Today sees the publication of new research funded by the Joseph Rowntree Foundation on ‘Raising productivity in low wage sectors and reducing poverty’. The study was carried out jointly by researchers at City-REDI at the University of Birmingham and at the Centre for Business in Society at Coventry University. The project sought to provide novel insights into how employers understand productivity, seek to grow productivity, and to assess what role, if any, productivity plays in wage-setting decisions. This brings together two major contemporary public policy issues – the stalling of productivity and the stagnation of wages in the decade since the economic crisis. The nature of the current ‘productivity puzzle’ has been a source of considerable debate, but the UK’s productivity performance has also been comparatively weak over the longer-term. The wage squeeze since the crisis is unprecedented in recent history; while low-pay is also linked to the growth of in-work poverty.
In order to provide new evidence and insights into these concerns the research addressed the following questions:
- How do employers understand and measure productivity?
- What role does productivity play in employers’ wage-setting decisions?
To answer these questions a four-strand research design was developed including a review of the existing evidence, an employer survey, employer interviews and an expert workshop. The research focused on three sectors – manufacturing, retail and hospitality.
In the survey, employers reported productivity to be an important performance metric. However, when this finding was examined through employer interviews it was found that firms tended to have a relatively partial understanding of productivity (although this did vary across firms). Firms also had difficulties in measuring productivity, and even where they had some metrics, they often lacked the capacity and capability to analyse these; this was particularly the case for small and medium size employers. In many cases productivity was simply equated with workers ‘working harder’, although some employers did place greater emphasis on capital investment and use of new technologies. The research also found a number of firms reliant on low-wage/low-skills business models, with little impetus or incentive to seek to shift this position.
Given this picture around employers’ understandings of productivity, what role does productivity play in wage-setting? The research found an opaque relationship between productivity and wages – with little evidence of a direct link. More broadly there was considerable variation in approaches to wage setting across employers, with some employers having formal processes but others with much more ad hoc methods. A critical element of the relationship between productivity and pay was the importance of the National Living Wage (NLW) in employer pay setting in low-wage sectors; with the NLW becoming the de-facto pay review for many employers. In this context, NLW increases encouraged employers to look for ways to increase productivity – in other words productivity following pay, rather than pay following productivity.
The research highlights an important disconnect between high level policy goals around productivity growth and the experience of some employers on the ground. With this in mind, what are the lessons for Government and for employers? First, there is a need to make the productivity debate more relevant and accessible to employers to move from policy goals to practical change. Second, the NLW seems to have an important role in influencing both pay and approaches to productivity. While the impact of NLW increases on employment needs to be carefully monitored, the continued growth of the NLW has the potential to yield both pay and productivity gains. Thirdly, there is no guarantee that productivity growth at firm level will necessarily translate into higher wages for workers, and other policies are needed to ensure the gains of growth are shared. Finally, there is an enduring concern about the long-tail of low-wage/low-skill firms in the UK and this represents a challenge to the ability of the Government’s new Industrial Strategy to deliver sustainable prosperity.