For wage growth in 2016 we need to raise productivity. How do we do that?

Today the Resolution Foundation has published figures from their Earnings Outlook saying that unless workforce productivity rises in the UK next year, Britain’s pay recovery will barely last.

Today the Resolution Foundation has published figures from their Earnings Outlook saying that unless workforce productivity rises in the UK next year, Britain’s pay recovery will barely last.

The Outlook, which the think tank publishes every quarter, initially raises optimism about reducing income inequality by saying this year marks a return of the rise in real wages, following a six-year squeeze during the recession years.

However the wages recovery has largely been down to ultra-low inflation which is unlikely to occur next year, meaning that any wage growth next year will have to be strongly pegged to high productivity levels.

The problem is, higher productivity levels are not forthcoming. Another recent report by the respected think tank Enterprise Research Centre found that right up to 2008 UK productivity was on a strongly upward trend. But since then, it has flatlined and the UK has fallen behind many of its international counterparts.

They estimate in their report Unlocking UK Productivity, that the UK’s productivity is around 16% lower than it would have been if it had stayed on its pre-2008 trajectory.

Scenarios of 2016

The Resolution Foundation have considered five different scenarios for productivity and wage growth for 2016, finding that in the best case scenario – 2% productivity growth and prolonged low inflation that rises to 1% by 2017 – could result in very fast wage growth of 3%, more than for a decade.

However on the worst case scenario – productivity stays pretty flat and inflation grows faster than forecast – real wages could drop by 0.9%, which may result in a situation where a typical worker’s pay does not return to pre-crisis levels for a decade or more.

As the hope for wage growth rests heavily on productivity, we should now start to be concerned about the jobs created during the recovery period. As David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, put it in a recent debate:

• The proportion of workers who say they have a temporary job and want a permanent job is up by 210,000;

• Fifty-five percent of the jobs created since 2008 are part-time;

• 15% of part-time workers now say they are part-time is because they could not find a full-time job, compared with 10% pre-recession;

• The incomes of the self-employed are down 22% since the start of the recession.

Optimism about productivity growth and the future of the labour market will not be helped by recent revelations that big employers like Sports Direct in the UK have been effectively paying below the minimum wage, according to an investigation by the Guardian.

Regular searches on warehouse staff and wage deductions if they are just one minute late means many staff being paid an effective rate of about £6.50 an hour, not the statutory rate of £6.70, which is potentially saving the firm millions of pounds a year.

How do we raise productivity in 2016

In the Unlocking UK Productivity report, the Enterprise Research Centre found that Britain’s productivity is falling behind other economies because it is slower to turn ambitious smaller firms into exporters of innovative new products and services.

They say that with more support, around 110,000 SMEs could add exports to their regular operations, adding £1.15bn in Gross Value Added (GVA) to the economy in the first year alone in the form of new and higher value jobs.

Support in the form education for entrepreneurs, business-to-business mentoring and targeted government support could all contribute to smaller firms increasing UK their line of products and services, putting them on the export market, which in turn could boost productivity levels and steady the UK recovery.

Until then, the productivity puzzle will still bewilder policy makers, causing great detriment to UK household wages.

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