Andrew Wilshire is the founder of independent strategic analytics consultancy Diametrical Ltd.
It’s a new year, and it can only mean one thing – another twelve months of economic commentators bemoaning the dire state of productivity in the UK, especially since the financial crash of 2008. Articles like this are usually accompanied by a chart of this kind. It shows where we might be able to achieve our goals. We expect productivity to increase if the trend that prevailed before 2008 continues.
There are many factors that can be blamed, but most of them may take time to filter out; They will not produce a step change in productivity rate.
For example, cutting infrastructure spending in 2008 would not reduce productivity by 2009. Business investment was already growing again by 2009, while the post-Brexit freeze did not lead to a noticeable decline either. . Energy prices nearly doubled between 2001 and 2010, but remained mostly flat in the first decade of this century, and the spike that followed the invasion of Ukraine does not appear to have had a visible effect.
But one question seems rarely asked: Are people actually motivated to work harder?
No matter the state of the business environment, there is an element of productivity that simply relates to individuals making the decision to work harder.
Most of us know that there are times when we can focus more on getting a task done, especially if a deadline is approaching. We can put distractions aside, reduce casual conversations, turn off our phones, etc.
There is a level at which you have to perform to keep your job, although it is often determined by the performance of those around you. Then there is a level above which you might be led to try to get a pay raise or promotion from your employer. Ultimately, you operate at this level because you believe you will be better off afterwards, that is, you will have more discretionary income.
But what happens if a salary increase or promotion doesn’t increase spending power commensurate with the extra effort?
Back in 2017, I books Many families were significantly discouraged from working harder because in 2003, Gordon Brown implemented a system of work benefits that interfaced with existing benefits, such as housing benefits, so that claimants could face an effective marginal rate of 97 percent.
A family with children renting in London may find that even tripling their income from £20,000 to £60,000 will only result in an extra income of £130 a week.
This was the trap designed by Universal Credit to help people escape, although only last year the so-called taper rate was reduced from 63 per cent to the originally expected 55 per cent, allowing people to keep their money. almost Half of their incremental gains.
Many people who were continuing their work until the accident probably didn’t realize: You do your job, you get your paycheck, you get your benefits paid. But when the crash happened, some of these people found themselves made redundant, or working fewer hours, but – more importantly – their incomes after taxes and benefits were almost unaffected.
Consider the following chart plotting spending in real terms on Universal Credit and its predecessors against the annual change in output in real terms for each worker in the economy. There is a clear cyclical element to welfare spending related to recessions, a trend that will be partly related to population.
But there are also some obvious steps: sudden increases in interest spending that appear permanent. There was a small step in 2003, when the new tax credits system was introduced, and another, much larger step in 2009 in the wake of the crash.
There are also two obvious changes in the rate of productivity increase. The last time productivity gains exceeded 2 percent was around 2003, before COVID-19. The other event was around 2009, after which productivity fell to its last dismal level.
Are these dates just a coincidence? maybe; It is possible that there is another factor causing the decline in productivity and the rise in the welfare bill. But it would at least be worth studying.
The main problem with social welfare at work is not only that it forces people to work less, but that it discourages companies from paying more to their employees. Why would a company increase the wages of its employees when the only beneficiary is the treasury?
This increase in tax credit payments is really just a huge subsidy for employers who work with low-wage workers. If companies do not have to pay workers higher wages, they are unlikely to invest in technology to replace those workers, or even to train the workers they already have. We have inevitably become a low-wage, low-skill, high-welfare economy.
But does this really affect so many people? Well, there are 4.6 million households on Universal Credit. By design, this includes a large number of people working part-time who could earn more if it was beneficial for them to do so.
Of course, it would be silly to place all the blame for slow increases in productivity solely on those working at the lower end of the wage scale.
People earning around £50,000 a year start losing child benefit if they earn more, a marginal rate of 71 per cent for a family with three children. Those earning up to £100,000 a year will face a marginal rate of tax of 62 per cent if they earn more. These rates can be higher if individuals have student loans to repay: an additional marginal rate of nine or even 15 percent if they have a graduate degree.
Small business owners may be discouraged by the application of VAT on revenues exceeding £85,000. Why do we push for expansion only to experience a massive increase in complexity? Increasing corporation tax, cutting the profits tax allowance, and tying people to a contract above IR35 is also a disincentive for those thinking about starting their own business.
It is better to remain an unproductive employee, rather than try to become an overproductive contractor.
Public sector productivity lags behind the private sector to a large extent. Thanks to national wage negotiations and regular increases, public sector workers no longer have a special incentive to become more productive.
Teachers get paid whether the children learn or not. Doctors are paid based on the number of patients on their books, not the number they treat. Treasury civil servants are paid whether the country’s financial condition improves or declines.
This does not mean that public sector workers do not work hard. But they are not driven to increase the actual amount of output created through that effort.
This problem does not occur to pensioners either: the ridiculous triple lock means that their state pensions increase whether productivity rises or falls. If measures to increase productivity, such as building homes and factories, would even slightly reduce their quality of life, why support that?
It is the tragedy of the modern commons – it is in our collective interest to have a more productive economy, but it is in the interest of a very few individuals to become more productive. This is no way to run a country.