Will upskilling the low-wage sectors solve Warwickshire's "productivity puzzle"?

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One of the biggest challenges currently facing the economy, both in Warwickshire and the UK as a whole, is the “productivity puzzle.” Natalie Henderson (Economist in Warwickshire County Council's Economy & Skills team) explains the problem and outlines the county council's objectives towards providing a solution.

Will upskilling the low-wage sectors solve Warwickshire's "productivity puzzle"?

One of the biggest challenges currently facing the economy, both in Warwickshire and the UK as a whole, is the “productivity puzzle.”

A long-term impact of the 2008 recession, the productivity puzzle has seen growth in output-per-worker stagnate and also led to a “wage freeze.” The UK annual growth rate has reportedly collapsed to under 0.5% - significantly below pre-recession growth of 2.2%.

The situation, further complicated by the recent Brexit decision to leave the European Union, continues to be at the forefront of economic issues across all local areas including Warwickshire. Low productivity and restricted growth in earnings are closely interlinked and have led to the “polarisation of the labour market” where low-skilled and high-skilled employment growth has remained the strongest. This has considerably reduced the share of middle-skilled workers – a consequence of digitalisation and competition from low-wage countries.

Many middle-skilled workers who lose their jobs face the aspect of “moving down the skill ladder” in order to improve their chances of finding work.

As demand for lower-skilled workers continues to grow, and therefore worsens wage-stagnation, it is suggested that improving the productivity of low-wage sectors is essential to pull Warwickshire and the rest of the UK out of the “productivity puzzle." This can help close the widening gap of income inequality and further boost the rate of personal expenditure in the local economy. The Institute for Public Policy Research recognises the following sectors as “low-wage” industries based on nationally low earnings and productivity:

• Agriculture, forestry and fishing
• Wholesale and retail trade
• Accommodation and food services
• Administration and support services
• Arts, entertainment and recreation

 Figure 1: Job growth in Warwickshire (2005-15)

Source: EMSI

Since the 2008 recession, 2,700 new jobs have been created in Warwickshire’s low-wage sectors. This was particularly driven by increased expansion demand in the wholesale and retail industry.

In contrast, high-wage sectors (manufacturing, IT services and finance & insurance) saw a significant loss of approximately 7,900 jobs during the years 2008-12. This suggests that our low-wage industries have stronger economic resilience and therefore fuelled the higher growth-rate of 8% in the post-recession era.

Currently, over a third of Warwickshire’s residents (34%) are employed in low-wage sectors, doubling high-wage employment (14%).

Figure 2: Job growth in Warwickshire by 2025

Source: LEFM

By 2025, there will be about 12,000 new jobs created in these sectors, with nearly half forecast in accommodation and food services; compared to 350 fewer jobs in high-value industries. This will contribute to a widening of the Warwickshire productivity gap where local residents will produce £4,000 less output compared to the average UK resident.

Forecast analysis undertaken by Warwickshire County Council concludes that a future 10% increase in low-wage productivity growth has the potential to halve the Warwickshire-UK productivity gap by 2025 and inject £560 million into the local economy; which will benefit both businesses and residents alike.

Based on this evidence, there is a clear need to undertake more proactive targeting of skills development within the low wage sectors. This should help increase productivity, push up wages and drive increases in innovation and quality. 

Look out for more information in the coming months, and in the January edition of Warwickshire Means Business, on how Warwickshire County Council will be putting these objectives into action.