Ed Miliband hasn't solved the productivity problem

In a well-flagged speech to UK business to mark the start of the election campaign, Ed Miliband yesterday made a sound appeal that Labour would not subject the country to the uncertainty of a prolonged EU referendum debate, not to mention the damage from the risk of a vote to leave the EU. There’s no question Miliband was knocking on an open door here, though how the business community weighs up the major parties on an EU membership campaign versus other leading business issues, such as tax, regulation and intervention, is a moot point.

What Milliband had to say earlier in his speech though was just as, if not more, important. He scored a bulls-eye in identifying the weakness of productivity as the UK’s number one problem, insisting that productivity is "key to the country we wish to be." He cited ONS data that showed UK output per head was about 20 per cent below that of our major G7 competitors and that this gap was the largest in 25 years. This particular comparison was not wrong, but there are other ways to interpret what has gone wrong, and in discussing proposed solutions, he missed the target by a country mile.

For Labour the solutions lie predominantly in their now infamous "supply-side" reforms. He outlined how a Labour government would remedy skills weaknesses, for example through a technical baccalaureate, maths and english education to age 18, and the provision of high quality apprenticeships, which would be part of public contracts. He said it would create a British Investment Bank, which would support a network of regional banks in supplying finance to SMEs. A new National Infrastructure Commission would be set up, while other policies would focus on energy market reforms, executive compensation transparency, and a cut in business rates for small companies.

The British Investment Bank and Infrastructure Commission ideas are interesting but in proposing them, Labour is blowing the dust off proposals first aired in the trough of the 2009 recession when it was thought recovery would never happen. Six years on, the need for big macroeconomic stimulus is obviously less pressing. It would be more relevant to focus banking reform on making existing banks safer and more effective than to establish another investment bank. An Infrastructure Commission sounds like motherhood, but is the Civil Service so inept that it can’t come up with a half dozen key ideas other than saving a few minutes off the London to Birmingham train ride? Commitment and implementation are key, and no commission is going to substitute for these political drives.

Some of Miliband’s prescriptive policies play to what many Labour people see as the more attractive business model in Europe, and Germany in particular. Yet, in many ways, this is a throwback to the days when Europe did work better. Europe is struggling when it comes to innovation and research and development spending compared to the US and even the UK, and it is certainly behind both when it comes to educational attainment levels in secondary schools and universities. It is true that Germany’s apprenticeship and management-worker structures remain envied by many, but nowadays, Germany’s productivity performance is no better than that of the UK, and its regional and savings banks have balance sheets that would be frowned upon by the Bank of England’s new supervisory staff. Investment spending in Eurozone countries has been as weak, if not weaker than in the UK. In short, there are some a la carte options for Labour in Europe, but the menu does not make for a strong recommendation.

In any event, it is not even true that the UK is a low-skill economy and that UK companies are starved of talent. Don’t take my word for it, but look at the Growth Through People report published last month by the UK Commission for Employment and Skills. It shows that compared to the EU, the UK has a high share of workers in high skill jobs and with tertiary qualifications. Its principal message was not that the UK lacks skills but that the workplace utilisation of those skills is a major problem. In other words, for some reason(s), we are unable to turn a high skill population into a higher productivity workforce. This is a not so covert indication that one of the UK’s key weaknesses is management practices.

If anything, rather than reading out a laundry list of what a Labour government would do, Miliband should have grabbed UK business by the scruff of the neck and insisted that a Labour government would work with it to overcome this critical failure. He could also have challenged companies to consider why they are sitting on a pile of cash on their balance sheets, rather than paying it out for investment. But this would entail a foray into the field of corporate governance and why companies act more to bolster short-term stock price performance than longer-term investment. I understand businesses harbour huge concerns about future economic and political stability here and in the world, and this is tricky stuff for an election campaign, but it is, nonetheless, of the utmost importance.

There are doubtless other factors that have intervened to cause our low productivity economy. It was not always thus. From the end of the 1980s until 2007, UK productivity performance was at least as good if not better than the average of the OECD, especially until about 2000. It is only since the financial crisis that the UK’s relative performance has deteriorated. But as the ONS has stated, the real problem in the UK isn’t labour productivity but what economists nerdily refer as "total factor productivity" or TFP.

TFP is the part of productivity we cannot measure directly but comes from the way in which economies and companies deploy and mix capital and labour in producing output. In short, it is a measure of efficiency and technical progress that makes the whole of output bigger than the sum of the (labour and capital) parts. Our performance here was poor between 2007-2011, both absolutely and by comparison with the G7 countries, and chronic in 2012. It was bad in 2013 but not much worse than in Germany and France. It has been consistently worse than in the US, whose performance hasn’t been exactly robust.

What this suggests is precisely what the Growth Through People report advocates, namely that we have to get smarter in the workplace. This might include, by the way, better working and childcare practices that would allow skilled and educated women to utilise their talents more. There’s no question that we have to make a priority of educating children better, preparing them for contemporary patterns of work. Miliband’s ideas to help spur business investment and confidence through better and high quality infrastructure is unquestionably a good idea if we can also identify how it is to be funded. We could add a stronger commitment to R&D, to innovation and to more robust corporate and educational establishment tie-ups.

We all understand what the Labour leader wanted to do, and how he wanted to portray the party as willing to partner business in resolving our major economic problem. But to this audience at least, he could have been more direct, more detailed, and more daring.