Written evidence from the TUC (ISG 112)

1. Introduction

1.1        The TUC is the voice of Britain at work. Our overall objectives are to raise the quality of working life and to promote equality for all. Representing more than 5.5m workers in 52 unions, we seek to make representations to government, campaign on workplace issues, represent working people on public bodies and undertake a range of activities on economic, employment and skills related issues.

1.2        The TUC has championed the need for an active industrial policy for many years. Our publication, ‘An Industrial Strategy for the United Kingdom’, published in 2005, was followed by ‘German Lessons’ in 2011 and ‘The Way of the Dragon’ in 2013, the latter two of which sought to develop UK responses to the economic and industrial strength of Germany, China and wider East Asia. We have argued in support of strong policies to boost science and innovation, and we have supported various government initiatives in the area of industrial strategy , such as ‘New Industry, New Jobs’, as promoted by Lord Mandelson, and ‘No Stone Unturned in Pursuit of Growth’, produced by Lord Heseltine.

2. What is an industrial strategy?

2.1        An industrial strategy, as the term is commonly used, is not simply any strategy that addresses issues within industry. Industrial policy is used when the government wants one thing but the market, left to its own devices, will deliver something else. In other words, industrial policy implies an intervention or a series of interventions that shape, rather than respond to, market behaviour.

2.2        From the end of the Second World War until the 1970s, Conservative and Labour Governments supported the use of industrial policies. Such policies fell out of favour, in an Anglo Saxon context, at the end of the 1970s.  . Other European countries, notably Germany, continued to support industrial policies, which have also been credited with the spectacular economic growth of China and the so-called ‘Four Little Dragons’ of Singapore, South Korea, Taiwan and Hong Kong. [1]  

3. Do we need an industrial strategy?

3.1        Having said this, it is legitimate to ask if an industrial strategy is either necessary or desirable in 2016. The TUC takes a simple approach to answering this question: in our view, if the economy, left to market forces and without government intervention, is producing the economic and industrial strength that the UK needs, there is no need for an active industrial policy. Sadly, the evidence shows that this is not the case. We believe the UK economy currently produces too many low paid jobs, is characterised by too low a level of productivity, and sustains an imbalanced economy characterised by an overheating London and the South East alongside significantly weaker levels of growth in many of the English regions. Indeed, we believe that the failure of our current system to provide enough decent well paid jobs and wider economic opportunities in the English heartlands was one of the reasons for the disillusionment that led some to vote to leave the European Union on 23 June.

3.2        As we set out below however, there is nothing inevitable about these outcomes; many other developed economies out-perform the UK, managing more productive economies, delivering higher paid jobs, high employment, and a more even distribution of growth.

3.3        The graphs that follow highlight the UK’s problem in terms of pay and productivity. The first graph shows that Britain has the sixth highest level of low pay in the OECD. Comparable European countries, such as Germany, Spain and Italy, have lower proportions of their employees earning less than two thirds of the median wage than does the UK:

Proportion of employees paid less than two thirds of the median wage, 2012

Source: OECD (2016), Wage levels (indicator). doi: 10.1787/0a1c27bc-en (Accessed on 23 September 2016)

3.4                                                                                             The next graph, measuring GDP per hour worked, shows the UK’s productivity problem. As the graph shows, UK productivity is lower than that in Italy and Spain, and much lower than in Germany and France.

Labour productivity, 2014 GDP per hour worked, total economy, US dollars, current prices and current PPPs

Source: OECD Productivity Statistics (database), February 2016.

3.5        Regarding regional disparities, according to Office for National Statistics figures published by the House of Commons Library in August 2016, between the years 2010 and 2014, the London economy grew by 24 per cent, compared to growth of just 10.7 per cent in Yorkshire and the Humber. The UK average was 16 per cent growth[2]. Moreover, the UK is also one of the most regionally unequal nations within Europe, with regards to GDP per capita and household income, as shown in the following graph, which sets out the size of the GDP per capita gap between the richest and poorest regions of each nation. As the graph shows, the gap in the UK is the fifth largest of the countries for which we have data, with only Belgium, Hungary, the Czech republic and Slovakia seeing such large regional disparities.

GDP per capita gap between richest & poorest region

Source: http://stats.oecd.org/Index.aspx?datasetcode=REG_DEMO_TL2

4. The Objectives of an Industrial Strategy

4.1 In the light of the UK’s relatively poor performance on pay and productivity, the TUC seeks an industrial strategy to rebalance our economy. The success of that strategy should be measured by whether it:

•              Delivers the industries that the UK needs to remain internationally competitive in the age of globalisation;

•              Delivers an increase in decently paid jobs, raising the level of wages across the country;

•              Does so in a way that delivers balanced growth across the country, minimising the influence of where you live on your chances of decent living standards; and

•              Is directed towards meeting the urgent necessity of tackling climate change, in particular, the commitments we have signed up to under the Paris treaty.

5. What should the government do to achieve these goals?

5.1 First, Government can use its power to set a direction of travel, giving clear indicators about the kind of economy it wants to see, the areas where it believes action is needed, and the strategies it intends to utilise to help achieve that goal. Government should aim to build a strong consensus around this strategy, working with businesses and unions.

5.2 Having set out that goal, there are five key areas in which government can influence the extent to which it is achieved:

• The level and type of infrastructure that is supported through government investment;
• The skills of the workforce and the institutional arrangements that enable those skills to be effectively utilised in the workplace;
• The terms on which British businesses trade with the rest of the world;
• The taxation regime faced by companies, and the incentives it offers; and
• The way that the government influences economic activity directly through procurement of goods and services.

Below we set out the issues in each of these areas that we believe should be considered as the Government develops its strategy, turning first to the strategic direction.

6. Set a direction of travel, and build consensus for a strategy

6.1. Under the Coalition, the government identified a number of strategic sectors where “government and business, working together, believe they can make the most difference.” Those sectors were: aerospace, agricultural technology, automotive, construction, information technology, international education, life sciences, nuclear, offshore wind, oil and gas, and professional and business services.

6.2 This strategy was important and its goal of expanding high value, high paying sectors, remains so. Where UK industry is good, it is very, very good. Our automotive and aerospace industries are great success stories. We boast world class companies like Rolls Royce, while the Nissan plant in Sunderland is the most productive car plant in Europe. Trade unions are proud to represent the workforce in such companies, as we are proud of our contribution to those companies’ success. Our problem is not that we do not have excellent companies; it is that we do not have enough excellent companies. Any future industrial strategy, therefore, must have the retention and increase of export rich, research and development rich, and well-paying companies as a key objective.

6.3 In his report for the previous government, ‘No Stone Unturned in Pursuit of Growth’, the former Deputy Prime Minister, Lord Heseltine, recommended that “[the] Government should produce an overarching and long term National Growth Strategy and its vision for wealth creation, with concrete commitments against which it can be held to account.” Heseltine also argued that “A new National Growth Council should be established, chaired by the Prime Minister and with a strong, cross-government focus on driving growth and wealth creation.”[3] Heseltine’s recommendations bring the sense of purpose and commitment from the very top of government that the TUC believes is necessary for a robust industrial strategy to be successful.

6.4 This sense of purpose and commitment however, must be clearly focused on a set of objectives. As we set out above, we believe that the success of an industrial strategy must be better paid jobs right across the country, consistent with meeting our climate change commitments.

6.5 Achieving these aims requires an understanding of which sectors are currently able to deliver these high value jobs, and require support to expand. But it also requires an understanding of where people work now. The table below provides some information, ranking industrial sectors according to productivity, workforce jobs, median weekly earnings and export orientation. [4] The figures are meant only to be illustrative, given problems with measuring productivity especially in industries dominated by public sector provision. Lighter shaded industries perform better within the category, and darker shades indicate the weaker performers. There are five industries in each shade.

6.6 The first thing we notice is that the most productive and highest paid jobs show little correlation with those that employ the largest number or those that are most heavily export orientated.[5]  To some extent we would expect this relationship between productivity and number of jobs, as productivity is calculated as a result of gross value added over workforce jobs. Nonetheless the relationship between export orientation, and weekly earnings and productivity bear further consideration.

6.7 A successful industrial strategy must engage with the fact that, within the UK, many of the largest industries in terms of employment fall low in the rankings in terms of pay. While action is required to protect and promote high paid, and high productivity sectors, the table points to the value that would be gained focussing attention on increasing pay and productivity at the lower end of the scale as this accounts for a large number of workforce jobs in the UK.

6.8 One industry, in particular, stands out from the above table. Human health and social work activities ranks top in terms of the number of jobs, but in the bottom half of earnings and the bottom third of productivity. This sector includes the care sector, one of the few sectors that we can be certain to grow in an ageing society. Measuring productivity in care work can be difficult; a care worker that spends half as much time with each client is twice as productive but, it could be argued, is much less “caring”, given the need for many older people living alone for social contact. However, job design might make them more productive by improving their impact, while allowing the same amount of client time. If making them more productive allows for increasing their wages, these become a very important part of the future employment mix.

Ensuring a sustainable strategy

6.9 In setting out its industrial strategy, government must ensure that it is sustainable. This means it must be socially and economically just, as well as environmentally sound.

6.10 The government expects 40 per cent of UK energy use to be delivered by renewable energy sources by 2030. The TUC’s new policy document, ‘Powering Ahead: How the UK can match Europe’s environmental leaders’, calls on the government to be more ambitious: 40 per cent of Danish energy already comes from wind and the Danes are aiming for 100% green energy by 2050. The government should aim for at least 50 per cent of energy to come from renewable sources by 2030.[6]

6.11 Specifically, a new sustainable industrial strategy should do two things: first, the government must conduct a study into the technologies that the UK would need to bring us up to 50 per cent of renewable energy and what industries could be developed in the UK; second, those new industrial sectors should be targeted on those communities that lost their livelihoods with the demise of heavy industry, most obviously the former coalfields.

6.12 This is particularly important, post-Brexit. There has been a growing recognition, reflected in the referendum campaign, that former industrial communities in England have been by-passed by the opportunities that globalisation has presented to other parts of the UK. Here is an opportunity to offer real economic change to a section of the population too-often overlooked.

6.13 Those companies building the green technology of tomorrow will mostly be in the private sector, but ‘Powering Ahead’ shows how in Germany and Denmark, when the government sets its strategy and designs its economic, industrial and environmental policies around that strategy, it creates the certainty that the private sector needs to invest. Government should offer sufficient financial incentives, such as loan guarantees, to companies that may wish to be a part of this project. The expansion of apprenticeships to deliver the skills necessary for these new industries in green technology must form part of this project. Government needs to be a hands-on partner. In one major policy, government could champion the renewal of industry in some of the UK’s most deprived communities and a greener future, both at the same time.

7. Investment: Ensure that business has the infrastructure it needs to grow and succeed

7.1 The TUC has long argued that increased infrastructure spending must form part of a coherent industrial strategy. Better infrastructure improves the way economic activity is conducted and can lead to higher output and growth. Infrastructure spending also provides an immediate boost to demand with contracts for firms meaning new employment and workers spending newly earned (or increased) salaries. For example, the government has claimed that the construction of the High Speed 2 rail line, its maintenance and new stations hubs driving surrounding commerce and regeneration, will create a total of 100,000 jobs.

7.2 The new Prime Minister, Theresa May, has put infrastructure at the heart of plans to rebuild the economy following Britain’s exit from the EU, pledging Treasury backing for new projects and the launch of infrastructure bonds. Action here is essential. The UK investment performance has been woeful for many years. Even ahead of the referendum, growth in investment spending had slowed to a near standstill. There are widely shared concerns that this spending will contract significantly in coming quarters.

7.3 This comes at a time when the construction sector has also warned of the risk to big infrastructure and housebuilding projects if skilled builders are not allowed to remain in the UK post-Brexit. In London, more than half of construction workers are from outside the EU.[7] On 14th September, the House of Commons Public Accounts Committee warned that the Department for Transport may struggle to find the skills required for the High Speed 2 railway project, given the raft of other projects coming on stream, such as Network Rail’s modernisation programme and London’s new super sewer.

7.4 Separately, a plan to give independence to the National Infrastructure Commission and has been shelved. The Commission was established in 2015 to avoid difficult decisions being undermined by party politics and the five year election cycle.

7.5 The TUC calls for government investment in major infrastructure projects as a matter of priority to protect the UK economy in the run-up to and following Brexit. At a time of economic uncertainty, infrastructure spending provides a degree of stability. As a start, government should commit to implement the Airports Commission recommendation for increased runway capacity at Heathrow, and set out plans to deliver the thousands of homes that Britain desperately needs.

8. Skills: Develop the skills the workforce needs, and ensure that those skills are effectively utilised at work

Ensuring that companies have the skills they need

8.1 An active industrial strategy would change the employment mix, and the skill mix, of the UK economy. It is essential that if today’s workers are to become tomorrow’s workers, they develop the skills for this change. Upskilling must become a normal and regular part of a worker’s life.

8.2 The TUC has welcomed the general thrust of some ongoing reforms of apprenticeships, especially the introduction of regulatory measures – the apprenticeship levy and new procurement regulations - to address long-term under-investment by UK employers. If the government is serious about industrial strategy it will ignore calls for these measures to be delayed or watered down. We have also supported many of the recommendations of the Independent Panel on Technical Education chaired by Lord Sainsbury, including that the Institute for Apprenticeships should have its remit extended to cover technical education. A major priority in the coming months must be to ensure that implementation of the apprenticeship levy next year leads to a significant improvement in the quality of apprenticeships as much as expanding provision in line with the three million target. The establishment of the Institute for Apprenticeships and Technical Education presents a real opportunity to adopt the principles of social partnership that govern similar bodies in other European countries, where employers and unions agree the standards for apprenticeships and wider technical education. The Institute should work closely with sector skills bodies that continue to facilitate high level dialogue between employers and unions on skills strategies and standards and it should also tackle those parts of the economy where this is currently not the case. Nationally agreed standard-setting in conjunction with a strong sectoral and industrial input from employers and unions would go some way to developing a high quality skills pipeline that would greatly contribute to a sustainable industrial policy.

Ensuring that skills are effectively utilised at work

8.4 It is vital that government invests in developing the skills that companies need. But in order for these skills to increase productivity, it is also essential that working people have the opportunity to utilise these skills effectively in the workplace.   At present, many of our low wage high employment sectors fall behind on how they utilise the skills of their workforce. Evidence published by the Institute for Public Policy Research (IPPR) in May 2016 showed how low wage sectors are also low productivity sectors in the UK. Retail, accommodation, food and administrative services employ a third of all workers, produce 23 per cent of the UK’s gross value added, but are on average 29 per cent less productive than the economy as a whole.[8]

8.5 This need not be the case: if we were able to raise productivity levels among low wage firms to the levels seen elsewhere, the UK could close a third of its average productivity gap with Belgium, France, Germany and the Netherlands.

8.6 Some of the answer lies in skills and innovation. Workers in low paid sectors tend to not only be lower skilled but are less likely to be offered training. Low wage sector firms also invest less in innovation, including information and communication technologies.

8.7 But reforming our low wage low productivity sectors so that they invest more skills requires action on several fronts. The IPPR called on Innovate UK, to use its ‘open programme’ to expand its funding criteria to innovations in workplace organisation, job design, leadership and management, drawing lessons from international experience, including Tekes, the Finnish Funding Agency for Technology and Innovation.

8.8 We also need a wider approach to encouraging workplace involvement and participation at work. Boosting workers’ voice in the workplace, specifically collective bargaining and collective consultation, has a direct impact on skills utilisation, work organisation and workforce motivation, all of which play an important role in raising productivity.

8.9 At its most simple, mechanisms for collective voice aid the good management of workplaces, with less time lost to accidents, sickness, stress and staff turnover in unionised workplaces. This facilitates a more efficient allocation of resources, including working hours, and boosts output per worker. In addition, there is the broader impact on morale and motivation that stems from people having a greater sense of employment security, enjoying higher wages, and feeling that their interests are better protected than is the case in most non-unionised workplaces. This engenders greater loyalty, commitment and boosts morale, all of which translate into improved organisational performance.

8.9 Where unions negotiate with employers over training, not only are training rates significantly higher, but there is also an impact on the critical area of skills utilisation, with research showing a direct association with higher wages, better job security and improved organisational performance.[9] Union learnings reps have significantly raised the training levels in their workplaces, especially for lower-skilled workers, who have perennially received a lower share of training budgets than their higher-skilled colleagues. This enhances the ability of workers to undertake their current role but is also playing a vital role in boosting the level of skills across the economy as a whole.

8.10 Collective consultation and representation also play a vital role in successful change management, with staff are much more likely to embrace change and have the motivation and confidence to adapt to changing requirements if they have been involved in discussions on how change will be implemented. There is also a positive impact on innovation; research has found that collective bargaining at workplace and firm-level is positively associated with product innovation. A contributing factor is likely to be the fact that team-working and functional flexibility are more likely to be found in union than non-union workplaces today.

8.11 Thus addressing the economic drag of low skills and low productivity should include a focus on boosting collective voice among workforces that are often badly paid and insecure. Giving workers a collective voice through which to address low pay and insecurity, engage with proposals for work organisation and change and contribute to ongoing discussions about the strategic direction of their company must be a part of any effective proposals to tackle low productivity.

9. Trade: Maintain the advantages of membership of the single European market

9.1 In the short term, there is a very real danger that the UK economy, and UK jobs, could be derailed by the terms of the UK’s exit from the European Union. Trade union convenors report to the TUC that decisions on investment in their workplaces remain on hold, with businesses taking a ‘wait and see’ approach. Whether that new investment materialises, and with it the prospects for jobs and pay in the UK, depends on the terms of trade with Europe and the rest of the world negotiated as part of the Brexit settlement.

9.2 The TUC believes that maintaining membership of the single market is the key to a successful Brexit for working people. The advantages of membership are significant, and vary by sector: tariffs are the main issue for some manufacturers, while many service industries rely on the absence of non-tariff barriers, for example the application of common regulatory standards.

9.3 It is vital that ministers consider the sectoral and regional aspects of any new trading arrangements. In every English region and Scotland, almost one in ten jobs are linked to EU exports. Initial analysis for the TUC[10] shows that in every part of the UK except London, there are more manufacturing jobs dependent on EU exports, than jobs in financial services that rely on the EU.

9.4 Membership of the single market would also guarantee that we signed up to the employment rights that come as a condition of membership, ensuring that Britain cannot seek to compete in a race to the bottom on workers’ rights and pay.

10. Taxation: Government should examine carefully how it is using tax reliefs aimed at improving growth and productivity

10.1 One of the major tools for any government in pursuing any policy goal is taxation. Corporate tax cuts have been a major feature of government economic policy in recent years, with corporation tax set to fall to 19% in 2017 and 18% in 2020. Government has also aimed to increase research and development through the use of tax reliefs, notably the ‘patent box’, which enables companies to apply a lower rate of corporation tax to profits earned from patented inventions, and through tax credits for research and development.

10.2 Expenditure on the patent box, introduced from April 2013, is expected to increase from £350m in 2013/14, to £650m in 2015/16. Expenditure on Research and Development tax reliefs is expected to increase from £1.4bn in 2012/13 to over £2bn in 2014-15,[11] having risen rapidly in previous years.

Total support claimed through R&D tax credits by scheme (£million, accounting period end date basis

Source: HMRC (2016) Cost of support claimed for the R&D tax credit by scheme and financial year on an accounting period basis, 2000-01 to 2014-15

10.3 Research by HMRC has found that this investment produces a good rate of return, with between £1.53 and £2.35 of expenditure on Research and Development spent for every £1 of tax foregone. [12]

10.4 However, the distribution of spending of these reliefs reflects and reinforces regional divides. The figures below should be viewed with caution, as the breakdown given shows the registered office of the company, where its tax liability will fall, which may not reflect the location of the actual Research and Development activities. Bearing this in mind, the figures do show a sharp concentration of expenditure on tax relief in London, the South East and East, with London receiving over a third of all expenditure on these reliefs. To achieve the aim of regional rebalancing, government may need to re-consider how innovation can be encouraged outside of the areas where economic growth is already strongest.

Expenditure of Research and Development and Patent Box reliefs, by region in which company main office is registered

Source: Source: HMRC (2016) Regional analysis of number and cost of R&D tax credit claims, 2014-15

11. Procurement: use government spending to support strategic industries

11.1 The UK has a poor record on the strategic use of procurement to support industrial policy, despite the fact that EU rules allow the creative use of procurement structures. In its regulations transposing the latest EU Public Procurement Directive, the UK failed to prohibit or restrict the use of price only or cost only as the sole award criterion for a public contract, meaning that the successful bidder will often be the one that bids on the basis of the lowest cost. Given that apprenticeships, for example, entail upfront spending, this discourages skills training for those seeking to win government contracts.

11.2 The government avoided regulation to enforce the promotion of environmental, social and labour standards, even though high quality companies, such as we need to build to remain internationally competitive, abide by such standards. The avoidance of regulation simply encourages the development of low quality companies at the expense of high quality ones, with UK plc being the loser over the medium to longer term.

11.3 More encouragingly, the Welsh Government has highlighted the potential of procurement policy in its new programme for government, ‘Taking Wales Forward’, which will run from 2016 until 2021. The Welsh Government will pilot a ‘Better Jobs, Closer to Home’ project, designed to create employment and training hubs in areas of high economic deprivation. The Wales TUC campaigned specifically for such a project. The Welsh Government has also pledged to continue to improve procurement policy, including community benefits.[13] This is clearly an approach that the UK government could learn from.

12. Conclusion

12.1 As a strong supporter of industrial strategy, the TUC is heartened that this appears to be an important strand of government policy, even leading to the restructuring of government to give it effect. Of course, it is essential to get the right industrial strategy. This submission has set out the major themes that the TUC believes need to be addressed.

12.2 Building the sustainable industries of the future must remain central to the government’s industrial policy. Our new policy document, ‘Powering Ahead’, points the way to developing those sectors. But it is also important to reshape other industries, including some low pay and low productivity areas of the economy. Through infrastructure support, skills and apprenticeships and the smart use of procurement, as well as specifically targeting low pay, low productivity sectors, that challenge can be met.

12.3 To be successful, however, the UK needs access to our most important markets. Maintaining the advantages of membership of the single European market is perhaps the single most important step the government could take to support the industries and jobs of the future. 

27 September 2016