PRODUCTIVITY is the measure of how efficiently businesses produce goods and services. It’s a key measure of economic success and international competitiveness, but it’s also a key driver of raising living standards, as there is a direct relationship between wages and productivity. Effectively it measures the value of what workers produce versus how many hours they work. The more a worker produces the more valuable they are to their employer and so if productivity increases the company makes more profit and therefor can afford higher wages.

According to the Office of National statistics (ONS), output per hour worked in the UK was 15.2 per cent lower in 2015 than it would have been if pre-recession trends had carried on. However, other G7 nations averaged a slowdown since the recession of only 7.5 per cent. Clearly something is going wrong in the UK and the latest Scottish Government figures show Scotland’s productivity is only slightly higher than the UK average.

The only major economies to do worse than the UK are Japan, trapped in a generation-long cycle of stagnating growth and high inflation (stagflation), and Canada, whose productivity has fallen largely due to a rapid increase in the number of people employed – so their productivity deficit to the UK (1.2 per cent) looks temporary. UK productivity now lags 16 per cent behind the average G7 nation, 22.2 per cent behind the US, 22.7 per cent behind France and 26.7 per cent behind Germany. Embarrassingly Italy, which has generated no productivity growth since the turn of the century, still maintains 10 per cent higher productivity levels than the UK.

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UK politicians don’t understand productivity, and its comparative fall has led to depressed wages leaving workers with lower disposable income and that is now filtering through into slower economic growth. One mistake those creating policy make is thinking that productivity can be improved by encouraging people to work harder, but that is simplistic at best. Investing in new machines and production processes, or new customer management systems in the services sector, drive productivity higher, but the downside is automation will eventually reduce overall jobs in the economy.

The current UK Government thinks that EU workers’ rights and regulations are overly bureaucratic and deter innovation in working practices, but then how does France’s productivity sit at 26.7 per cent higher than the UK despite being a case study for higher standards of worker and safety regulations, rights and unionisation. France, which will soon permanently overtake the UK in the league of large economies, represents all the things that the UK Government believes harms productivity.

Another key mistake is to think that increased wages incentivise workers to improve productivity. They do, but only to a point. Once wages have risen to a level that satisfies people’s living needs, every extra pound earned has a diminishing marginal effect on the motivation of that employee. The problem is that low productivity and depressed wages (which is demotivating) mean that much of the UK workforce is not having their basic living needs met by their wages and have to take second jobs (which is tiring) or/and rely on payments such as housing benefit which is calculated based on your rent-to-wages ratio (which is demeaning for people working so hard). In other words, the Government ends up subsidising low wages paid by underproductive companies.

Cutting taxes without targeting those cuts to positive productivity outcomes will simply lower revenues, as corporation tax cuts in nations where there is lower productivity are cancelled out by the higher unit production costs. A really simplistic example would be if a worker’s production is equivalent to 100 units a year sold at a profit of £1000 per unit, then the company makes £100,000 profit and keeps £80,000 after paying 20 per cent corporation tax. If productivity is lower and the worker’s output is equivalent to 80 units a year then the company makes £80,000 profit on that worker, and after paying 17 per cent corporation tax keeps £66,400 – a net loss to the company of £13,600 and a net loss to the Government of £6400.

Investment in apprenticeships, in-work skills training and close to market R&D are vital in addressing the productivity failings of the UK economy, but untargeted tax cuts and relaxation of workers’ rights would seem to be a higher and wrong-headed UK Government priority. With skills investment and average wages falling in real terms and overall investment likely to fall due to Brexit, I predict that UK productivity will have fallen to 20 per cent below the G7 average by 2020 as forecast in my example above.

Scottish Enterprise, Skills Development Scotland and the Scottish Government have used the tools available to them to push the skills agenda for decades. So now Scotland has the most highly educated and trained workforce in Europe, with 48 per cent having degrees, professional or vocational qualifications – nine per cent higher than the rest of the UK and 17 per cent above the EU average. The reason our productivity doesn’t rise as a result is the branch level nature of our economy and the larger number of call centres, retail and low-tech manufacturing and services in our economy – in others words we have the most underemployed workforce in Europe.

To change this must be a priority for the Scottish Government and so we must reject the big PLC bias of London policy-makers and take a leaf out of the German economy’s book and invest heavily on an SME growth plan. Small to medium sized businesses dominate Scottish business formation and their workers are closer to management, making them more engaged and involved. Those businesses need to innovate to overcome the disadvantages of size and are entrepreneurial in nature and so will seek out new markets and importunities for growth more efficiently.

Essentially they are the undervalued keepers of Scotland’s growth, exporting and productivity potential. If there was just one policy that would release the potential of Scotland’s SMEs, it’s for the Scottish Government to legislate against late payment, setting a time limit for payments to avoid larger companies taking advantage of small businesses and to accelerate cash flow investment in SMEs. Some 67 per cent of SMEs claim that if late payment wasn’t a problem, then their business would grow an average 10 per cent faster in the following year.

That’s just one way to grow the economy, increase productivity and exports whilst creating new jobs, but big companies and some public sector bodies won’t like it. Tough – we have a job to do.