Our Hidden Deficit

A hugely positive outcome of the 2008/9 financial crash has been the emergence of a broad consensus on one of the biggest challenge facing the UK economy and our public services.

It has taken a long time. But there is now a growing understanding amongst politicians across the spectrum, business leaders, and opinion formers that we have to overcome our productivity deficit. There is an acceptance that it needs to be dramatically improved at pace. We are on average 20% behind our main industrialised competitors when it comes to private sector productivity. And in our public services, the largest single part of the economy in many of our regions and sub-regions, productivity has declined over the last 12 years despite a large real terms increase in funding. As the OECD says, low levels of productivity in the UK are deeply ingrained and structural, not a short term cyclical hangover from the last crash.

Many of the consequences of our productivity deficit are obvious. It holds us back, for example, in our global economic competitiveness. It is, therefore, no coincidence that we have not had an overseas trade surplus since 1998. And in our public services, despite the magnificent efforts of so many on the front line, it often results in consistently low value for money and poor service quality. Some of the implications are more subtle. Consistent increases in pay can only be funded by sustained productivity gains. Therefore our productivity deficit restricts the ability of many employers to improve the real terms annual earnings of employees, because the value added by each employee is not increasing year on year. This traps people, particularly the lower paid, through no fault of their own, into a long term regime of falling real wages, especially in sectors of the economy that have low margins or very tight funding settlements in the case of public services.

It is definitely encouraging to see so many able minds now focusing on our productivity challenge. It is worrying however that almost all of the policy prescriptions that are being proposed to tackle it amount to exhortations about what should be done. Yet the urgent requirement is to unlock the conundrum of how to make progress. What does the evidence tell us about the how? The facts speak for themselves. They shine a bright light on the key to success: the engagement question. There is a crystal clear causal relationship between high levels of employee engagement and high productivity in modern economies. In the UK’s case we are currently ninth amongst the world’s top twelve economies in terms of employee engagement, the lower quartile by international standards. So, if we are serious about making progress on productivity levels we have to enhance employee engagement.

To do so quickly and sustainably we should look no further for a template than the rapidly expanding employee ownership sector, a sector that is now bigger in the UK than the aerospace industry. Businesses with significant employee ownership have the highest amounts of positive employee engagement in the UK economy. 80% of those who work in employee owned companies feel fulfilled in and experience a sense of achievement from their roles. As a direct consequence productivity in those businesses is increasing 4.5% year on year when productivity in other types of businesses is flat. UK business leaders should study and borrow the best practice, much of it world leading practice, about how employee owned businesses deeply engage their workforces. Employee ownership in the various versions it is used in different businesses offers a framework for giving employees a financial and emotional stake in the business. It deploys brilliantly effective methods of employee engagement. The framework and methods in turn unleash astonishing levels innovation, productivity and profitability. This potent formula offers a powerful route map to the new economy we need to build.

So yes it is great that most business conversations about the economy now include consideration of both our financial deficit and our productivity deficit. And yes it is very encouraging to see the CBI in a report it launched this month, talking about the chance we have to add £144bn to UK GDP if we can increase productivity levels to those achieved by comparable businesses in the US. But only if we properly address our employee engagement deficit, our hidden deficit, can we build a highly productive economy. Employee ownership offers a fantastic source of best practice for how to go about this.

If we choose not to grip this hidden deficit we will all live to regret it.

Iain Hasdell is Chief Executive of the EOA