Equality of Opportunity and the Productivity Puzzle

While the Budget announced today will be the first Conservative Budget since 1996, it will focus on the same old problems that have plagued the British economy since the crisis years of 2007 and 2008. Of course, the most politically important issue is the deficit, to which the Chancellor will prescribe a continued programme of spending reductions. As always before a budget, the press have been kept in a state of speculative feeding frenzy through the slow leaking of details, and it seems that limiting child tax credits, reducing housing benefits, changes to working tax credit and a lowering of the benefits cap might be on the cards.

Most of us are familiar (perhaps overwhelmingly so) with the dualistic lines drawn around Britain’s deficit: to tax more or spend less, austerity or borrowing, to burden the rich or the poor. But there is another serious economic problem, which, perhaps hidden in the shadow of our deficit, has until recently been less prominent in the national conversation. This problem is ‘Britain’s productivity puzzle’, which earlier this year the Chancellor announced would be addressed through a new ‘Productivity Plan’ as part of today’s budget.[i] The contents of this plan will be one of the most important parts of the budget.

Normally after a recession in the UK, productivity has bounced back. This happened in the recessions of ’61, ’73, ’79 and ’90, but it hasn’t happened in anything like the same way in the aftermath of the latest economic crisis. Even seven years after the initial downturn, productivity is still slightly lower than it was in 2007, despite strong GDP growth. This is a serious problem. Productivity doesn’t just help define the size of the UK’s public sector deficit; it is a key determinant of living standards and wage growth.[ii] The causes of this low productivity, and how to solve it, are serious problems that the Bank of England and the Treasury will have to get to grips with over the next five years.

The precise causes of Britain’s productivity problem are unclear, but what we do know is that some of the most important factors in determining productivity relate to the skill of the workforce: education, workplace skills and training.[iii] In the context of Britain’s productivity problems, wasted potential in the workforce represents a clear threat to the UK’s economic well-being. And this we can be sure of – Britain wastes plenty of potential.

In the UK, only one in five low-paid individuals fully escapes low pay in a ten year period.[iv] Those from the most advantaged backgrounds are significantly more likely to go into higher education that those from poorer backgrounds, and far less likely to be NEET at age 18-24. What’s more, people with parents in managerial and professional occupations are much more likely than those with parents in lower socio-economic groups to themselves enter into the higher managerial and professional occupations.[v] If you are from a poorer background or lower down in the socio-economic pecking order, you are far too likely to stay there. This isn’t just a moral problem about a fairer society; it is a serious economic threat.

In these respects, improving the skills and education levels of our population, and matching them to jobs that can help contribute to economic growth, will be important to not only improving the nation’s productivity, but also its equality of opportunity.

Here at Demos, we will be exploring how best Britain can tap into its talent base and help a much wider section of society to fulfil their labour market potential over the coming months.