The link between the two papers

In Unpacking the puzzle (UTP) we analysed five factors to try to explain the weak manufacturing performance since the aftermath of the financial crisis.

These were:

• Investment level
• Labour use
• Complex business operations
• Company average size
• Management practices

The factors have all had an effect on productivity and in Piecing together the puzzle (PTTP) we aimed to explore these in more detail using new data as well as consulting with manufacturers.

Capital vs labour

Our Manufacturing Outlook has showed for quite some time that employers have been keener on hiring people more than investing on capital.

This was also confirmed by our latest Investment Monitor where companies highlighted how they invested enough to meet demand and KPIs but not enough to avoid recruiting to meet additional demand.

While this is great for those looking for a job, it’s not the best outcome for a sector trying to get productivity back on the trend it used to have.

Output and now inputs

In UTP we analysed how some UK manufacturing sub-sectors are more or less focussed on “core production”. In our new analysis, we moved our attention on the input side to underline once more how some sub-sectors (but clearly not all) might be different compared to international competitors and/or other domestic sub-sectors. The PTTP analysis has an interesting example on the inputs used in the food industry which I invite you to read.

The aim of the input and output analysis was to underline how good policies need to take into account peculiarities of each sub-sector, the markets they operate in and any other characteristics for which a “one size fits all” policy solution may not be adequate.

Get big, get productive

In PTTP we wanted to check once more how average company size is important for productivity. What’s better than a graph to show this correlation?

Each bubble represents one manufacturing sub-sector of the four countries we took into consideration, the vertical axis reports productivity and the horizontal the average size of companies in terms of employees. The size of the bubble shows how big is the overall sector (total number of people employed in the sector). It’s quite clear how well correlated are the two and how there is no particular differences amongst countries or sub-sectors.

Good management practices are the key

Already in UTP we underlined how important are good management practices and how the UK did not score too well on average compared to other countries. Since we think that the topic is crucial but the availability of data is scarce, we asked manufacturers in a survey. One of the results that caught our eye, since it is related to both good management practices and the output structure of some UK sectors (heavily focussed on manu-services), is about which areas companies measure productivity.

As expected production and whole business scored best, but the most striking result is that 27.5% of companies do not measure productivity anywhere and in any way. Moreover, the problem is not only related to SMEs, indeed in our sample 19.5% of large companies do not measure it.

As a last remark, the graph shows also an important mismatch between productivity targets and actual measurement.

We noticed a common characteristic

Analysing all these factors, we noticed how foreign owned companies scored better in terms of investment, size, management practices and productivity compared to domestic ones. However, this section won’t be part of this article. Don’t worry we will get back to that during the week.

If you are impatient, you will find everything you need to know in the full release, or you can check the two minutes video at the bottom of the page.

The budget is coming and we need to act to fix the productivity problem

In the last section of this work we made a few proposals for the Budget coming out on Monday 29th and these are based on the following approach: change, influence, accept.

What do we need to change immediately?

Something clearly needs to be prioritised and in this group we included actions to boost investment and prepare better managers for the future.

To do this, we propose an accelerated depreciation over the current Annual Investment Allowance which would help companies that want to invest more and scale up. We also think that the re-institution of a Regional Growth Fund will help businesses to invest more.

The second proposal is about using the current Apprenticeship Levy framework to incentivise management training. For every 4 apprentices trained by firms using the Apprenticeship Levy, firms should be able to use their levy funds to train one manager, up to a maximum of five managers. Moreover, we think we should create a Continuing Professional Development account scheme for individuals which will drive demand on the individual front for management training.

As we have said a few times, fixing the “productivity puzzle” is crucial to guarantee a bright future to the UK. Putting aside booms and busts, the long-term economy growth trend follows the one of productivity.

It’s just too important to ignore it.