Britain failed to adapt to economic change once. It is risking the same mistake again.
Britain is a country with many problems. Living standards are falling, social mobility is static, homelessness is increasing. Even life expectancy is going down.
But three main economic problems set it apart. It has the worst regional inequality of any developed country. Its cities do not get richer as they get bigger, leaving its large cities — bar London — poorer than they should be. And its productivity, on which long-term improvements in living standards depend, is exceptionally poor.
These problems emerged from the 1970s and early 1980s when the structure of economic activity and organisation and the dominant way of thinking about economics changed. It was a whole new economic paradigm.
Rigid, stable, hierarchical conglomerates were usurped by nimble, horizontal, outsourcing competitors, as trade unions weakened, analytical and social skills became favoured over physical skills, and production became able to respond more quickly to consumer tastes.
Other countries recognised the need to adapt to change. Many embarked on radical decentralisation programmes, such as France’s Defferre Laws in 1982, enabling local difference in a more diverse economy to be recognised and addressed. In Britain, meanwhile, central government waged battle with local government in the 1980s, cutting its powers, dissolving the Greater London Council and penalising councils that did not adopt centrally-mandated spending cuts.
Failing to devolve power is a long-term failure of British government. It has the most centralised political system in the developed world with 95 per cent of tax revenue accruing to central government; in comparable countries it is less than 70 per cent. Local government in the UK spends money allocated by central government, making it more accountable to Whitehall than local taxpayers.
Britain’s other major policy failure is under-investment, especially in tangible capital such as infrastructure, buildings and machinery.
Similar countries built vast metro, rail and tram networks to enable people in suburbs and smaller towns to access the knowledge-intensive, higher-value jobs that proliferate in city centres in this new economy.
Germany’s second, third and fourth largest cities have 24 metro lines between them; France’s have eight; Britain’s have none. Manchester has a decent tram network, but many European cities do. Birmingham has one overcrowded tram line. Leeds is Western Europe’s largest city without any light rail or metro system.
Under-investment also holds back British manufacturing, which typically prospers where land is cheaper. Yet the British towns in northern England, southern Wales and the Midlands that rely on manufacturing are the country’s poorest.
Meanwhile, continental Europe’s two richest cities — Ingolstadt and Ludwigshafen in Germany, home of carmaker Audi and chemical giant BASF respectively — are its most reliant on manufacturing.
Britain’s inter-regional inequality has long-standing roots, but the gap between richer South-East England and the rest of the country was narrowing until the 1970s. Now it is a chasm as the changed economy’s gains accrue predominantly in London and its hinterlands.
Until the late-1970s British productivity was 10 to 40 percent higher than the rest of Western and Northern Europe (except Switzerland). Now the gap between Britain’s productivity and that of Germany, the Netherlands, Austria and Scandinavia, as well as Canada and Australia, matches the gap between Britain and the Czech Republic.
No country adapted worse to this new economic reality than Britain, going from one of the best records for creating broad-based prosperity to being an international laggard.
Now, outside south-east England, it is a country left-behind.
High-speed trains.
The Conservative Party has governed Britain for 28 of the last 41 years and until at least 2016 it prioritised cutting public spending and unfettering markets.
Anti-austerity rhetoric and plans for hard Brexit, however, evidence a changed approach. Under Boris Johnson the Conservatives now seem a spades-in-the-ground neo-Gaullist party, intervening in the economy and upgrading infrastructure in the name of the people and the nation.
However, the focus of the new-found infrastructure money highlights a continued misunderstanding of the modern economy’s nature.
Rather than rail within cities to provide better access to city-centre jobs, the focus is high-speed rail between cities and reversing the Beeching cuts, enabling commuters to travel from small town, where there are few high-value jobs, to small town, where there are few high-value jobs.
Infrastructure is a focus for the Conservatives for two main reasons. Firstly, it is something conspicuous to point at and say ‘look, we’re doing something’. Johnson’s personal politics are indeterminate, but, from garden bridges to island airports, he is clearly drawn to showy infrastructure of spurious value. Meanwhile, the underlying principles of small-state conservatism can go unchallenged.
And secondly, because capital investment sits outside day-to-day government spending figures, infrastructure spending enables the government to end austerity rhetorically while avoiding increased spending on welfare or public services.
On devolution, Johnson has enthusiastically reheated the metro-mayor programme of his predecessor but one’s chancellor, George Osborne, which has delivered powers to some urban areas.
But the metro-mayor agenda is small fry alongside austerity, which falls on local government more than any central government department.
On average council spending on local services is 23 percent lower per person than in 2009–10, but with larger cuts in poorer areas. The newly-introduced North of Tyne mayor controls a £20-million-a-year budget; Newcastle City Council, one of three local authorities included in the new combined authority, alone has had £280 million cut from its budget in the last decade.
Electorally this has proven successful, enabling the Conservatives to share the blame for austerity with councils. But it is a false devolution that passes the deepest spending cuts onto local government. The imbalance between locally-raised and centrally-raised taxes remains untouched.
High-speed brains.
The paradigm shift coincided with sharp upturn in university enrolment across the developed world. In 1982 18 percent of British school-leavers attended university; by 1999 more than 60 percent did.
Britain has more workers with a degree than any EU state bar Ireland, Cyprus, Luxembourg, Sweden and Finland, but a third of workers say they are qualified beyond their job’s requirements — the most ‘over-qualified’ workforce in Europe.
Graduates who move away from where they studied or grew up are much likelier to need graduate-level skills for their jobs with people moving region averaging a £2,000-a-year wage increase.
Even though they are more likely to be graduates and renters (both characteristics associated with greater movement), today’s young people are more risk-averse in the jobs market than previous generations, switching employers less frequently. The share of Britons moving regions for work has fallen a quarter since 2000.
Britain’s economic model loads risk onto younger people especially, forcing them to prioritise security and staying near family.
Employment is at an all-time high, but the share of workers in full-time, permanent employment has fallen four percentage points since 2010 with self-employment and zero-hours contracts at record levels. Home ownership rates are down on previous generations. Life for many is insecure.
If work is more precarious, welfare security should be stronger and more comprehensive to encourage economic risk-taking.
Poor access to city centres also damages employee-employer matching. Larger labour markets minimise job-changing disruption — for workers seeking improved roles and for the unemployed more easily finding work — and improve matches between skills and firms who need them. It is why three-quarters of US entertainers and performers live in Los Angeles. Yet Britain alone places de facto ceilings on its larger cities’ working populations.
Britain also needs a better skills system for non-graduates. Despite so many university attendees, Estonia and Italy are the only EU states with fewer 15–19 year-olds in employment, education or training and young Britons are much less likely to have basic literacy and numeracy levels. A fifth of people in Britain cannot understand instructions on a medicine packet, for example.
But those who would most benefit from training are least likely to access it. Employers invest more in higher-skilled employees, who are also better placed to invest in themselves.
As well as encouraging relocation, stronger welfare security would enable the less-qualified to take time off to up- or re-skill, and facilitate the path from the warehouse or call centre floor to management that used to exist in factories, mines and dockyards.
Osborne’s planned route out of the low-skills, low-productivity, low-pay pattern was to work backwards from pay, pumping up the minimum wage and hoping skills and productivity would follow. They did not. Osborne’s minimum wage hikes were as surface-level as his devolution. The statutory minimum does not guarantee a decent standard of living and the economy’s structural deficiencies remained untouched.
The latest plan is retrofitting skills development onto the economy via a ‘points-based’ immigration plan and getting the economically-inactive to fill skills gaps.
However, with employment near full labour market slack is minimal and job-seekers are not necessarily where the work is. Reducing immigration to the UK would also exacerbate regional immobility as migrants account for a quarter of Britain’s regional job moves, up from 8 per cent in 1995.
Skilled immigration has long substituted for skills development in Britain, but decreasing the former does not automatically increase the latter.
The only way to improve skills is government and business investment in skills development. This is another thing at which the UK under-performs. British employers, who fund the majority of skills development, spend half the EU average per employee per year on continued vocational education and £5.1 billion less in real terms since 2007.
This is mirrored by government spending on adult education, which, excluding apprenticeships, fell 47 percent between 2009–10 and 2018–19. Accordingly the number of adult learners fell by 10 percentage points in that time.
The repudiation of the early-2010s’ turbo-Thatcherism is an acknowledgement that things must change. But the priorities so far remain misplaced. Few of the problems of Britain’s high-employment, but low-investment, low-skill, low-productivity, low-pay economy can be fixed without investing in people and restoring the local government funding and safety net that has been taken away.
The next paradigm.
The risk now is that Britain, having failed to adapt to the modern economy, makes the same mistake with the next economic transition, which, among other things, will be shaped by the impact of technological change on work.
As machine capabilities encroach further onto tasks traditionally performed by humans, Britain is trapped in a catch-22. Far from fearing robot-induced mass unemployment, a high-employment, low-productivity economy should especially welcome the opportunity to automate low-value tasks and develop new higher-value tasks.
However, those economic characteristics minimise the incentives to abandon entrenched British methods.
Cheap labour discourages investment in labour-saving technology and so, even where a job or part of a job can be automated, low wages render it uneconomic. Cleaning jobs remain because human cleaners are cheap and available, not because the work cannot be automated. A lack of investment feeds low productivity which reinforces low wages which discourages investment.
In manufacturing, for example, where wages trail those in other large, developed countries, so too does robotics’ use. Britain’s industrial robot density is the lowest in the OECD.
Far from technology obviating work, evidence suggests it is increasing the need for it. We generate as much data in two hours as from the dawn of time until 2003 and the amount of digital data grows by 50 percent annually. Data begets exponentially more data and with it work collecting, storing, processing, analysing and using data.
Likewise there is huge work-growth in audit, regulation and bureaucracy, driven by applying modern IT to this data eruption.
Combine this with demographic trends reducing the working-age share of the total population and the expected immigration reduction, and greater investment in technology is likely needed just to tread water. Countries ageing fastest have tended to invest most in robotics. Because Britain is particularly poor at the latter, it leaves itself more open to the consequences of the former.
This impacts their health: half of new incapacity benefits claimants cite mental health as their main health problem, up from less than a third in 2000, and there are strong links between higher-strain jobs — typically those combining high pressure with minimal autonomy — and stress and depression, as well as cardiovascular diseases and musculoskeletal problems.
Britain’s reliance on increasing the quantity of work but not its quality is unsustainable, but it will remain unless the opportunities provided by technological change are taken.
Trade unions.
The deterioration of workers’ health and the stagnation of their pay and skills coincided with a deep shift in labour market power.
In 1979, the year Margaret Thatcher came to power, collective bargaining agreements covered nearly three-quarters of British workers. Now just a quarter of workers have collective bargaining coverage, more only than Poland and Lithuania of EU countries.
As mass industrial employers have declined, local economies are less dominated by a few large firms, which should create more competitive labour markets and prompt wage growth. Yet labour market concentration is dragging wages down more than ever, because its effects primarily impact workers not covered by collective bargaining.
Technology will further tilt labour market power away from workers, as every aspect of work can be measured and analysed. Many workers, such as those in Amazon warehouses, already complain of inhumane conditions when algorithms control work’s pace.
In 2005 Michael Howard, in his final conference speech as Conservative leader, characterised conservatism as standing up to “the over-mighty”. Trade unions might have been over-mighty in the 1970s, but they are the underdog now.
Conclusion.
As one of the most productive and prosperous countries on the planet, Britain was well-placed to prosper in the post-1970s economic era.
It also had world-class universities, a history of scientific excellence and innovation, and it is dense enough that nearly every town is close enough to a city to share in the disproportionate growth that urban scale now generates. More spread-out countries such as France, Germany or the USA had no such luck.
Yet Britain has gone backwards. Despite Brexiteers’ representation of Britain as a world-leading, dynamic economy held back by Europe, the country lags other advanced economies in terms of productivity, growth, regional equality and living standards.
A very tight labour market was — until the coronavirus lockdown — beginning to deliver overdue improvements with some wage growth returning, the growth of insecure work easing and underemployment declining to its lowest point this century. Nevertheless, Britain very much still has a low-investment, low-skill, low-productivity and low-wage economy.
Other than increasing the minimum wage and shrinking the welfare state, recent British governments have taken a hands-off approach to the world of work, but returning talk of industrial strategy suggests there is belated realisation that government can shape an economy.
Investing in skills or technology, or incentivising businesses to do so, continues to be a minimal consideration though. Although rhetorically austerity is over, the spending focus is large-scale infrastructure, not restoring welfare.
Britain is also well-placed to benefit from the next paradigm. Low-value work can be automated, and there is little of the industry, such as car manufacturing, most exposed to climate change. The ability to generate abundant wind and tidal power should make Britain a leader in green energy production.
But an unchanged approach will harm Britain in the next economic paradigm too. Developing new human-tasks requires developing new human-skills. Workers will need to re-skill, up-skill or change occupations altogether.
Improving living standards depends almost entirely on increasing workers’ output. In Britain this has long meant working more not better, and without either labour market power or localised political power few of the gains ended up in people’s pockets.
Whether in this paradigm or next, for the country’s sake this has to change.
