To solve Britain’s productivity puzzle, don’t just focus on frontier firms

Leaders from across politics, business and trade unions will today put their heads together at a major summit to tackle one of the UK’s most intractable problems: improving productivity—the amount workers produce per hour—particularly in the retail and hospitality sectors. While the Beast from the East may have provided a week-long chill to the nation’s economic output, more fundamental challenges than snow are hampering UK businesses and workers.

Poor productivity is holding back improvements in wage growth and living standards. This is bad for both firms and workers: businesses are unable to improve their performance at a time when they need to be match fit for Brexit, while more families struggle to make ends meet. Despite record employment and a recent uplift in wage growth due to falling inflation, productivity still holds the key to improving living standards across the country. Yet we appear no closer to solving the productivity puzzle. That’s why we need to look again at not just how we improve productivity across the economy, but where.

Whatever the outcome of the Brexit negotiations, there are swathes of our country that have failed to see any significant recovery following the financial crash. If the government wants to fulfil its ambition to create an economy that works for everyone, we need to drive up pay and performance in sectors that often aren’t seen as glamourous or high-tech but are really important to people and our wider economy. One in four private sector jobs are in the retail and hospitality sectors (3m in retail, 2.3m in hospitality, per latest ONS data). Just under half (46 per cent) of workers in retail and around three in five workers in hospitality are on low pay. As analysis for JRF shows, across all low-paying sectors, German, French and Dutch workers produce more in four days than we produce in five.

The government has emphasised the need to drive up productivity across the economy—and many firms are leading the charge. Lush and Greggs are taking steps to improve staff skills and increase pay, keeping them motivated and adding value to each store, while Be the Business, a business-led initiative to share best practice, is working with firms to improve how they engage their staff, design jobs and improve training opportunities, leading to higher pay and productivity.

CBI research sets out how the UK can tackle the striking variation in productivity that exists between UK firms. The challenge now is spreading innovation and good practice much more widely across the economy. Many more of our small and medium sized businesses already collaborate on innovative projects with other businesses and institutions. The challenge lies in making this diffusion the norm—and the government’s new industrial strategy represents a golden opportunity to get this right.

More and better on the job-training, making best use of workers’ existing skills and increasing staff use of technology will all help. Mayors, combined authorities and Local Enterprise Partnerships must use their powers and budgets to help spread innovation and improve management practices for firms who have ignored these issues for too long. Taken together, this can help create a more engaged, motivated and skilled workforce, which is crucial to unlocking productivity improvements. So the benefits are clear.

Previous efforts to improve productivity have focused only on the shiny and new—frontier firms at the cutting edge of technology. Helpfully, the Department for Business, Energy and Industrial Strategy (BEIS) has acknowledged not only the importance of creating innovation, but also spreading it. Giving retail and hospitality a more prominent role in the industrial strategy would be an ideal place to start. Raising productivity in these sectors to the levels in Germany would close between a fifth and a quarter of our productivity shortfall.

Britain’s firms are ready to join their counterparts in Europe—leading to much-needed pay rises, better jobs and a more prosperous nation, whatever the weather throws at us.

Rain Newton Smith is chief economist at the CBI. She tweets @RainNewtonSmith

Ashwin Kumar is chief economist at the independent Joseph Rowntree Foundation. He tweets @KumarAshwin