blair Government in particular, but before that as well, had this deal whereby we say, “Any kind of growth, even if it is low skill and low pay, we can then take the tax and use that to redistribute”. That works, and it did work for a long period until you get downturns, when suddenly there is no tax and you cannot redistribute. What you discover is underlying that was a fundamentally low-productivity economy. If you have a rising economy, if you have money coming into the Exchequer, then you can do all sorts of tweaks that make a low-pay economy look not like a problem.
It is the second you hit financial downturns or flatlining and then suddenly you realise, “We don’t have the money for tax credits anymore. We are just going to have to accept the poverty”. I think there was a lot of expedient decisions made over quite a long period of time, and as with everything, as Mike was pointing out, the difficulty is once you have—it is the super-tank, I think—a big system, getting back out, reversing back out of that again is tricky. We saw in 2008 that there was a number of insolvent banks, but because the system is so reliant on them, there was no way that you could, in a timescale that wasn’t going to be devastating to the economy, do anything other than prop them back up again.
That is the problem. Once you go too far into creating an unbalanced economy, the very nature, that it is unbalanced, means you need to keep propping it back up again. I would argue that lots of places were not badly hit by the financial crisis. The places that were not badly hit by it were the ones that had a more balanced economy, because finance didn’t drag the rest of the economy down to the extent that it did here.
Q160 Chair: Could Scotland become this productive, high-skill economy then? If Scotland can become this vision that you have about how we could have this productive high-skill economy, how do we do it?
Robin McAlpine: You have to disincentivise the other thing. First of all, if everybody has to pay a decent wage, then suddenly humans don’t become disposable commodities. If you are paying a proper wage to someone, bringing them in to do utterly routine work, which you could better automate, doesn’t make sense. There is this idea that we have abandoned protectionism in the economy and that we no longer pick sides. This isn’t true. Every decision will favour one thing or another, by its nature. What we tend to do is favour the things that we have. If we more favour the things that we don’t have, they would have a better chance to develop and to sustain.
We can do this, but you need to make a decision that you are actually going to rebalance the economy. I do not think there is an economist in the world after 2008 who did not say, “We need to rebalance the economy”. I find it very difficult to see any concrete evidence that anything was done to actually do it. They said, “We will prop up the banks. We will fix this and then we will come back and rebalance the economy”. What they really did was they propped up the banks and went on holiday.
Q161 Chair: I just say this as a way of closing up this session. There is the fair work framework and I read in your submission that you have several criticisms about the framework that are outlined by Professor Danson about the Scottish Government. Could you go over and reiterate to this Committee what your problems are with what has been attempted to be achieved by the fair work framework?
Professor Danson: It was Gregor Gall in particular who wrote this part. He did not have a problem with what was being proposed. I think it was really that it was going to be a voluntary basis, a voluntary code. As we know, this laissez-faire attitude underpins a lot of the changes that have happened. It does not work and can lead to unintended consequences or no consequences. I think it was the 1820s was the first time this Parliament debated why the UK was falling behind Germany in economic development. It was because the Germans recognised that in training and education markets, if the market fails you need to intervene.
A lot of the developments in the last few years, the last 20 or 30 years, have been about that laissez-faire attitude: for the UK to benefit from globalisation, we need to deregulate the financial markets and so on and then other things follow from that. Taking all that on board, our problem with the fair work framework was not what was in the framework, apart from this would be a voluntary code, because we know that businesses will not change. You need to encourage them, incentivise, regulate them and legislate. As I said, we saw from the Commonwealth Games intervention there that a voluntary plus code led to real positive changes. Back that up with legislation so that all public procurement and other contracts are then bound by that and it would start to move us into a period of transition.
Q162 Chair: I am presuming for both of you that workplace democracy is a very important issue and something that should be realised within all the sectors of the economy. Do you have any views about how that could be achieved and are there any good best practices or good models that you have in mind?
Professor Danson: Yes. Ewart Keep, who is a professor at Cardiff and now Oxford, who has advised the Scottish Parliament and Skills Development Scotland and spoken in here as well, has done an awful lot of work on this. He points out that the states that have the highest degree of trade union membership, the highest degree of worker involvement on the shop floor—and Robin gave some examples there—pay the highest wages, have the highest tax rates are also the most successful and innovative in the world. Sweden, Denmark, Finland appear at the top of most of the league tables for where do businesses like to be, despite the fact there is high wages, high taxes.
I was speaking in Norway a couple of years ago and one of the business leaders came and spoke to me, because they can’t understand what the hell we are doing in the UK. He said that they had a major problem in the cleaning industry, that the big corporations were not pleased with the service they were getting from cleaning companies so they whacked the minimum wage up to something like £15 an hour. The companies went mental at this: they had to invest in capital equipment, invest in their workforce and so on. The quality went up, the companies who were buying these services were satisfied, but it was not done through a national minimum wage, it was done through wage bargaining and wage councils and so on.
Q163 Margaret Ferrier: Just a supplementary on that about workers’ rights. One of the things I worry about is Brexit. If we do come out of the European Union, there are a lot of laws on workers’ rights. Do you feel that there will be a downgrading or that the UK Government would do away with some of the rights? We heard earlier about the working time directive for one. My fear is that there will be a downgrading of workers’ rights, based on the fact that the UK Government are thinking of doing away with the Human Rights Act and bringing in a British Bill of Rights, and also what went on when they tried to get the Trade Union Bill through.
Professor Danson: As we say in the first paragraph of the submission, there is lots of work on this. As I have just said, the countries with the strongest rights for workers, with the highest rates of tax, with the most intervention top the innovation scoreboard of the EU every year. The top four countries are Finland, Denmark, Sweden and Germany consistently, year after year. From the World Trade Organisation: where does big business say it wants to set up production facilities? It is in those countries, despite the fact of the high tax and so on. Yet what we have for the last 30 or 40 years, from the late 1970s onwards, is this idea that deregulation and flexible labour markets, undermining trade union employee rights is good because that lets the market succeed. Markets fail and, even worse, sometimes markets work. The way they work is by driving down rights, wages, income, demand and so on. It is a downward spiral.
Robin McAlpine: It is also worth mentioning that it is good to be reminded we are already the second worst in Europe. The only country in Europe with a lower score in the European Trade Union Index than Britain is Lithuania. We are really quite bad just now. There is a tiny bit of me that wonders if the current Government take a slightly economic populist approach and think that at this point attacking workers’ rights, which is kind of the Brexit vote—it might not be what they do—but I also want to say it is not just about rights.
It took somebody to explain to me why places with better employee democracy have more innovation. I didn’t understand in really innovative countries that innovation is not done in laboratories. In Denmark, Germany, Sweden, if you have two guys standing around a conveyor belt and they suddenly realise, “If we turn this conveyor belt in the opposite direction, we could get twice as many people around it and double productivity” they take that to their shop floor, union rep, to their board. They will have members on the board; in front of the board will be employee people. They put a proposal to the board; the board considers it; they move the conveyor belt; they double the productivity.
In Scotland, in Britain, two kids standing around that conveyor belt will be on zero hours contracts on minimum wage. They are not dumb. They can work out that turning it around this way would double the number the people they get around it, but what is their incentive and what is their route for taking that innovation to their company? It is important to understand it is not just about the wages and it is not just about rights. Good industrial democracy is good for the enterprise. That is why Germany is innovative.
There is an innovation map of Scotland that somebody showed me. It has little bursts of brightness around about the cities, largely around where the universities are, in the clusters that are around universities, and the rest of it is quite low innovation. If you look at an innovation map in Norway, there is a couple of dark spots. I said, “What are those?” and they said, “Mountains”. That was when I suddenly realised they have very even, consistent innovation all over the economy. This is what I mean by every industry can improve. Real innovation that makes a real difference is when somebody realises if they do their delivery run in a different order, they can do it faster. You cannot do that in a laboratory. You need a delivery driver to realise, “Actually, you know what, I am going to take a different route and I can get more in”.
But I had a delivery the other day and the guy says, “Can I sit in your drive for 15 minutes?” and I said, “Why is that?” He said, “Because if I turn up too early for my next delivery, I will be fined”. He sat in my drive for 15 minutes listening to the radio. I said, “But have you ever talked to your boss?” and he said, “What, you think we have any say over the delivery policy?” That is what is wrong with this economy, we think our employees are all dumb and only the managers have the genius to work out how to drive a van.
Q164 Margaret Ferrier: So we need to put more value on the employees’ input and then of, course, there will be more productivity as well?
Robin McAlpine: We have to give them routes and we have to make them feel like they are vested, that they are not a consumable but they are part of the enterprise.
Professor Danson: Just one quick statistic. There was something like 80,000 or 100,000 Poles came to Scotland after EU enlargement. From various sources, they worked out two-thirds of them had degrees or equivalent and yet most of them were employed gutting fish, making beds, working in hospitality. The Scottish economy is not set up to use skilled labour, educated labour, so there is a real basic structural problem in the economy.
Q165 Ian Murray: I wonder if it is worth us turning this conversation a little bit on its head, on the basis that we have talked about Government intervention, we have talked about what has happened over the period of a number of decades to create the economy that Scotland has. Is it a cultural issue as well about consumers, about us all? The public in general—and these are all generalisations—do not want to pay more tax. They don’t want to pay more for their chicken or for their bottle of whisky. That has been the driver of supermarkets and driving down costs, so they can drive down prices and they can keep consumers happy. There are very few retailers—every sector would also apply in this particular context—that could say, “We are going to pay our employees X, we are going to pay our suppliers Y and we are going to make sure that that is just passed on to the consumer and you will have to pay more”. I am not quite sure that kind of retail would be successful in that culture.
Is there a cultural change you have to make as well, to say to consumers, and to all of us as the public, “In order to make this change, you are going to have to try to take a little bit of a step outside your own comfort zone of low tax, low price, easy access”?
Professor Danson: You can think of anecdotes and so on. You can think of certain class differences, if you are on a higher income and you have the surplus to be able to choose to get organic rather than bog standard from the supermarket and so on. Talk to one set of people and they say, “Yes, we would be willing to pay a bit more. We recognise that malt is better than grain” and so on. But actually put them into the big supermarket and there will be gradation. There is a matter of education, of thinking about the wider society and the impact of recognising those. Those are all difficult.
Q166 Ian Murray: I disagree with you to a certain extent, because people say they will do it but then don’t. Everyone says, “I am happy to pay extra tax for better public services” but they hope that their neighbour does it and not them.
Robin McAlpine: Can I also pick up, and I will keep this incredibly brief, because I am about to miss my plane. We signed up to a daft deal that nobody knows we signed up to, which was, “Okay, we are going to suppress your wages badly to become one of the lowest-paid developed economies in the world, but on the upside, we are going to sell you really cheap, utterly shit sausages”. That is what happened here. If you look at the Nordic countries, the quality of their food, their bread, their clothing and their infrastructure is all much better. Their tax is higher and yet they still have more disposable income.
Ian Murray: It is a cultural issue.
Robin McAlpine: It is largely an economic issue. If you have suppressed wages and you struggle, you will buy the cheapest sausages you can. If you are comparatively affluent, you will buy stuff that tastes good. This is part of the point. We have to see this as rising. In Norway you buy your bread from a local baker. If the local baker’s window breaks, they get a local glazier in to fix the window. The local glazier will be much more likely to use a local electrician and so on. What that does is everybody in that economy ends up with higher income because much more of it is there and much less is taken away by international corporations and service companies and so on. People become more wealthy and suddenly you look across the road and say, “That bacon looks brilliant”. That is the point. Given the natural order of things, people do not eat horsemeat sausages. That is not what they choose if they are able to choose.
Ian Murray: They certainly do in Sweden.
Robin McAlpine: Sorry, the horsemeat sausages were probably of better quality than some of those that were just sprayed down carcass meat, but I try not to think about that.
Chair: Possibly, but we will leave that. Anyway, we will skip over very quickly Mr McAlpine’s lack of parliamentary language in his last contribution. We don’t want to deprive him obviously of his flight back to Scotland. Can I thank both of you for what has been a fascinating session? It has been really helpful to this Committee to learn some of the bigger concepts and bigger themes behind some of the issues that we are looking at. We are very grateful for your first appearance for your respective think tanks, even though Professor Danson has said he has appeared before this Committee. Thank you ever so much for your attendance today.