This is the second article in our series on the puzzle of the UK’s low productivity [1].   As we touched upon in the first article, many factors affect productivity some of which are beyond the control of senior managers e.g. global trading and economic changes.   Even now, new pressures are arising which may affect productivity either way.   This article examines these different aspects:

• Changes in the skill composition of the workforce;
• Rising wage/salary costs;
• Changing attitudes to relative productivity;
• The challenge for schools and the education sector.

Changes in the Skill Composition of the Workforce

The growth in jobs in the last few years has been skewed towards low skilled work which may account for the average low productivity and a weak increase in average wages.  Reported comments of the Deputy Governor of the Bank of England indicate that is changing [2].  Average wages increased from 2.8 to 2.9% in the quarter ending June 2015 which was the highest increase since 2009.  The Deputy Governor expects that the growth in pay will get stronger.

However, it is likely that the increase in productivity being experienced currently will falter due to new wage pressures.

Rising Wage and Salary Costs

When organisations agree to pay increases that is usually accompanied by higher productivity/efficiency agreements and/or by cost cutting both of which are within the control of the company or public authority.  With the implementation of the National Living Wage in April 2016, many sectors will find their wage costs increasing rapidly without any matched increase in productivity.

The minimum wage will rise to £6.70 per hour from 1st October 2015.  A more significant cost increase will hit organisations in April 2016 when the National Living Wage (NLW) comes into effect at £7.20 per hour for those aged over 25.  The NLW will be linked to 60% of the average median earnings and it is estimated that this will lead to a rate of £9 per hour by 2020.

This will affect some sectors harder than others, for example, retail, leisure, distribution and agency workers generally.  Senior managers need to plan how the additional wage costs will be addressed especially as many organisations will find that the increases trigger knock on effects to pay structures as differentials are eroded or narrowed which then leads to higher costs to restore an appropriate differential.

Relative Productivity

Senior managers are often programmed to think of cost cutting as the response to a recession and higher wage costs.  Many managers know, from experience, that such a tactic leads to a downward spiral of continuing cost reductions which impair the flexibility of a firm to respond to new circumstances.

Senior managers may feel that they have no choice but to implement tight financial controls including the cessation or reduction of capital investment, expenditure on training etc.  This is viewed as a survivor mindset but it is still the more common priority in the private sector with other business priorities in order being: market share increase; customer service improvement; productivity improvement    Based on its research, the CIPD has summarised a set of factors [3] which have a positive effect on relative productivity.  Those could be loosely describe as an organisational mindset of:

• Rating productivity as a high business priority within the organisation;
• Striving for a premium service/product standard rather than basic or standard approach;
• A results orientated culture rather than a family feel;
• Actual output growth in the last 12 months;
• Capital investment in the last two years;
• Rating training and development highly.

The CIPD is open in its comment that its research does not show cause and effect but does show significant relationships between the above factors and productivity.

It is not clear whether the functional background of participants in the report may have influenced the data.  The results also infer that productivity improvements are likely to surface in the next year or so as companies feel more confident about capital investment and expenditure on training to equip their workforce.

As a personal observation, the reseach indicates that senior managers do have choices i.e. whether or not they wish to position themselves as focused on productivity.  That is so even though some factors are outside the control of a company.

A key question remains though as to how schools and the education sector will facilitate the acquisition of appropriate skills especially by young people.

The Challenge for Schools and the Education Sector

There still remains the issue of low skills or perhaps more accurately the lack of opportunities for young people to explore how their interests and gifts can find fulfilment in different types of work.   We need to go further than a work experience week.  Is there not a place for enabling youngters to explore their skills before the end of the school year so that they can see how their interests and natural abilities can be put to use at work and thus widen their horizons of what they could do?   The weeks after SATs etc. could be put to use by giving them an exposure to various practical skills and learning opportunities about different disciplines and so whet their appetite to explore job/career options in which they develop an interest.

We need to value practical skills in manufacturing and engineering but also provide real taster experiences for young people to identify what leanings they have and what direction they should take in work.  However that is not just a challenge for schools and colleges –  companies also have to be prepared to invest time in making such practical lessons and experiences of interest and realistic.

References 

[1] The first article in this series can be seen by clicking on this link Productive Productivity
[2] Szu Ping Chan, report on Deputy Governor of the Bank of England re Pay Growth – Daily Telegraph Business Section 24/09/2015.
[3] Investing in productivity: Unlocking ambition, Policy Report September 2015, CIPD

Related Articles

Links to related articles that have appeared in our blogs are given below.

• Productive Productivity
• Are We Switching Off Creativity and Satisfaction at Work?
• Management Bonuses – what should they reinforce?

If you would like help on reviewing organisational and/or pay structures, please feel free to contact the author via office@hrmd.uk

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