Focusing policies for improving productivity
Helping employers understand how to measure and improve productivity is a central part of improving business competitiveness, says Anne Green, Professor of Regional Economic Development at the University of Birmingham.
Improving productivity lies at the heart of policy at national and sub-national scales. Productivity is a way of describing how much output is produced for a given input – a simple example would be how many products an individual worker in a factory can produce in an hour, looking at the cost of labour, raw materials and machinery to do so.
But employers have diverse, and often partial, understandings of productivity. Research conducted for the Joseph Rowntree Foundation showed that while employers recognise the importance of productivity, they often attach greater importance to performance metrics such as profitability, quality of products and services, and customer experience, rather than cost of inputs and labour efficiency. Importantly, understanding productivity, and how it might be improved, is context-specific and often depends on the industry they operate in. This suggests that a pragmatic, rather than a blanket, approach is needed for improving productivity.
Not all employers measure productivity, and even if they do, they may not have the resources and capability to conduct meaningful analysis. Conventional economic analysis use measures such as Total Factor Productivity or Labour Productivity (expressed as output per hour or output per worker). The West and North Yorkshire Productivity Audit and Sector Analysis uses these ‘top down’ measures to show that GVA per hour in the region is lower than the English average, despite improvements in recent years. Similarly, looking at business starts per 1,000 residents as a measure of enterprise shows the West and North Yorkshire economy falls below the English average and other City Regions. In in 2017, there were 4.4 business starts per 1,000 residents in North and West Yorkshire, compared to the England average of 6.1, and lower than Greater Manchester (8.4) and Merseyside and the West Midlands (both 5.0).
A novel and interesting approach adopted alongside conventional ‘top down’ productivity and sectoral analysis utilised in the in the in West and North Yorkshire Productivity Audit and Sector Analysis to develop new insights into productivity-related issues involves using machine learning to identify businesses based on key words associated with ‘productivity markers’. Examples include ‘graduate scheme’, ‘apprenticeship scheme’, ‘professional development’ and more as key words for ‘skills’; ‘idea’, ‘collaboration’, ‘design thinking’ and others as key words for ‘Innovation’; and ‘export’, ‘international’ and ‘new market’ as key words for the Business Environment. Together these key words and markers encapsulate behaviours of productive businesses.
This approach enables new aggregations of companies as categories for analysis and facilitates targeting of companies by how productive they are, as opposed to by sector. This opens up new ways of targeting interventions for improving productivity. Interestingly, the analysis shows that productive companies are often cross-sectoral in focus - in ways not captured easily by conventional standard industrial classifications. Targeting high-performing companies irrespective of sector is one way of improving productivity performance. These companies are likely to show a greater degree of openness to productivity building.
Yet the analysis also shows that microbusinesses are less productive by typical definitions, with firms in the bottom 10% of performance more likely to be in the micro size band. A different approach to raising productivity is needed for them. Such microbusinesses are the subject of an ESRC-funded project at Aston, Birmingham and Warwick Universities in the West Midlands focusing on strengthening management practices in micro-businesses, especially those owned and run by disadvantaged communities, who are some of the 'toughest nuts to crack' in terms of business support for enhancing productivity.
As Nobel Prize-winning economist Paul Krugman so famously stated ‘Productivity isn’t everything, but in the long run it is almost everything’. Implementing policy measures to improve productivity across North and West Yorkshire will be one of the single most powerful ways to improve living standards for those who live and work across the region.
Anne Green is Professor of Regional Economic Development, University of Birmingham. She is involved in two ESRC-funded projects focusing on productivity: Productivity and Prosperity: Inclusive Growth for the West Midlands and Productivity from Below (focusing on microbusinesses). She is a member of the independent expert panel brought together by the Leeds City Region Enterprise Partnership, working with the York, North Yorkshire and East Riding Enterprise Partnership, to help develop their Local Industrial Strategies.