Tue. May 17th, 2022

In 2015, Tory Chancellor George Osborne argued that tough welfare cuts were needed to support Britain’s transition away from “subsidized low wages” and low productivity. Six years later, Boris Johnson uses the same argument to justify his curtailment of low-skilled immigration after Brexit.

The chaos in the UK supply chains, he told the Conservative Party Conference this week, was “mainly a function of growth and economic revival”. But it was also part of a long-delayed change of direction from a “broken model” with low wages, low growth, insufficient skills and low productivity – made possible by a clear supply of cheap overseas labor.

Economists are less convinced. Raising Britain’s chronically poor productivity — the key to long-term gains in living standards — has been the goal of successive governments, but it has proved elusive. In the decade leading up to the pandemic, production grew per. Working hours at less than half the rate it averaged in the years leading up to the global financial crisis in 2008. By the end of 2019, it was 20 percent below the level it would have reached if it had continued at its road before the crisis.

Index bar, 2019 = 100, showing UK productivity, has grown much more slowly since the financial crisis

But such poor performance, witnessed in many developed economies, but especially acute in the UK, had little to do with openness to EU workers. Instead, economists attribute it to international factors, such as the halting of globalization and to specifics in the UK, such as the rise in self-employment and the so-called “long tail” of poorly managed small businesses.

Huw Pill, the Bank of England’s new chief economist, said in a written testimony to the House of Commons Treasury Committee this week that Britain had also “experienced three major waves of uncertainty”, in the form of the global financial crisis, EU referendum and pandemic, which would have made companies cautious about investment, innovation and research and development.

“Migration is such a small part of this,” said Alan Manning, a professor at the London School of Economics who previously chaired the government’s Migration Advisory Committee. The Committee’s research showed that neither a very restrictive nor a very liberal approach to immigration would have any major effect on gross domestic product per capita. Resident of the UK, he said, adding: “I do not think this boosterism will change anything”.

Instead, the Brexit-induced truck driver shortage that has tightened supply chains — with a clear hit to productivity in almost every corner of the economy — is simply the most acute example of a much broader pressure becoming apparent in the UK labor market.

A monthly survey conducted by the consulting firm KPMG and the Recruitment and Employment Association, published on Friday, showed that recruiters reported the most intense pressure on wages in 24 years in September, in salaried employees as well as in the low-paid areas where shortages have been most visible.

Business executives argue that these wage increases will simply feed inflation unless they are driven by higher productivity. “Ambition for action-free wages on investment and productivity is ultimately just a path to higher prices,” Tony Danker, CBI’s director general, said on Wednesday.

Line chart of the UK, constant price measures (2000 = 100), showing that wages generally move in line with productivity in the long run

But some argue that higher wages can instead increase productivity gains — whether it be by getting employers to invest more in labor-saving machines or training or by killing weaker companies in the “long tail” that was unable to to match the wages paid by more productive rivals.

Johnson suggested that in the absence of low-wage migration, companies would be forced to confront their “lack of investment in people, in skills and in the equipment, facilities, machinery they need to do their jobs”.

However, this argument works better in theory than in practice, according to Jonathan Portes, a professor at King’s College, London. Britain’s experience with minimum wage showed that higher wages did not necessarily hurt jobs, but also did not lead to “dramatically higher productivity”, he said.

Kitty Ussher, chief economist at the Institute for Directors lobby group, also said there were “massive reservations” about the prime minister’s argument. First, wage increases would bite right away, while productivity gains would take time. Second, there were sectors such as social care, where employers may have found it “economically advantageous to have fewer people”, but productivity lay in the quality and timing of interaction. There would also be individuals, especially those in the middle of their careers, who were eager to retrain for a better qualified, higher-paying role — but did not necessarily have the time or means to do so.

Line chart of GDP per  Working hours (2010 = 100), which show British productivity, have lagged behind their peers over the past decade

Yet the shock of the pandemic could still provide a much-needed boost to UK productivity — for reasons that have nothing to do with labor shortages. Pill told the Finance Committee that in a “positive perspective”, many companies that had shut down completely now had “a chance to re-optimize and improve their processes once they restarted”.

An outbreak of new business could create innovations that proved more productive, he added, and existing businesses had automated or introduced technologies to support homework that could increase productivity in the long run.

The government is also pushing for investment in skills and infrastructure, which has long been seen as the standard recipe for increasing productivity: Johnson promised this week to “solve the national productivity puzzle by repairing the ruined housing market by connecting gigabit, by putting decent safes bus routes … and by investing in skills, skills ”.

But business groups say it is not yet clear whether action in these areas will match the rhetoric – and that the ministers’ confrontational approach is not helping.

Neil Carberry, chairman of the REC, said it was “important that the government works in partnership with business to deliver sustainable growth and rising wages rather than a crisis-driven sugar rush.”

“I do not like the undertone of ‘if it does not hurt, it does not work,'” said Ussher, who wants the government to give individuals more help with retraining and companies more support through the tax system to invest in skills – ” so we do not have to stoically go through pain, but can adjust ”.

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