Ten years into Britain’s productivity crisis and the finger of blame is increasingly being pointed at the structure of the economy.
With living standards held back by slow growth in output for hour worked, some politicians are starting to say that capitalism is failing.
Jeremy Corbyn, leader of the Labour party, last month gave a speech in which he pledged that as prime minister he would introduce a “new economic approach” that would focus on manufacturing rather than the City of London and financial services. He vowed to “provide capital to the productive, real economy that secures good, skilled jobs”.
In her first Conservative party conference speech after becoming prime minister in 2016, Theresa May promised action after admitting that structural problems with the economy were “holding people back”. She promised to intervene in “dysfunctional” markets, such as energy, and the government is now in the process of placing a cap on consumers’ electricity and gas bills — if they are on standard variable tariffs.
Against this backdrop, economists have been trying to find a definitive link between aspects of modern British capitalism and UK productivity woes.
One key question is whether inadequate competition is contributing to Britain’s feeble growth in output per hour worked.
Since the mid-2000s, British industries have become more concentrated — with fewer companies enjoying larger market shares.
The top five companies in each of 600 sub-sectors secured 43 per cent of available revenue in 2015-16, compared with 39 per cent in 2003-04, according to a report published last month by the Resolution Foundation, a think-tank.
The report noted other research about the US, where industry concentration is more pronounced than in the UK, which found companies were enjoying higher profit margins owing to reduced competition.
However, industry concentration in the UK peaked in 2010-11, and sectors have become less concentrated for most of the period of low productivity growth.
“The productivity effect [of industry concentration] in the short term is not totally obvious in the UK, unlike the US,” said Torsten Bell, director of the Resolution Foundation.
Some economists have concerns that a lack of competition — coupled to low interest rates since the financial crisis — has been allowing low-productivity “zombie” companies to survive in the UK when it would be better for them to die.
However, these concerns are mainly undermined by how a “long tail” of unproductive companies existed when output per hour worked grew strongly before the crisis.
If interest rates rose quickly, companies that went out of business would not be the zombies because they are not generally overburdened by debt, said Andy Haldane, the Bank of England chief economist, in June.
But even if it is difficult to prove that the UK’s economic or market structures are the cause of the slowdown in productivity growth, the competition authorities are eyeing action.
Andrew Tyrie, new chair of the Competition and Markets Authority, told companies in July to stop “ripping people off” or face the full force of the watchdog’s sanctions.
His focus is mostly on regulated markets such as banking and energy, where companies are accused of exploiting vulnerable households by extracting a “loyalty penalty” if they do not switch suppliers.
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Lord Tyrie, a former Conservative MP who chaired the Commons Treasury select committee, told MPs during his confirmation hearing for the CMA in April that retail banking and auditing were parts of the economy that did not work in the interests of the public or productivity.
Scott Corfe, chief economist at the Social Market Foundation, a think-tank, suggested that consumers should be switched between energy suppliers automatically after several years to stop companies exploiting customer inertia.
He claimed that pro-competition moves such as this had some potential for raising productivity growth rates. “When there was a suggestion [by the government] of a price cap in the energy sector, the big six responded by immediately shedding jobs, which suggests they weren’t being very productive,” he said.
He told MPs that in addition to the ability of these companies to harvest data about their customers, “there are a lot of other problems with these platforms, and they will require regulatory action of some sort eventually. I do not know exactly how that should come, but it should be international”.
One of the core tasks facing the government over the next few years will be establishing a post-Brexit economic and markets framework that will involve a bigger role for the UK competition authorities because Brussels will no longer play a part.
Another task will be to negotiate a future relationship with the EU that provides as much scope as possible to strike trade deals with countries beyond the bloc. Mr Haldane said greater openness to trade had consistently been shown to boost productivity.
As part of this series, we want to hear what you think is the main solution to the UK’s weak productivity growth since the financial crisis. Share your ideas in the comments below and we may publish the best in a follow-up piece. You can also share your thoughts directly with us at email@example.com.
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