Executive summary

Securing higher living standards requires a revival in labour productivity

Labour productivity has stalled
Real GDP per hour worked, in constant 2010 USD PPP
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Source: OECD (2017), “GDP per capita and productivity levels”, OECD Productivity Statistics (database), September.

 https://doi.org/10.1787/888933600581

After a good performance until 2016, growth slowed in the first half of 2017. The unemployment rate has fallen to below 4.5%, but real wages are in a downward trend. Reviving labour productivity growth is key to ensuring higher living standards. Planned departure from the European Union (Brexit) has raised uncertainty and dented business investment, compounding the productivity challenge. Negotiating the closest possible EU-UK economic relationship would limit the cost of exit. The authorities should allow automatic stabilisers to work and identify in advance productivity-enhancing fiscal initiatives on investment, to be implemented rapidly were growth to weaken significantly in the run-up to Brexit, while safeguarding fiscal sustainability. A tax and spending review would enlarge fiscal space for further productive measures.

Reducing regional discrepancies to support aggregate productivity growth

Regional disparities in productivity are high
Nominal GVA per hour worked, in GBP
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Source: ONS (2017), “Regional and sub-regional productivity in the UK: Jan 2017”, Office for National Statistics, January.

 https://doi.org/10.1787/888933600600

Regional labour productivity is weak outside Greater London and South East England. Policy packages building on existing strengths of lagging regions, and possibly developing new ones, should foster local and regional transport infrastructure, research and development, housing and skills. This would increase the economic benefits from national infrastructure projects. Sustaining high integration in global value chains would bolster goods-oriented regions. Services-oriented regions would benefit from services trade liberalisation and more integrated cities. Devolution should continue to better tailor policies to local needs and more co-ordination in transport plans across city-regions would help creating larger economic hubs.

Raising competencies of low-skilled workers to make the economy more productive and inclusive

Regional productivity and education are linked
Quarters of regions by productivity levels, 20141
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1. Quarters are calculated as un-weighted averages.

Source: OECD (2017), OECD Regional Statistics; and ONS (2017), “Regional and sub-regional productivity in the UK: Jan 2017”, Office for National Statistics.

 https://doi.org/10.1787/888933600619

Over a quarter of workers in the United Kingdom have only low skills, which holds back labour productivity and job quality. Raising skills is a priority given plans to reduce net migration. The government has started to simplify vocational education and training and to raise the number of apprenticeships financed with a levy on large businesses. Enhancing teachers’ training and other incentives, in particular in disadvantaged schools, would address teacher shortages. Low-skilled workers participate less in lifelong learning and introducing targeted re-training programmes would boost competencies more broadly. Tax and regulatory reforms of non-standard forms of employment would offset workers’ weaker bargaining power and ensure better job quality.

MAIN FINDINGS

KEY RECOMMENDATIONS

Macroeconomic and trade policies

Fiscal space has risen – with a fiscal buffer of 1¼% of GDP relative to the structural deficit target of 2.0% of GDP by 2020 – while monetary space is limited.

Allow the automatic stabilisers to work fully and identify in advance productivity-enhancing fiscal initiatives on investment that could be implemented swiftly (such as spending on repair and maintenance or soft investment), should growth weaken significantly ahead of Brexit.

The tax system favours self-employed people over employees and the indexation of state pensions is generous.

Perform a tax and spending review to allow for additional productivity-enhancing fiscal initiatives, for example by:

Raising national insurance contributions for the self-employed;

Indexing the state pension on average earnings only.

High consumer debt growth, coupled with stagnant household incomes, is a major financial stability risk.

Introduce debt-to-income ratios for borrowers depending on their exposure to shocks.

Disorderly exit from the European Union would hurt trading relationships, reducing long-term growth.

Maintain the closest possible economic relationship between the United Kingdom and the European Union.

Starting regional convergence in productivity

Productivity growth has been stagnant and there are productivity differentials across sectors and regions.

Develop integrated, regionally focused policy packages based on current and emerging regional strengths. Prepare impact assessments of the EU departure and climate change objectives.

Low transport infrastructure investment outside the south of England may have created bottlenecks, holding back agglomeration effects and associated productivity gains.

Champion the recently created strategic planning and delivery agencies for transport infrastructure to achieve a stable and more efficient long-term investment framework.

Invest in improving inter- and intra-city transport links where such investments can foster agglomeration effects and unlock related productivity benefits.

Subnational governments have limited fiscal autonomy, on both spending and taxes.

Housing supply is not responsive enough to demand.

Continue decentralisation by concluding deals with all city-regions.

Allow local authorities to retain more revenues from locally levied property taxes.

Research and development (R&D) is low, holding back innovation and its diffusion across regions, in particular in the least productive ones.

Continue to increase direct and indirect support for private and public R&D, and for the collaboration between businesses and universities to promote applied innovations and their diffusion.

Lagging regions find it difficult to attract or retain skills. Teacher shortages are high and retention rates are low, mainly at the secondary level. New teachers are unwilling to work in disadvantaged areas. As a result, not all students attain strong basic skills once they have completed their studies.

Allow more freedom to adapt technical education to local business needs.

Raise training and other incentives to recruit and retain teachers in disadvantaged areas and/or regions with high teacher shortages.

Improving productivity and job quality of low-skilled workers

Childcare participation is low at age 2 and the education and training of childcare staff could be improved, particularly in disadvantaged areas.

Prioritise funding to training and skills development of childcare staff.

Planned hikes in the minimum wage could price low-skilled workers out of standard forms of employment.

Use existing flexibility in reaching the National Living Wage 2020 target in case of negative economic shocks.

Growing use of non-standard forms of employment (self-employed, zero-hours contracts, etc.) can be detrimental to skill acquisition and job quality of low-skilled workers.

Grant workers on zero-hours contracts enhanced job security rights after three months.

Keep under review the interplay of taxes and welfare benefits to raise incentives to work more hours.

Introduce tighter criteria to restrict self-employment to truly independent entrepreneurs.

Low-skilled workers participate less in training relative to more skilled workers.

Introduce individually targeted programmes for low-wage and low-skilled workers to improve their lifelong learning opportunities.

The proportion of youth detached from the labour market is high, relative to other age groups.

Increase financing and continue to promote the effectiveness of active labour market policies for youth who are neither in employment nor in education or training.