Written evidence from Trades Union Council (TUC)

(GPP 71)

Introduction

The TUC is the voice of Britain at work. Our overall objectives are to raise the quality of working life and promote equality for all. We seek to be a high profile organisation that campaigns successfully for trade union aims and values and promotes trade union solidarity. 

The TUC welcomes this opportunity to contribute to the Business, Innovation and Skills Committee inquiry into the Productivity Plan. We agree with the comments from the Chair of the Committee, Iain Wright MP, in the press notice for this inquiry: “Productivity is the pressing economic challenge of this Parliament and tackling the productivity gap is crucial to the UK’s economic competitiveness and to improving workers’ living standards”.

The TUC Submission

This submission will address the four questions set out by the Committee in relation to this inquiry. We will not seek to address every aspect of the Productivity Plan. Instead, we will focus on those issues that we believe to be most important and, in some cases, we will fill in gaps.

1. Do you agree with the Government’s assessment of the reasons for the UK’s productivity slowdown (as outlined in the Annex to the Plan)? Has the Government acknowledged all of the main causes of the UK’s poor productivity growth?

Annex A to the Productivity Plan is divided into four sections. A consideration of the UK’s historical performance is followed by a discussion of the so-called ‘productivity puzzle’, which considers the gap that has developed between the UK’s actual productivity performance and the level implied by the pre-crisis trend. Annex A then considers the twin pillars of the Government’s approach to increasing productivity, i.e. encouraging long-term investment and building a dynamic economy.

The UK’s Historical Productivity Performance

Regarding the UK’s historical productivity performance, the TUC broadly agrees with the details set out in Annex A. We note the figures quoted in paragraph A4, which we reproduce for convenience here: “The ONS estimate that UK output per hour is 17% below the G7 average, 27% below France, 28% below Germany and 31% below the US. Matching the productivity of the US would raise GDP by 31%, equating to over £21,000 per annum for every household in the UK.”

We also note the possible explanations for the higher levels of productivity in competitor countries set out in paragraph A5, i.e. higher levels of investment, particularly in regard to research and development (R&D), higher skill levels and, in the case of the US, more rapid diffusion of new innovation and superior management techniques.

The ‘Productivity Puzzle’

The UK faced a productivity challenge before 2008 that has worsened since: productivity in the UK is 17 per cent lower than it would have been had it continued to increase during and after the financial crisis at the average rate for 1982 to 2007. In the 1980s productivity grew at an average rate of 2.34 per cent per annum (output per hour worked, quarter on equivalent quarter of previous year), in the 90s at 2.21 per cent and in the 00s up to the recession at 2.27 per cent; since the recession, the equivalent growth rate of has been negative: – 0.04 per cent.  

The economy is still under-performing. The manufacturing and construction industries remain significantly smaller than they were in 2008, and manufacturing is now in decline again. Instead of the investment- and export-led growth promised by the Chancellor in 2010, investment as a share of GDP has fallen to levels last seen in the 1950s, and GDP per capita is still slightly below its pre-recession level.

Although employment rates are high, the real value of earnings has fallen. Despite historically low levels of inflation, increases in average weekly earnings only crept above prices earlier this year. The average employee remains £50 a week worse off than they were before the crisis. One in five workers is paid less than the living wage. While job levels have risen, the quality of work has fallen, with the growth of under-employment and precarious work creating widespread employment insecurity and in-work poverty. Part-time self-employment is up 400,000 since the crisis.

With the employment level 4.3 per cent higher than it was pre-recession (over one and a quarter a million) and weekly hours worked 4.8 per cent higher but output still slightly below the pre-recession peak productivity per worker and productivity per hour are still necessarily lower. Fewer workers are unemployed, but more suffer lower earnings, worse working conditions, insecurity and casualisation. In other words, the labour market is adjusting to weak growth through price rather than quantity: low productivity is a symptom of inadequate growth.

The TUC believes that the economic priority should be a stronger recovery, which must be supported by both fiscal and monetary policy. Severe government spending cuts have reduced demand, held back the recovery and mean that we are still failing to achieve our full potential after more than seven years of recession, stagnation and insufficient growth. The ‘puzzle’ over recent years is then simply resolved as driven as much by weak demand resulting from spending cuts as structural deficiencies. The National Institute of Economic and Social Research have also recently acknowledged the importance of demand in explaining productivity outcomes.

Ultimately any solution must tackle demand and supply in tandem. This country must address long-standing supply-side problems in finance and investment, skills, industrial policy, transport and the problem of poorly managed companies. But the immediate priority should be to increase output. Prices are stable, indicating that there is still spare capacity that can be utilised without risking accelerating inflation; interest rates are low, especially on government debt, pointing to a golden opportunity for investment in public infrastructure. We therefore believe that the immediate priority must be not just an end to austerity but a boost to public investment.

The TUC would agree with the twin headlines of the Government’s longer term approach to raising productivity, i.e. encouraging long term investment and promoting a dynamic economy; it is on the detail of Government policy that we part company, in some cases very strongly.

In our view, the Government is taking its previously developed economic policy priorities and simply claiming that they will lead to an increase in productivity, even when they are unrelated to the productivity challenge. For example, there is no particular reason to believe that extending the Right to Buy to housing association tenants will boost investment. It is highly contentious to suggest that reducing the household benefit cap  will boost productivity. Cutting red tape may be desirable – it rather depends what we are defining as “red tape” – but some regulation that requires employers to behave properly and avoid cutting corners could be productivity enhancing, not the other way around.

Furthermore, many of these policy priorities are those that have been pursued for many years and that have demonstrably not led to increased productivity. If the Government is seriously committed to tackling this problem, it must look again at its economic and industrial strategy. In particular, if the UK’s productivity performance is lower than that of France, Germany, the US and the G7 in general, the Government would be well served by looking at those actions undertaken by better-performing governments and seeking to emulate them.

2. One pillar of the Government’s Plan is to increase “long-term investment”. It outlines eight areas with specific measures to increase productivity.
1. Why has the UK’s long-term investment been so low up to now?
2. How can we ensure that the measures relating to long-term investment in the new Plan will contribute to productivity growth?

Long-Term Investment

There is no one reason for the low level of long-term business investment. Part of the problem is the short-termism that is endemic in UK boardrooms, an attitude that is sometimes reinforced by our institutions.

The TUC believes that corporate governance reform is essential to address the problem of short-termism. In corporate decision-making, this short-termism derives from the UK’s system of corporate governance and company law. In theory, directors’ duties requiring them to prioritise the interests of shareholders should benefit other stakeholders in the company, including employees, because the long-term interests of all groups overlap. In practice, even so-called long-term investors increasingly rely on strategies based on share trading, rather than long-term shareholding, to generate returns and thus shareholders may encourage company boards to pursue short-term strategies to raise the share price, rather than investing in long-term, organic growth.[1]

The TUC believes that directors’ duties should be reformed so that directors are required to promote the long-term success of their company as their primary duty. Serving the interests of shareholders and the stakeholder groups currently included in directors’ duties should be secondary to this central aim. In addition, shareholders’ corporate governance rights should be subject to a minimum period of shareholding of at least two years.

In addition, the TUC believes that the time has come for the UK to recognise the interests and rights of other stakeholders in corporate governance, and in particular those that companies often say are their greatest asset: their workforce. The UK is currently in a minority of countries across the EU that has no rights for the representation of workers in corporate governance. Research shows that countries with strong rights for workers’ participation – defined as widespread rights and practices for board representation, workplace representation and collective bargaining – do better than those with weak participation rights on a range of important measures, including R&D expenditure, employment rates and educational participation among young people, while achieving lower rates of poverty and inequality[2]. The government should therefore also move towards introducing a mandatory system for worker representation on company boards in UK listed companies.

On other issues relating to long-term investment, the TUC has welcomed the establishment of the British Business Bank but believes it is far too limited in scope. The Bank should be able to invest directly in infrastructure projects and provide long-term financing for small and medium sized businesses across the whole economy. The British Business Bank needs significantly more capital, full borrowing powers and much wider remit.

The introduction of the Green Investment Bank (GIB) under the Coalition Government was also a welcome development. With its £3.8bn initiation capitalisation it has a vital role to play in supporting our decarbonisation commitments and already some GIB-supported projects have realised over six times the amount of capital committed. We are particularly concerned, therefore, that this potential success may be put at risk by the proposed privatisation of the GIB.

Moreover, there is much more that could be done. With an enhanced capital base of around £15bn the GIB would be able to kick-start £60bn worth of investments, or more than half the minimum needed to modernise Britain’s crumbling energy infrastructure.

Business Taxation

The Productivity Plan states that “high rates of corporation tax distort incentives and stifle business investment.” It notes that during the last Parliament the main rate of corporation tax was cut from 28% to 20% and that the Government seeks to cut corporation tax to 18% by 2020.

Yet nowhere does it seek to prove its assertion that high corporate tax rates (not that 20% is particularly high) distort incentives and stifle investment. This is simply stated as fact. Indeed, if the cutting of corporation tax from 28% to 20% in the last Parliament did not lead to an increase in investment it is hard to argue that a further cut would be any more effective. Moreover, France and Germany, with their higher levels of productivity, also have higher levels of corporation tax, further undermining the Government’s case.

The TUC does not support high taxation, we support fair taxation, with all of us, including the better off and companies paying their share. Where is the evidence that the savings to companies of lower corporation tax – a cut to 18% could save business £6.6bn, according to the Productivity Plan – would be invested? How do we know it would not simply lead to larger dividend payouts to shareholders? It is for this reason that the TUC would prefer to see specific tax cuts for those companies that do invest, but not for those that do not. 

Industrial Strategy

The TUC believes the real reason for higher levels of productivity in France and Germany can be found in the skills investment, the long-term industrial strategies and the culture of social partnership that exist in those countries. It should further be noted that the United States, often held up as the prime example of neo-liberal economics, also pursues an active industrial strategy. For example, as the economist Mariana Mazzucato has outlined, Apple Inc. received its early stage funding from the US Government’s Small Business Innovation Research programme and all the technologies which make the iPhone ‘smart’ are also state funded.[3] Even the CBI states: “Like the UK, the United States doesn’t explicitly engage in industrial strategy. Scratch beneath the surface, however, and it becomes clear the US model is built on support for radical innovation, delivered primarily through public procurement, combined with further incentives such as R&D tax credits.”[4]

Social Partnership

In 2011, the TUC published ‘German Lessons’, which sought to show how Germany had developed its industrial economy so successfully in the post-war years. Central to the German success story has been the role of social partnership. This is a world away from the excessive approach to trade unions being pursued by the current Government, most obviously in the form of the Trade Union Reform Bill.

Contrast the UK approach to that of Germany. Part of the research for ‘German Lessons’ was carried out at Volkswagen, which overtook Toyota to become the world’s largest motor company by sales in the first half of 2015. Interviewed by the TUC, Thymian Bussemer, from the Industrial Relations Department at Volkswagen, said:  “This [the Social Market Economy] is very strong in Germany, which means that there is a very close interaction between enterprise, especially big ones, the welfare state, the unions. We saw that in the crisis. The main contribution of the German state is to provide stable industrial relations, and to provide the welfare state which linked up to the companies.”

Evidence highlights the positive role that unions also play in UK workplaces where they are recognised. According to the latest Worklife Balance Employer Survey, published by BIS in December 2014[5], union workplaces were more likely to offer a full range of flexible working practices including job shares, term time working, compressed working weeks and annualised hours, policies that make it easier for parents to contribute to the workforce. More than half of unionised workplaces provide enhanced maternity pay compared with 35 per cent of non-unionised workplaces, while union workplaces were also more likely to provide support for women returning to work from maternity leave.

Research commissioned by the Department of Trade and Industry (DTI, now BIS) in 2007 found that unionised workplaces had lower voluntary exit rates which led to an estimated saving in recruitment costs for employers of £22-£43m per annum[6].

Negotiations between employers and unions can facilitate innovation and change. In a recent article a leading academic, Professor David Bailey from Aston Business School, acknowledged the important role which unions play in improving the competitiveness of the UK motor industry:

“I would also add another factor for the industry’s success – the flexibility and hard work of workers and unions in pulling out all the stops to help make the UK a competitive place in which to assemble cars and source components (something the media all too often fails to recognise).”[7]

Of course, the role of trade unions is sometimes to fight for decent employment rights, which protect working people against abuse. This is a matter of justice and fairness at work, but it also promotes sustainable and equitable growth. Good employment rights boost workforce morale and motivation, which has a direct impact on productivity and profitability. Workers who feel secure in their employment are much more likely to embrace change and developments such as the introduction of new technologies or working practices. Rather than trying to use the negotiations over the European Union to limit or reduce rights at work, the Government would be better advised to recognise the contribution that fair treatment at work makes to securing high productivity growth.  

In the TUC’s view, perhaps the single most important thing the Government could do to boost productivity would be recognise that workers and their representative organisations are key partners in delivering high productivity growth.

Skills

The Productivity Plan highlights several weaknesses in the UK’s skills base that have contributed to its longstanding productivity gap, including serious shortfalls in intermediate professional and technical skills. In essence we need to replicate the UK’s success in recent decades at expanding our graduate population by revitalising apprenticeships and higher-level professional and technical courses. However, delivering a new coherent vocational framework along these lines is easier said than done and a key challenge remains convincing individuals and employers of buying into this vision.

In spite of a broad consensus that apprenticeships are a “good thing”, only 11% of UK employers recruit them, compared to three to four times as many in other European countries that have extensive high-quality apprenticeship systems. Also, too many of our young people (and their parents) remain to be persuaded of the value of apprenticeships, Higher National Diplomas and other higher-level vocational courses, which do not have the equivalent status that they had in society and the labour market some decades ago.

There is not a silver bullet that can achieve change overnight, but the TUC has welcomed some recent policy announcements such as the Apprenticeship Levy. In addition to increasing revenue, it will prove a powerful catalyst for incentivising much greater investment in apprenticeships and skills by employers that currently largely rely on recruiting skilled labour.

The introduction of the levy also offers an opportunity to address some other key challenges, including continuing concerns about the quality of apprenticeships and the need for all apprenticeship frameworks to reach the “industry standard”, as defined by employers and unions. As alluded to earlier in this submission, other countries (e.g. Germany) avoid these pitfalls by assigning ownership of apprenticeship quality and standards to employers and unions through social partnership arrangements.

The scale of the UK’s productivity challenge also means that we need to empower the existing workforce to improve their skills. However, government funding for adult FE and skills has been cut back heavily since 2010 and it is notable that independent advisors to government, such as Professor Alison Wolf, have argued that these funding cuts are untenable in the long-term.[8]

Government also needs to pay much more attention to how training and skills are influenced by other external factors in the workplace, especially the impact of employee engagement in maximising skills take-up and improved utilisation.  For example, a recent research report commissioned from Leeds University by the TUC showed that union members are a third more likely to receive regular training, and that union engagement in learning and skills in the workplace is directly associated with higher wages, better job security and improved organisational performance.[9]

Finally on skills, any plan to boost productivity must consider the demand for skills. The UK has too many companies that are happy to remain in low skill, low specification industries, rather than seeking to move up the value chain. Addressing this challenge goes wider than skills policy, requiring a social partnership economic model based on an ambitious industrial strategy designed to foster high skill industries.

Sustainability

The Productivity Plan is right to say that energy underpins the operation of a successful and productive economy, and that we need a better plan to meet the triple challenge of security of supply, affordability and sustainability. It is, therefore, unfortunate to say the least that since the General Election, the Government has announced at least 11 policy reversals in areas of sustainability policy that have drawn criticism from industry and will, in the TUC’s view, undermine investor confidence and jobs growth and will slow the pace of clean technology development. Policy reversals include scrapping the Zero Carbon Homes building standards, privatising the Green Investment Bank, applying the Climate Change Levy to renewable energy, cutting renewable energy subsidies for onshore wind, cutting subsidies for larger solar power schemes, and cutting subsidies for small scale renewables.[10]

As noted above, a large part of the solution to the UK’s productivity problem is to upgrade currently low skill, low value sectors and to build high skill, sustainable, long-term industrial sectors that create quality jobs.  Again, Germany has shown the way with its ambitious ‘Energiewende’ programme, which seeks to build a thriving industrial economy based on renewables and energy efficiency. Roughly 370,000 Germans now work in the renewables sector. The TUC disagrees with some aspects of the ‘Energiewende’ programme – we do not seek a nuclear free energy policy, for example – but the role of government in driving industrial and economic change is vital to the success of Energiewende and it has important lessons for the UK.

Science and Innovation

The Productivity Plan, quite correctly, highlights the importance of high-quality science and innovation. The TUC welcomed the freezing of the science budget in cash terms under the previous government. A freeze in cash terms is, of course, a cut in real terms, but we recognise that in the context of much tougher spending cuts taking place elsewhere, science did relatively well under the Coalition Government. We also welcome the new Government’s promise to deliver on the science capital commitment, investing £6.9bn in the UK’s research infrastructure up to 2021.

It is an inescapable fact, however, that widespread government spending cuts have had a detrimental effect on science in general and the science workforce in particular. A survey by Prospect, the union for science professionals in the public and private sectors, conducted in June 2015 found that budget cuts and flatter organisational structures were seen as key barriers to career progression in Science, Technology, Engineering and Mathematics (STEM). Nearly a third of respondents said they would consider moving to a different employer for better career prospects, better financial rewards, to secure more interesting work or to avoid short-term appointments. Of these, 80 per cent were looking for opportunities outside science. To put it bluntly, if we do not protect our science workforce, including in the public sector, we will lose it. If that happens, the cost to productivity and to wider economic success will be massive.

3. The second pillar of the Government’s Plan is to encourage a “dynamic economy”. It outlines seven areas with specific measures to increase productivity.
1. What are the main weaknesses of our economy, in terms of dynamism, which are supressing our productivity?
2. Do the measures introduced in the plan address those weaknesses and are they appropriate?

The TUC will address one aspect of the ‘dynamic economy’ section of the Productivity Plan, relating to the UK as a trading nation. Our focus on this one area does not mean we have no opinion on other sections – although in some cases, as noted in the introduction to this paper, it is difficult to see how these sections fit into the productivity agenda.

For example, under the heading, ‘A higher pay, lower welfare society’, the Productivity Plan says that the government will “further reduce the household benefit cap alongside a four year freeze in working age benefits (except disability and statutory payments)”. A freeze in working age benefits will simply lead to poorer workers. In extreme cases, it could lead to people going to work hungry or cold. It is hard to see how this would boost productivity. The opposite is more likely to be true.

International Trade

On the UK as a trading nation, the TUC agrees that the Government should seek to build stronger trading links with emerging markets, especially China, India and Brazil. The TUC’s 2013 report, ‘The Way of the Dragon’[11], explored how the UK could take advantage of China’s entry into the world economy, along with the growing economies of South Korea and Singapore. Among our conclusions, we called for a major study of where the UK could export to China, focusing on growth areas of the Chinese economy whose needs Chinese firms themselves cannot meet and where UK companies have the skills, technology and experience to meet this gap in the market. We also called for more teaching of Mandarin in the UK education system.

The TUC has called for an expanded budget for the Technology Strategy Board (now Innovate UK), as our innovative businesses will make the best contribution to our export performance, and for fees for overseas students to be re-examined, with the view to make the UK one of the best destinations in the world for attracting overseas students. In relation to countries such as China, today’s students are tomorrow’s cultural and ambassadorial links. In addition, the TUC has recognised the risk of the UK’s withdrawal from the EU to our future role in the global economy.

4. Overall, does the Plan adequately address the main causes of low productivity in the UK (as discussed in question 1) and will it have the desired results?

Conclusion

In conclusion, the Productivity Plan partially addresses the causes of low productivity in the UK. It could, however, be boosted in three ways:

First, the Government should address macroeconomic policy as well as supply side initiatives. The TUC believes that a more supportive fiscal policy is necessary to boost productivity. Severe government spending cuts have reduced demand, held back the recovery and mean that years after the financial crisis we are still failing to achieve our full potential.

Second, while it is right to focus on skills, science and innovation, and long-term investment – as improving the performance of UK plc in these areas would have a major impact on productivity performance – Government policies in those areas are not always the right policies. The TUC recommends the policies set out in this submission if we are to really address the problem of productivity.

Third, alongside these issues, the Government should address a number of other key areas. Corporate governance reform as part of the investment agenda is one such area, a modern industrial strategy is another, the provision of decent employment rights is a third. We also need to address the culture of short-termism that exists among too much of the UK’s corporate world.

It is particularly important that the Government learns key lessons from those economies that have delivered higher productivity. Germany’s social market model, where workers and their representatives are treated as partners in the business, could be hugely positive for UK productivity performance. The TUC would urge the UK Government to build such an economy.

10 September 2015