Factory decline blamed on managers, not ministers

Blame for the poor performance of manufacturing since Labour came to power lies with factory bosses rather than ministers, an independent study shows today.

Failure to boost productivity and a surge in labour costs has left the UK manufacturing trailing its main economic rivals, according to the report.

The study, by the Ernst & Young ITEM Club forecast unit, found high levels of interest and exchange rates on the back of Labour's fiscal expansion, had contributed to the decline.

But Peter Spencer, a University of York professor who advises ITEM, said the main problem was the failure of employers to control labour costs. "It is difficult for manufacturers to compete with the financial services sector for skilled labour, particularly for graduates, but they might have restrained labour cost inflation more effectively by increasing efficiency," he said.

Professor Spencer also said his analysis showed that while the pound had risen 30 per cent since 1997, total labour costs had risen 40 per cent. This compared with 15 per cent in Germany and 12 per cent in France.

The US has seen a higher rise in labour costs (48 per cent) but had boosted its productivity by 41 per cent compared with the UK's 28 per cent.

Professor Spencer acknowledged the UK had suffered from competition from China and other low-cost countries but said it had failed to take advantage of the global boom of the past four years. "What needs to be done is to focus on what the industrialists and Government can do to improve the sector's performance, close the productivity gap and dampen further labour cost pressures."

Manufacturing has lost a million jobs since 1997 and its share of GDP has fallen below 15 per cent compared with more than 20 per cent in 1997.

The EEF, the manufacturing employers group, agreed there was a need for industry to improve productivity but said the blame did not lie with wage inflation.

"The reason for low productivity in the UK is central to their ability to invest in capital and R&D and innovation," Lee Hopley, an EEF economist, said. "Costs pressures they are facing have been a definite constraint on their productivity growth."

She said another issue was the mismatch of skills with science and engineering graduates suffering the highest level of unemployment at a time when firms were complaining of skill shortages. "That needs to be resolved if manufacturing is to continue to compete more in technology and high-valued added sectors."

The EEF and the ITEM Club agreed that manufacturers should aim to compete in the higher-value manufacturing activities for exports rather than products that can be produced more cheaply in other countries.

Professor Spencer said: "Although the make-up of the manufacturing sector is going through major change, exports are not in danger of collapse, as the strength of pharmaceuticals and aerospace demonstrate."