Raise wages and give workers more holiday to boost UK demand and productivity, think tank urges

Recommendations also include abolishing personal allowance of income tax to make direct payouts to consumers, and frontloading green investment

Olesya Dmitracova
Economics and Business Editor
Monday 12 August 2019 13:16 BST
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(Reuters)

Workers should be given pay rises and more time off to splash their cash if the government wants to solve Britain’s persistent productivity crisis, according to new research.

UK productivity as measured by output per hour worked has been growing at a snail’s pace since the last recession, slowing down sharply from its pre-crisis trend. Policymakers have looked for an explanation in the so-called supply side of the economy – the ways in which goods are made and services delivered – and pointed to declining technological innovation and cheap loans keeping unproductive “zombie” firms afloat, among other possible reasons.

But the New Economics Foundation says its research shows that the government must also look at the demand side – the level and nature of spending across the country.

“Average productivity, wages and living standards have experienced their worst decade in almost two centuries. It is increasingly clear that weak demand has been the overlooked problem,” said Alfie Stirling, head of economics at the think tank.

“Raising demand by putting more cash in the pockets of the UK’s poorest workers, while giving people more paid time off from work to spend it, should now be part of a radical mix of options for any government that is serious about increasing productivity in a way that works for people and society.”

Weak demand can affect productivity by discouraging firms from making costly investments needed to increase efficiency over the longer term, the think tank says. Instead, companies rely on cheaper labour that can be shed quickly if demand doesn’t improve. As a result, productivity does not improve.

The New Economics Foundation finds evidence of exactly this in official data.

It says that since 2012, firms have increasingly preferred to hire rather than to invest and that, relative to all employees, the proportion of zero-hour and self-employed workers, as well as one-person “micro-companies”, has grown by two fifths since before the financial crisis. The corresponding lack of investment now explains at least a quarter of the UK’s gap in productivity with the historical trend.

A report by the New Economics Foundation sets out a number of measures to lift demand, including gradual increases in statutory paid holiday and faster rises in the minimum wage.

“The evidence shows that increased leisure time for workers can be expected to increase economy-wide demand,” the think tank says.

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It adds: “Increasing minimum wages is a particularly efficient way of boosting demand because workers on minimum wages are far more likely to spend rather than save any increases in salary, compared with higher-income individuals.”

Based on the same logic, the report recommends abolishing the personal allowance of income tax and using the extra public revenue on direct payouts to consumers and an increase in child benefit. It says this will redistribute £8bn a year from the richest 35 per cent of households to the remaining 65 per cent, with most of the gains concentrated on the poorest 10 per cent.

The think tank also argues the government should frontload a large share of investment required to turn Britain into a zero-carbon economy over the next five years, in order to boost demand.

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