The British economy is less productive today than it was a decade ago. That means for every hour of work done, we make less than we did in 2007. Our pay too is lower than it was a decade ago, with weekly wages buying less today than it did in 2007.
These two damning statistics are linked. We must look at improving pay to increase productivity. Britain’s productivity gap - it takes us five days to produce what France can in four - has many causes: underinvestment in skills, infrastructure and R&D (research and development), limited government support for business and industry, and low wages.
To solve this problem, government must be willing and able to intervene in the economy. Our economy needs infrastructure investment to meet the OECD recommendation of 3.5% of GDP. Our manufacturing sector, which offers workers higher average pay than services, with productivity growth three times faster than the economy as a whole and delivers 68% of business R&D, needs the supportive policies it currently lacks.
The government is failing to create a broad, fertile and supportive business environment that incentivises upgrading of technology and skills, which would improve productivity.
There is wide agreement that we need to solve our productivity crisis to enable employers to pay higher wages. Far less widely acknowledged is that higher wages must be part of the solution to that productivity crisis, as wage growth also provides the spur for firms to develop and use new technologies which boost productivity.
Lifting wages alone will not solve low productivity growth. But if higher wages sit alongside a comprehensive industrial strategy to develop the infrastructure, technology, skills and industries fit for the 21st Century, it will.
Historically, this has been the case. Indeed, Professor Robert Allen argues that Britain’s high wages relative to other countries in the 18th and 19th Centuries fuelled the industrial revolution.
He argues that in the eighteenth century many countries shared characteristics which would have improved the supply of new technologies, such as scientific and technical culture. But only one country, Britain, had firms with the demand, due to having the highest wages in the world, to develop and use new technologies, which led to an upward virtuous spiral of higher wages and higher productivity.
Statistical research looking at more contemporary economies supports this argument. Alfred Kleinknecht, looking at OECD countries over the last 50 years, demonstrates that higher wage growth is linked to productivity growth.
With a comprehensive industrial strategy, this argument could hold for Britain today for at least three reasons.
Firstly, if wages rise alongside a robust support and incentive system for business, then firms will be encouraged to boost investment in new technology and training to ensure workers produce more to sustain their higher wages and also increase the firm’s profitability.
Secondly, firms will substitute capital - machines, buildings etc. - for labour, if wages are high relative to the price of capital. Increasing capital per worker will improve productivity and drive technological progress. Combined with government investment in education and action to incentivise businesses to upskill workers - as Labour are committed to doing through their National Education Service - this process is crucial to creating a high-skill, high-productivity, high-wage economy.
Thirdly, high wages may have a direct effect on workers by motivating them to work harder or stay loyal to the firm. There are three broad areas a Labour government would intervene in to increase wages.
Firstly, we would improve workers’ collective bargaining power, so they can negotiate better pay and conditions. This would be achieved by strengthening employment law and its enforcement, giving unions the right to access workplaces, repealing the Trade Union Act, which unfairly ties the hands of unions, and rolling out setting wages through negotiations between workers and employers across a whole sector.
Secondly, we will boost the wages of over 11 million workers - almost half - through legislation and the public sector. Labour’s £10 per hour Real Living Wage would give almost one in four workers a pay rise. We would also lift the public sector pay cap, improving the wages of an estimated 5.4 million workers.
Thirdly, Labour would create the conditions for businesses to improve wages themselves through greater productivity. This requires government action to increase private and public investment in capital, infrastructure, skills and R&D, giving firms greater access to finance, and providing a fair taxation system that incentives growth such as reforming business rates system.
Britain is lagging behind other advanced economies. Our people are dynamic but that dynamism is stifled, with us all losing out. We must breathe new life into our economy. We can’t do that without supporting the workers, who will drive that process and make our economy fit for the 21st Century.
Labour has that approach, which understands that to increase productivity, we need an active government and a pay rise for workers. Without this comprehensive two pronged approach, we’ll never have an economy that works for the many not the few.