Progress | Centre-left Labour politics

Solving Britain’s productivity crisis

A high-efficiency, high-wage economy is needed to take on the economic challenges our country faces post-Brexit, writes Chris Carter

It is always a challenge getting people interested in inflation figures. The collective eye-glazing of new economic statistics are palpable for any writer or armchair economist’s audience. Yet it is with this in mind the latest inflation figures are perhaps the most worrying set of economic figures since the financial crisis.

Inflation of 2.3 per cent does not mean much to most. Nor will it probably ever. To demonstrate the urgency of the situation, imagine this 2.3 per cent as the amount by which currency devalues every year – the pound in your pocket. Now take that number away from an annual wage increase of 2.6 per cent and you have ‘real’ wage growth of 0.3 per cent.

Although statistical analysis is less than interesting for some, this 0.3 per cent is significant. Significant because it demonstrates the danger Britain finds itself in ahead of withdrawal from the European single market. Real wage growth is now fourteen times lower than when Labour managed the economy 20 years ago in a growth-led environment.

Bloomberg predicts that the United Kingdom is on track for even higher levels of inflation of more than three per cent next year. Even the slightest increase will flatten and depreciate wages. It is now a matter of when rather than if Britain’s relative wages fall again following short-lived recovery. Policymakers worry day and night about the real impact of low wages on the wider economy, not to mention the fact it will punch a sizeable hole in the government’s industrial strategy.

A weak pound, higher basic food and fuel costs have made imports eye-wateringly expensive. From fuel pumps to food shelves, inflation pinches at people’s pockets, made worse when wages stagnate or decline. The weakness of the pound compounds matters, domestic factory production costs have risen radically by more than 19 per cent. It will not take long until costs, passed on to the wider economy, are felt by workers. The most deeply affected will be Britain’s poor.

A developing problem for Britain’s low-income earners is the introduction of the so-called ‘living wage’ by the government, leading to job losses, most evidently with high street retailers. They have shed jobs in response to higher wage bills, with over 4,000 this year so far.

A Catch-22 situation for the government is developing. They can forge ahead with wage increases but this reduces the number of jobs. If they fail to continue with increases in the minimum wage, Britain’s workers will be less well off as inflation’s depreciating effect on wages takes hold.

There lies the opportunity for Labour to lay out its new industrial strategy

Efficiency, efficiency, efficiency.

The Bank of England’s Andy Haldane highlighted the plight of Britain’s medium-sized businesses. They are profoundly and worryingly inefficient compared to international rivals. Hard Brexit catalyses these economic weaknesses. Expensive imports from a weakening pound and higher cost exports from the trade tariffs imposed upon exiting the single market will slam the brakes on the economy. It will put mid-sized businesses into disarray. Costs rising one end, with sales falling the other. Not so much feeling a pinch but a knockout punch.

Productivity growth amongst mid-sized businesses has fallen to nearly zero per cent a year from a previous peak of two per cent since the financial crisis. One in every three of has not seen any increase in productivity since 2000. Across the continent, relative efficiency has risen year on year over the period. German ‘Mittelstand’s’ have become the centrepiece of Germany’s global dominance as an export-led power. Mittelstand’s business philosophy of reinvesting profits into better and more productive machinery and equipment has powered them ahead relative to Britain’s increasingly ineffectual factory floors and office spaces.The consequence has been higher wages for German workers and stagnant ones for British. It may be a model Britain’s left has explored but needs more rigour in following through on.

A high-efficiency, high-wage and thoroughly competitive economy to take on new economic realities the country faces. It seems almost futile to write this with our present leadership in place but as larger retailers continue to shed staff and big business proves itself to be less reliable, it is up to us to fight the corner of quietly ignored mid-sized businesses. They hold the potential to exponentially grow Britain’s economy and aid its workers.

Our objective from the inflation data is the same as it has always been: create more jobs with higher wages and adapt to the prevailing circumstances. The challenge is how to get there. No matter what strategy Labour adopts in the face of new economic statistics and realities, the path to prosperity is paved by business. We owe it to the low earners of this country who feel most the pressures of these inflation figures, abandonment by high street retailers and the whiplash of Brexit to guarantee their safety and success.

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Chris Carter is a member of Progress. He tweets at @ChrisJCart

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