Examination of Witnesses (Questions 20
- 39)
TUESDAY 16 SEPTEMBER 2003
WELSH ECONOMY
RESEARCH UNIT
Q20 Albert Owen: Yes, because they
cannot get around the German employment laws basically.
Mr Jones: Because they cannot
sack people?
Q21 Albert Owen: Because they cannot
sack people.
Mr Jones: I see what you mean.
I think far more likely the outcome—this is just my personal
opinion—is that we will see countries like Germany and France
moving closer to the UK position because I think the last couple
of years of stagnation in the German economy particularly has
been a wake-up call. Could my colleague, Jane, join me?
Q22 Chairman: By all means.
Mr Jones: The German system of,
if you like, consensus between unions and employers is breaking
down. We have seen that with some developments in VW where they
have tried to sack some workers and faced union resistance and
that has turned fairly nasty. I think that will happen more and
more, so it is less likely that we will move very far towards
their position. We have adopted a Social Chapter, or Charter,
whatever it is called, which we were not going to do under the
Conservative Government, so we have moved a little way towards
that, but I think it is more likely that Europe will move back
towards us driven by the need for flexibility in the workforce
when we are competing with other locations, certainly Central
and Eastern Europe, which have very flexible workforces, or increasingly
flexible workforces, and Asia.
Q23 Mr Williams: You mentioned that
the exchange rate of the pound, more realistic exchange rate of
the pound, will help manufacturing but will it help inward investment
more or will it aid the existing businesses in Wales more? Will
it affect how we should be supporting the different types of investment?
Mr Jones: By and large, inward
investors, by their very nature, are exporters far more than indigenous
business, so a priori you might think that they would be
more selective. Of course, what inward investors can do is through
things like transfer pricing and so on, there are some things
they can do. FDI is a sector which is most affected by changes
in exchange rates simply because we do not have that many indigenous
exporting companies and that probably is a fair characterisation.
In answer to your question, yes, the FDI sectors are probably
the most likely to be happier about the declining exchange rate
of the euro, but there is also the stability argument. Many of
these companies, Honda in Swindon, for example, are complaining
that they prefer to see a stable environment rather than one where
costs go up and down, even if those costs are coming down.
Q24 Mr Williams: Your paper gives
a snapshot of average earnings in Wales as being seven or 8% less
than the UK average. Perhaps you could tell us whether that gap
is closing or widening at the moment?
Mr Jones: I think the more recent
figures would show, if anything, a slight widening of that gap.
It is true that where we are close to the UK in terms of wages
tends to be in slow growth sectors and where we are far away from
the UK, that tends to be in high growth sectors, so by and large
the gap is likely to increase. I would not say that is a significant
increase in gap. What you do tend to find is specific sectors
of occupations, of industries, will drive those differences.
For example, manual workers in manufacturing in Wales are paid
the same as in the UK, there is very little difference in manufacturing
wages for manual workers. Non-manual workers in manufacturing
are paid far less than the UK average, about 12-15% less than
the UK average, driven largely by this limited functional base
that I was talking about. Non-manual manufacturing workers in
Wales tend to be middle management at the very best, and hence
get those sorts of rewards, and in the UK as a whole there is
a much wider scale of manual-type occupations so the rewards tend
to be higher.
Q25 Mr Williams: So if you took out
the very high wages or high earnings in the South East of England,
the average wages in Wales would not be a lot different from the
rest of England?
Mr Jones: They would still be
slightly lower, I think. I would have to check the figures. Considering
the sample sizes and the way they do this it is difficult to be
definitive. I think we would probably still see a lower level
of wages but not to the extent that we have now.
Q26 Mr Williams: I think you have
probably addressed this next issue before but perhaps you could
expand a little bit on why business and service sectors pay less
than the manufacturing sector?
Mr Jones: The first question to
address is the sector mix in the two. What we do have in Wales
relative to the rest of the UK are service sectors which are low
value added, so we do not have as many lawyers and accountants
and stockbrokers, who obviously get paid very much better than
the typical manufacturing sector. We do have, by and large, the
lower value added service sectors which pay less, whereas our
existing manufacturing sectors, where the big employment is, are
still quite high capital intensity sectors, things like steel,
automotive and aerospace, because they put so much capital to
each unit of labour and get much more product out per unit of
labour, so can afford to pay higher wages to that unit of labour.
It is a sectoral mix-type argument.
Q27 Chairman: Can I just bring in
Julie Morgan, but before I do, welcome, Dr Bryan.
Dr Bryan: I am sorry I am late.
Q28 Chairman: We understand why.
Do feel free to chip in at any time.
Dr Bryan: I am trying to catch
up.
Q29 Julie Morgan: I wondered if you
looked at the gap between men and women's pay and how that comes
into this discussion that we are having.
Mr Jones: I did very briefly.
Given this is a manufacturing inquiry, sample sizes of female
manual in manufacturing are virtually non-existent, as you can
imagine. On the whole, for all employment, I believe that the
gap for females is less than for males, obviously from a far lower
base, but in percentage terms—I am happy to give the Committee
chapter and verse on this at a later date—the gap for females
is still below the UK average but tends to be less than for males.
That is largely a function of poor pay for women across Britain
more than it is women being paid well in Wales compared to men.
Q30 Julie Morgan: Are you saying
that the gap between women in Wales and women in the rest of the
UK is less than the gap between men in Wales and men in the rest
of the UK?
Mr Jones: That is what I am saying.
That is driven largely by the smaller spread of earnings for women
compared to men, because obviously there are more men who are
much better paid so that spread tends to be longer which means
the average is higher, or the median is higher. For women there
is a much more squashed distribution, so even though we get to
the same place in the distribution those percentage figures are
smaller because there is a smaller gap between top and bottom.
Q31 Mr Williams: Turning back to
your paper again, you assert that the foreign-owned industries
provide better paid and more stable employment. Can you give us
the reasons behind that statement?
Mr Jones: Yes. There are two.
I refer you back to my last answer on sectoral mix, the large
FDI employers tend to be high capital intensity sectors. If you
think of things like Dow Corning in Barry, the chemical industry,
there is a very high product per unit of labour, reasonably high
wages. In terms of stability, it is by and large a size issue.
Large firms tend, by and large, to be far more stable than SMEs,
small firms, a lot more churning at the lower end. Given the fact
that FDI is almost by definition large companies, they are more
stable and do not tend to come and go quite so often as small
companies.
Q32 Mr Williams: So does that mean
that the emphasis on SME growth and establishment actually predicates
towards low wages and unstable employment?
Dr Bryan: I think the point about
FDI is this correlation with size, as Calvin has said, and therefore
large firms, whether they be large indigenous firms or large foreign
firms, can bestow this benefit of size and the benefits, that
I think Calvin has probably referred to throughout, would be higher
productivity, economies of scale and scope, higher wages and so
on, opportunities. Yes, we do find in the literature evidence
that smaller firms do not bestow so many of those benefits. You
have perhaps lower earnings, shorter, flatter hierarchies, poorer
opportunities for occupational development and so on. I do not
know whether you want to talk more about SMEs at this point but
those are issues that have to be considered by the policy-makers.
We can talk about SMEs in a very general sense and I think perhaps
that would be one of our problems in that it is perhaps too general.
Q33 Mr Williams: I was going to ask
is there anything that can be done at a UK level, or even at an
Assembly level, to help create better conditions of employment
and wages by influencing SME growth?
Mr Jones: Relative to FDI?
Q34 Mr Williams: Yes.
Mr Jones: It is very difficult,
I think you are comparing apples with oranges in terms of what
goes on inside these companies if you think of a smallish indigenous
company and a large FDI plant. The reasons that FDI is more productive
and can then pay higher wages are largely to do with things like
its ability to be in the best geographic locations, its ability
to take advantage of very sophisticated just-in-time type logistics
chains and so on.
Dr Bryan: And strong messages
to the labour market as well.
Mr Jones: If you could offer these
to Welsh SMEs, the FDI, if you see what I mean, they are simply
not available to independent companies. I think there have been
arguments that Welsh companies involved in FDI supply chains actually
find very stringent cost pressures coming down the supply chains.
They have large contracts with FDI purchasers, they are keen to
hang on to the contracts and year on year the FDI might demand
productivity improvements which may be of benefit to the supply
chains but also the price goes down, so what you tend to find
is you can get a lock-in of Welsh owned companies into these supply
chains and really they are making products which in the end are
only suitable for one purchaser and if that purchaser does disappear
that is a problem. I think Fenner is perhaps one company that
experienced that sort of problem.
Q35 Dr Francis: Good morning. We
have already been touching on overseas investment but if we could
focus specifically on it. In what ways do foreign owned industries
encourage better practice in domestically owned industries?
Mr Jones: Certainly I would refer
you to the work done by my colleague, Dr Munday, who is not here
today. He has made quite a study of this. I will try to distil
some of his thoughts. It is a very complicated issue, tracing
things like technology spillovers and productivity gains down
the supply chain. FDIs demand modern suppliers, so it requires
products delivered at a certain price which can place high demands
on the supplying industry which it then must meet or fail to get
the contract. These are often attached to quality improvements
so, for example, failure rates per thousand and so on, there will
be a target that supplying companies must meet. Those sorts of
improvements in quality control one might argue are the benefit
of having the FDI as part of the supply chain. More generally,
in some sectors where you have embedded, if you like, monopolistic
indigenous industry, the existence or appearance of FDI can impose
competitive pressures on that existing company to sharpen up its
act, cut costs and so on in the face of new competition. It is
a corner shop compared with the new Tesco's down the road type
of argument, I suppose. Also, I think there are one or two other
things. Where you see an FDI entrant doing something well and
you have identified perhaps a management type approach or marketing
approach or something which you see as a good thing, you can then
copy that to some extent in the indigenous business. Finally,
the potential perhaps for market improvements. Big new FDI may
encourage an up skilling of the labour market by increasing demand
for various different types of skills. As I say, this is not my
particular area and I refer you to the work done by Max Munday
and Nigel Driffield which is quite extensive in this area.
Q36 Dr Francis: What about employment
practices? What is the perspective, say, of the trades unions
on all this?
Mr Jones: Certainly I think it
would vary from case to case and you would probably have to ask
them. I am not sure I am qualified to answer that.
Q37 Dr Francis: When you are talking
about all of this, is this peculiar to Wales or is this the general
situation across the UK?
Mr Jones: It is a situation which
has been found to exist across regions in the UK, although there
is a specific within region type effect, so you can quantify the
effects within a given region but they tend to exist at different
levels within different regions of the UK.
Q38 Dr Francis: If we could move
on to R&D. You note in your paper that R&D expenditure
in Wales is low compared to the UK average. Is this solely because
the research arms of the industries in Wales are based outside
of Wales, or are there other factors?
Mr Jones: There are other factors.
Certainly a major part of the answer is what you have just stated,
that the companies do not tend to have headquarters-type operations
within Wales and do not tend to carry out blue sky R&D. Maybe
some sort of product innovation but not what we would categorise
as pure R&D within Wales. That is a major part of the answer.
Obviously there are other issues maybe closer to home for the
UK Government. We do not have much research infrastructure in
Wales outside of the purely academic university infrastructure
and a large reason for that is the paucity of expenditure by Central
Government on R&D-type activities in Wales. Certainly I would
categorise that firstly in defence spending. R&D defence spending
in Wales is virtually non-existent, as far as I am aware. There
are one or two plants in Wales but when you compare it to something
like the Bristol cluster of R&D and the sorts of things that
go on there, it is very, very different from the situation in
Wales. That means that you do not have the labour supply and so
on and the support infrastructure for R&D-type facilities
which that sort of Government spend can offer. Secondly, the astonishing
concentration of Government support for academic research is within
a 25 mile radius of London. I am not sure of the exact figures
but something like a quarter to 30% of all Government sponsored
research is carried out in a very, very narrow circle around London
and that means the opportunities for things like commercialisation
of research, which may be what aids companies in their R&D
efforts, simply does not exist in Wales to anything like the same
degree.
Dr Bryan: It is interesting to
note that when Corus, British Steel in its old days, had its R&D
headquartering in Port Talbot it probably employed only about
150 people there. I do not know how much money was spent but it
is interesting that such a large presence, even at its height,
had such a low employment impact in terms of R&D. That has
gone now, of course.
Q39 Mr Caton: Last night we had an
informal meeting with business people from Wales, including both
indigenous industries and foreign owned business, and one representative
of quite a large foreign company accepted research and development
was not really something that they did but design and development
was something that they did here in Wales and they play what he
seemed to feel is quite a significant part in the new technium
approach. There are two parts to this question. Do you feel that
things are moving in the right direction with those sorts of initiatives?
Secondly, are there examples anywhere where multinational companies
have actually shifted significant parts of their research work
from the headquarter countries to other places?
Mr Jones: The first part of the
answer, I think, is it is far too early to say whether the technium
approach is the correct one. That sounds like a best case scenario,
the technium approach. I am not sure whether when we think about
the sectoral definitions of technica there is the infrastructure
support for that, I simply do not know yet. Certainly I think
what is happening if we look at Swansea and the automotive developments
down there, I know the Swansea Institute are very keen to tie
development and automotive technium into their offer of various
engineering courses. I think that is the way to go to ensure that
the full gamut of public resources is employed through that kind
of focus point. With the private sector involved as well there
is certainly hope for the technium but it is too early to say.
Dr Bryan: Can I butt in there
and make the generalisation that R&D activities are highly
prized and guarded and are not something that would normally be
transferred overseas. I think that is probably why we have the
situation that we do.
Mr Jones: Obviously there will
be exceptions that prove the rule but by and large they will be
at or close to the headquarters of the respective companies. Certainly
in terms of the production, design-type innovations that argument
does not hold because those are better placed at the production
centres but there is still a big gap between design innovation
and R&D in its pure sense. When we think about incremental
improvements, big steps and new products and so on, it would be
very difficult to see a situation where FDI would move that sort
of operation into somewhere like Wales where they are here
because of cost competitiveness-type arguments, not because we
have that sort of developed infrastructure. The development of
certainly the academic side in Wales and catering for things like
production innovation and so on, and I know in the Business School
there are people who do that, is probably the way to go in terms
of involving the academic community perhaps.
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