2The productivity challenge
Lagging productivity
6.Labour productivity measures output, in terms of goods and services produced, per hour worked.9 A country’s ability to improve its standard of living is determined by its ability to raise productivity. A high-productivity economy will tend to grow faster, with consequent positive effects on the public finances.10
7.UK labour productivity has tended to grow by around 2% per year, but it diverged from that of France and Germany since the 1970s and has stagnated since the 2008–09 recession. It has also persistently lagged behind other major economies, as is shown in Figure 3).11 Matching the productivity of the United States would raise UK GDP by 31%.12
Figure 3: Gross Domestic Product per hour worked (US $)
Source: The Conference Board, Total Economy Database - Output, Labor, and Labor Productivity, 1950 - 2015, September 2015. Note: This uses data from a variety of sources, including from Eurostat and the Organisation for Economic Cooperation and Development (OECD).
8.The Government’s 2015 productivity plan, Fixing the foundations: creating a more prosperous nation, aspires to achieve a higher pay, lower welfare society through means such as the introduction of the National Living Wage (NLW).13 The DWP told us that “enabling progression in work is central to transforming people’s lives and increasing labour productivity”.14 It was also important for government finances. Illustrating the potential fiscal rewards on offer, the JRF found that if each in-work tax credit claimant earned £30 per week extra in 2015–16, equivalent to working less than an hour extra a day at the National Minimum Wage, annual savings to the Exchequer would be £4.1 billion.15
9.A key objective of the Government’s strategy is moving people out of a cycle of long-term low pay. The Resolution Foundation showed that of those who were low paid in 2002, approximately three-quarters (73 per cent) had failed to escape onto consistently higher earnings by 2012. Nearly half (46 per cent) had escaped low pay during the decade, but found themselves back in or at risk of low pay by 2012.16 Figure 4 shows trends in low pay.17
Figure 4: The proportion of employees below selected low pay thresholds, 1968 to 2020
Source: Corlett, A. and Gardiner, L., Low pay Britain 2015, Resolution Foundation, October 2015, p. 7. Based on analysis of: DWP, Family Expenditure Survey (1968–1981); ONS, New Earnings Survey Panel Data (1975–2013); and ONS, Annual Survey of Hours and Earnings (1997–2014). Note: Great Britain. Hourly earnings excluding overtime.
10.The Child Poverty Action Group (CPAG) told us that a comprehensive national strategy on low pay is “urgently” needed. It suggested such a strategy should encourage all employers who can afford to, to pay a true living wage and provide for better earnings progression.18 Tony Wilson, Director of Policy and Research at the Learning and Work Institute (LWI), said “simply raising the wage floor” through the introduction of the NLW “is not enough on its own” to address the UK productivity challenge. He said that supporting people out of poverty required earnings higher than the NLW and advocated a broader in-work service involving employers, skills and childcare providers and public services.19
Ground-breaking and potentially revolutionary
11.Our evidence demonstrated very strong support for the principle of an in-work service for people on low pay. CPAG welcomed both recognition of the difficulties people face in moving out of low pay and the expansion of support.20 Prospects Services, an employment and skills provider, said people capable of part-time or full-time work should not be allowed to settle for working only a few hours each week indefinitely.21 Remploy, an employer of disabled people, acknowledged the policy would help to increase individual earnings and decrease Government expenditure on in-work benefits.22 Tony Wilson said the in-work service could be “revolutionary” in helping claimants find better-paid opportunities that match their skills.23
12. A large-scale employment support service for people who are in work will be ground-breaking.24 It amounts to a revolution in the benefits system. The current pilot is the first time an in-work service will be available to all claimants of in-work benefits below an earnings threshold.25 Furthermore, there are no comparable international precedents on which to draw. The DWP told us that, while there were instances in Canada and the Netherlands of “some state support to increase earnings for small cohorts of people”,26 this was “the first time that any country has made a significant commitment to supporting people through the welfare system to seek to increase their earnings in work”.27 It will therefore be incumbent on the DWP to build the evidence base as the policy is developed.
13.The DWP’s ongoing in-work progression pilot (considered in the next Chapter) aims to raise claimant earnings to at least the equivalent of full-time work at the National Living Wage.28 We heard some calls for the scheme to cover more people.29 Dr Anthony Rafferty, Senior Lecturer at the Manchester Alliance Business School, noted that the group covered is small relative to the 2.6 million people who are underemployed.30 A person may be considered underemployed if they are in part-time or full-time employment but wish to work more hours.31 The proportion of people who are underemployed is higher than the proportion of people who are unemployed and has fallen less in recent years, as shown in Figure 5.
Figure 5: The rate of UK unemployment and underemployment
Source: Office for National Statistics, Labour Market Statistics, March 2016 (Tables EMP16 & UNEM01). Notes: (1) Figures are not seasonally adjusted. (2) The rate of underemployment is the proportion of total people in employment who are underemployed. (3) The rate of unemployment is the proportion of people who are economically active and not working.
14.Other witnesses suggested extending the in-work progression service to specific groups such as:
- people working part-time or on zero hours contracts who would prefer full-time employment;32
- people with under-utilised skills, such as university graduates working in non-graduate jobs;33
- self-employed UC claimants, who might benefit from “self-employment specialists” to help with growing their business; and34
- young people.35
15.The Employment Related Services Association (ERSA), the main employment services trade body, called on the DWP to “work across departments to see how in-work progression support could be made available on a voluntary basis to all employees who might benefit, regardless of benefit status”.36 Remploy concurred that support for in-work progression should be “available to everyone who wants it”.37 The LWI suggested that savings in benefit payments resulting from people increasing their earnings could fund a wider service.38
Conclusion
16.In-work support in Universal Credit is a radical policy departure, the first of its scale in the world. In promising progress in breaking the cycle of people stuck in low pay, low prospects employment, it could be revolutionary. It is potentially the most significant welfare reform since 1948. We congratulate the Government for developing this innovation.
17.Starting with part-time workers earning less than the equivalent of full-time work at the National Living Wage is sensible. The UK’s productivity challenge, however, is much broader than that. If an in-work service achieves its potential, there is a clear case, in time, for extending it further up the earnings scale.
9 It is most typically measured as Gross Domestic Product per hour worked
10 Harari, D., Briefing paper number 06492: Productivity in the UK, House of Commons Library, 8 April 2016
11 See ref. 10
12 HM Treasury, Fixing the foundations: creating a more prosperous nation, July 2015. Note: GDP per household is not a household income metric as GDP also includes Gross Operating Surplus of corporations and other measures of domestic income/production. HMT calculation: 2014 nominal GDP (YBHA) divided by 2014 ONS household estimates; Quarterly National Accounts, ONS, June 2015 and Families and Households, ONS, January 2015
13 HM Treasury, Fixing the foundations: creating a more prosperous nation, July 2015
15 Oakley, M., Employment support for a high-wage economy. Joseph Rowntree Foundation, 2015. The calculation is based on the 2015-16 tax and benefit system
16 Hurrell, A., Starting out or getting stuck? An analysis of who gets trapped in low paid work - and who escapes, Resolution Foundation, November 2013
17 Note: Low pay is defined as being paid less than two-thirds or less of the median hourly earnings. Figure 4 shows that the NLW will reduce the prevalence of low pay to its lowest level since 1985, from 21 per cent in 2014 to 19 per cent in 2020, Source: Corlett, A. and Gardiner, L., Low pay Britain 2015, Resolution Foundation, October 2015, p. 5
25 While a similar service was trialled by the DWP in 2003, it was smaller in scale and focused on specific, largely unemployed, claimant groups. See Hendra, R. et al, Breaking the low-pay, no-pay cycle: Final evidence from the UK Employment, Retention and Advancement (ERA) demonstration, Research report 765, DWP, 2011. Note: 9,161 people participated in the ERA demonstration. Page 39 of the DWP report shows this involved 6,787 unemployed lone parents volunteering for the New Deal for Lone parents welfare-to-work programme; 2,815 lone parents working-part time and receiving Working Tax Credit; and 6,782 long-term unemployed people aged over 25 who were required to participate in the New Deal 25+ welfare-to-work programme
28 People between lower and upper earnings thresholds will be eligible. For a single person aged over 25, for example, the weekly earnings threshold will be between £78.10 and £252.00. The first figure is known as the ‘lower’ level administrative earnings threshold, and is the JSA weekly amount (up to £57.90 for people aged 18 to 24; up to £73.10 for people aged 25 of over; and up to £144.85 for couples both aged over 18), plus an extra £5 for single people and £10 for couples. The higher figure is the ‘upper’ level conditionality earnings threshold, and includes claimants with earnings below a maximum of the equivalent of 35 hours work at the National Living Wage. The National Living Wage is referred to as the National Minimum Wage for those aged under 25. DWP (IWP0034)
29 See, for example, Learning and Work Institute (IWP0031), Community Links (IWP0036), University of York (IWP0029), Remploy (IWP0024), Employment Related Services Association (IWP0032), and Prospects Services (IWP0030)
31 This includes people working full-time or part-time who wish to work more hours and are available to start working longer hours within two weeks, and their weekly hours worked were 40 or less (for people aged under 18) or 48 or less (for people aged 18 and over). See: Office for National Statistics. Dataset: Underemployment and overemployment: EMP16, 17 February 2016
© Parliamentary copyright 2015
Prepared 06 May 2016