Opinion

Government dictation of wage levels will hinder, rather than help, productivity

7 min read

10 September 2015

Ahead of the next jump in minimum wage next spring, it was reassuring to hear the CBI speak out against mandatory rises but more must be done to combat polices aimed at popularity rather than success – particularly for the manufacturing sector.

It was great to hear John Cridland, outgoing director-general of the CBI, being positive on manufacturing. It could be now considered worth 19 per cent of the UK economy, he said, if one includes the service industries that the manufacturing sector is now sub-contracting out to rather than achieving in-house.

The outsourcing combined with the necessary emphasis on service for survival has, Cridland says, blurred the lines between service and manufacturing industries.

I would be the first to agree that manufacturing has had to convert and absorb lessons from the service industry on how to stand out from the crowd and beat the competition – but I think it is a stretch to include it as having re-balanced the economy between the two. We still need more manufacturing that we can be proud of in the UK. We should be proud of it, rather than the British tendency to consider it a dirty word.

Cridland went on to say it is “less and less about the quantity of widgets…but more and more about the quality of customer interaction”. Running a manufacturing SME, I would agree that we have to deliver the service – but I strongly disagree that in fighting to stay profitable, the quantity of widgets and productivity is absolutely crucial. Even more so when we are having to beat off cheaper, foreign competition.

While he recognises that productivity is still a bugbear, and to some extent welcomes the government’s focus on it, he is cautionary about chancellor George Osborne’s flagship solution of mandatory wage rises and I am 100 per cent in agreement.

I have always contended that government interference in business is a massive double standard when expecting us to deliver the country’s economic recovery and at the same time dictating what we can and cannot do. 

I was probably more sanguine than usual about the first of Osborne’s rises to the minimum wage this autumn, not because I supported his policy particularly, but more because I felt strongly that it is totally in line with where business and the recovery are. 

Read more from Jan Cavelle:

On next spring’s jump to £7.20, I am somewhat more hesitant about – believing that the knock on across the board on all wage structures will cause a mix of some increased unemployment and inevitable price rises of goods and services right across the board. Thus, this will result in heating inflation and achieve little more buying power for the man in the street who should actually benefit.

A plan to dictate wages for the next five years to business is however a different ball game and it comes as no surprise to me that Cridland offers a note of caution to the government. We have rising investment, rising wages and rising productivity right now – perhaps not as fast as any of us would like but the growth is there. 

He is concerned that the government’s education plans will not deliver enough help to British mid-size companies to address the gap in education especially in the areas of technical qualifications.

Cridland believes that many CEO’s are concerned that the mandatory wage rises are causing them to revise business plans that will include fewer job and progression opportunities. Now that is obviously going to bad news for the government, the economy and the man in the street. 

I would argue though that that will have an even worse effect on productivity. Where is the motivation to work hard and progress if your scope for progression is limited and your wage rise automated on high – with the necessary rises throughout the economy so that you are never actually better off? This is simply senseless and will be hugely destructive.

Incidentally, I don’t know if Osborne is aware of another little detail. Most of us re-write and update our business plans all the time. The flexibility to react to outside influences is what saw most of us through the little recession that is going on. If, for example, China influences the economy into a global recession then we are all going to need the ultimate flexibility of planning and running our businesses to survive yet more onslaught. How on earth does a dictated hike in costs ever allow for that?

It will hit productivity in the workplace; it will hit motivation in the business owner; it will create unemployment and increases to costs to ensure no one is actually any better off. And manufacturing will be one of the worse areas hit. I am glad that Cridland is speaking out but I hope his successor is a great deal more voluble against dangerous policies that are aimed at popularity rather than success.

The reality is that Britain still needs, and should have, a manufacturing sector that is both substantial and something we can be proud of – and within which we have achieved a growing productivity.