building a better balanced uk economy: where will jobs be created in the next economic cycle?

8/14/2019 Building a Better Balanced UK Economy: Where will jobs be created in the next economic cycle?

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Tom

orrowsCapita

lism

BuildingaBetter

BalancedUKeconomy:Wherewilljobsbecreatedinthenext

economiccycle?

ByJonathanClifton,researcher,ippr,TonyDolphin,senioreconomist,ippr,andRachelReeves,LabourParliamentaryCandidateforLeedsWestand

formerlyBankofEngland

July2009

www.ippr.org/tomorrowscapitalism


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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy2


Aboutippr

TheInstituteforPublicPolicyResearch(ippr)istheUKsleadingprogressivethinktank,

producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand

sustainableworld.Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakingintheUK.Throughourindependentresearchandanalysiswedefinenew

agendasforchangeandprovidepracticalsolutionstochallengesacrossthefullrangeof

publicpolicyissues.

WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedaspossible,whileourglobalchangeprogrammeextendsourpartnershipsandinfluencebeyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch.

ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100

E:[email protected]

ThispaperwasfirstpublishedinJuly2009.ippr2009

TomorrowsCapitalism

TomorrowsCapitalismisamajorprogrammeofworkpresentedbyipprinconjunction

withFriendsProvidentFoundation.Itaimstoexplorethefutureofourfinancialand

economicsystem.Formoredetailsandtoaccessotherpapersfromtheprogrammevisit


Theviewsinthispaperarethoseoftheauthorsonlyanddonotnecessarilyrepresent

thoseofipprorFriendsProvidentFoundation.


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Executivesummary............................................................................................................. 4

1.Introduction.................................................................................................................... 6

2.ThecurrentstructureofUKemployment ...................................................................... 8

3.ThemaintrendsinUKemploymentoverthelasteightyears..................................... 10

4.Employmentinthenextrecovery ................................................................................ 17

5.BringingaboutabetterbalanceintheUKworkforce................................................. 26

6.Conclusion.................................................................................................................... 45

Appendix1:FinancialservicesjobsintheUKandLondon............................................. 46

Appendix2:BreakdownofUKGDPbysectorforyears2007and2020........................ 48

References ........................................................................................................................ 49


Contents


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Althoughtherootsofthecurrentrecessionaretobefoundinthefinancialsector,allpartsoftheUKeconomyhavebeenaffected,withmanufacturinghitthehardest.By

theendoftherecession,Britainmayhavethreemillionpeopleunemployed.

Inthesevenyearsleadinguptotherecession,theUKwasheavilyreliantongovernment,housingandfinanceassourcesofemploymentgrowth.Thesesectors

cannotberelieduponforgrowthinthefuture.Norismanufacturingemployment

likelytoreverseitsrecenttrendandstarttoexpand.Thereis,therefore,considerable

concernoverwherejobswillbecreatedinthecomingrecovery.Thisiscompounded

bythedesiretobuildasustainable,broader-basedeconomy,lessdependentona

fewsectorsoftheeconomyinthefuture.

Ifemploymentistogetbacktoitspreviouspeak,therewillhavetobelargeincreasesinthenon-finance,non-retailingprivateservicesectors,whichcurrently

accountforonlyaround30percentoftotalemployment.Thiscouldhappen,but

onlywiththerightcombinationofentrepreneurship,aglobaleconomicrecoveryand

governmentaction.

Returningtofullemploymentdependsonamoreactivestate.Thereisamiddlegroundtobefoundbetweenaninadequatelaissez-faireapproachandareturntoa

misplacedpolicyofpickingwinners.Potentialgrowthsectors(includingknowledge

industries,high-techmanufacturing,creativeindustries,pharmaceuticalsandcare

services)arepronetoanumberofmarketfailuresininnovation,training,

infrastructurespendingandfinancethattargetedgovernmentcanrectify.Recent

Governmentrhetorichasbeenpositive,butneedstobebackedupwiththecreation

ofinstitutionstofixthisapproachintotheeconomy.Indeed,ifGovernmentfailstotakeactionthereisarealpossibilitythatunemploymentcouldremainatelevated

levelsformanyyearstocome.

Actionisneededinsixareas,coupledwithawholesalecommitmenttoenvironmentalsustainability:

1.Improvingaccesstofinanceforbusinessinnovation,forexamplethroughthe

creationofaGovernment-backedIdeasBank.

2.Investingmoreinskillsandtrainingtoencouragelife-longlearning,forexample

byintroducinganationallyrecognisedtransferablecredit-systemforallFurther

andHigherEducationcourses.3.Encouraginginvestmentinresearchandbusinessstart-up,forexample

supportinguniversitiestobuyinsupportforspinningoutcompanies.

4.Supportinginfrastructurecoststhroughthecreationofaninfrastructurebank.

5.Givingregions,RegionalDevelopmentAgenciesandcity-regionsmorecontrol

overtheirowneconomies.

6.Buildingafinancialservicessectortoworkwithandsupportbusiness,especially

inthelow-carbonsector.

Implementingsomespecificpoliciesthatareconsistentwithaphilosophicalapproachofgovernmentactivismwillnotbeenough;actionisneededacrossallsix

areaslistedabove.Investmentintraining,R&Dandinfrastructurearecomplementary

andre-enforcingandinvestinginonewithouttheotherswillnotgeneratethewww.ippr.org/tomorrowscapitalism

Executivesummary


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WebelievethereisaroleforgovernmentinshapingthefutureoftheBritisheconomy.The

performanceandstructureoftheeconomyisnotjustamatterofchance.Governmentpolicy

willdeterminefuturegrowthinoutputandjobs.

Thestateisalreadyinvolvedinsupportingtheeconomy,forexamplethroughbankbail-outs,

backingloanstosmallandmedium-sizedenterprises(SMEs)andthefiscalmeasuresthatwerecontainedinlastyearsPre-BudgetReportandinthisyearsBudget.Togetherwiththe

actionstakenbytheMonetaryPolicyCommittee,thesemeasureswilllimitthedropin

outputandemploymentduringtherecession.However,theroleofgovernmentisnotlimited

toaddressingcrises.Weargueitshouldplayamorepermanentroleinsupportingthe

economy.

Indeed,ifkeydecisionsoninvestmentininfrastructure,scienceandskills,onaregulatory

frameworktoencouragelong-terminvestmentandoncreatingopportunitiesforsmalland

start-upbusinessestoaccesscreditareavoided,unemploymentcouldstayatextremely

highlevelsforanextendedperiod.ThesupplycapacityoftheUKeconomywouldbe

seriouslydamagedasaresult.However,withamoresupportivegovernmentframework,theUKeconomycouldrebalanceandprosper.

Forexample,policiesthatsupportthegrowthofnewandsmallfirms,suchasagovernment-

backedIdeasBank,wouldhelpinnovativeideasbecometheknowledgeindustriesandjobs

ofthefuture.Similarly,thefutureeconomywillvalueskillsevenmorehighlyandwillrequire

life-longlearningtoadapttonewtechnologiesandbusinessmodels,sogovernmentsupport

forSkillsAccountsandTraintoGainshouldextendbeyondLevel2toLevel3qualifications

andtheloanschemeforhighereducationshouldbeextendedtocoverapprenticeshipsand

part-timecoursestoboostdemand.And,whilethefinancesectorisfacingachallenging

timerightnow,wecouldexploitourcomparativeadvantageinthisindustrytopioneeranew

carbon-financesectortoleverageprivatesectorfundingforinvestmentingreentechnologies.

Thesearejustafewexamplesofpoliciesconsistentwithagovernmentstrategytotakean

activeroleinshapingthefutureeconomyandprovidesolidfoundationsintermsofskillsand

infrastructureforbusinesstosucceedandcreatejobs.Recentgovernmentrhetorichasbeen

amoveintherightdirection,butneedstobematchedwithinstitutionsandpolicies

designedtofixsuchideasintotheeconomy.Thisisthetimeforrenewedstateinvolvement

intheeconomynotpickingwinnersbuttakingmeasurestosupportbusinessand

enterprise,andsoenablingentrepreneursandtomorrowsfirmstocreatejobsandgrowth.

Aimsandstructureofthepaper

Thispaperrecommendspolicymeasuresthatcouldhelpreturntheeconomytofull

employmentinawaythatissustainable.Section2brieflydescribescurrentpatternsof

employmentintheUK.Section3looksatdevelopmentsintheUKsworkforceoverthe

sevenyearsuptothemiddleof2008andestablishesthekeyfactsaboutrecentchangesin

thelabourmarket.Italsolooksbrieflyatdevelopmentsintherecession.Section4discusses

possibletrendsintheUKsworkforceoverthenextfewyearsandputstheproblemof

gettingtheeconomybacktofullemploymentintoastatisticalcontext.Section5setsout

whytheGovernmenthastobeinvolvedinhelpingtheeconomyachieveabetterbalance

andlooksatsomeoftheactionsthatcouldbetakentofacilitatethenecessaryjobcreation.

Section6summarisesourconclusionsandpointsthewaytoamoresustainableBritish

economy.



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Therewasareasonablyevensplitofemploymentbyoccupation(Figure2.2).Intermsofthe

broadcategoriesidentifiedbytheOfficeforNationalStatistics(ONS),managersandsenior

officialsarenowthebiggestgroupingintheworkforce,accountingforjustunderone-sixth

ofthetotal.Ifmanagers,professionals,associateprofessionalsandskilledtradesare

categorisedasbeingskilledworkers,thenjustoverhalfoftheworkforcefallsintothis

grouping.


15.6

12.8

14.6

11.3

10.9

8.3

7.6

7.1

11.6

Managers & senior oficials

Professional occupations

Associate professional &

technical

Administrative & secretarial

Skilled trades occupations

Personal service occupations

Sales & customer service

occupations

Process plant & machineoperatives

Elementary occupations

Figure2.2.UK

employmentby

occupation,

2008Q2(%)

Source:Officefor

NationalStatistics


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ItisnowtheconventionalwisdomthattheUKhasbeentooreliantinthepastdecadeona

narrowpartoftheeconomyforgrowth.Thereisaclearturningpointinthedataonoutput

andemploymentin2001,theyeartheGovernmentbegantoincreasethegrowthrateof

publicspending.Sincethen,theconsensusisthatthebulkofgrowthinoutputand

employmenthasbeeninthepublicsectorandthefinancialsector,particularlyTheCity.

Thissectioncheckswhetherthisconventionalwisdomissupportedbythedata.Itlooksat

howthedistributionofemploymentintheUKchangedoverthesevenyearsfromQ2,2001

toQ2,2008.Overthisperiod,thenumberofemployedpeopleintheUKincreasedby

1,830,000,equivalentto0.9percentayear.Butwhilecertainsectorsandoccupations

prospered,othersdeclined.Thissectionalsolooksatdevelopmentssofarintherecession

andpresentsaprojectionofhowthepatternofemploymentmightlookwhenitreachesits

trough.

TrendsinUKemploymentbyoccupation

Atthebroadestlevel,jobsgrowthoverthesevenyearstothemiddleof2008was

concentratedinmorehighlyskilledservicesectorjobs.Inthesecondquarterof2008,there

were1,970,000moremanagers,professionals,associateprofessionalsandtechniciansinthe

UKthantherewereinthemiddleof2001,morethanaccountingforthegrowthin

aggregateemploymentovertheperiod.Theonlyotherbroadsectorthatexperienced

significantgrowthinjobswaspersonalserviceoccupations(seeFigure3.1).


3.ThemaintrendsinUKemploymentoverthelasteightyears

Therewereincreasesinskilledservicesectorjobsandpersonalserviceoccupationsand

reductionsinemploymentinclericalrolesandlow-skilledmanufacturingjobs.

Therewereincreasesinemploymentineducation,healthandsocialworkandinsome

businessactivities,whilejobswerelostinmanufacturing.

Employmentinfinancialservicesshrank,butitincreasedstronglyinthoseareasusually

referredtoastheCity.

Governmentspendingandthehousingboomhelpedcreatejobs;technologicalprogress

andoverseascompetitionledtojoblossesinotherareas.

-1,000 -500 0 500 1,000 1,500 2,000

TOTAL

Elementary occupations

Process plant & machine operatives

Sales & customer service occupations

Personal service occupations

Skilled trades occupations

Administrative & secretarial

Associate professional & technical

Professional occupations

Managers & senior oficials

Figure3.1.

ChangeinUK

employmentby

occupation,

2001Q2to

2008Q2

(thousands)

Source:Officefor

NationalStatistics


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Thejobsthathavebeenlostsince2001weresemi-skilledandunskilledones.Therewasa

declineof400,000inthenumberofpeopleinadministrativeandsecretarialrolesanda

250,000dropinprocessingandmachineoperatives.

DrillingdownintotheninebroadcategoriesillustratedinFigure3.1highlightssomespecific

areasofsignificantincreasesandreductionsinjobs.Occupationsthathaveseentheirshareofthejobsmarketincreasemostoverthelastsevenyearsincludefunctionalmanagers

(particularlyinITandcommunications),officemanagers,teachersandhealthprofessionals.

Inthesecondquarterof2008therewere1,394,000functionalmanagersintheUK,an

increaseof333,000(31percent)comparedwithsevenyearsearlier.Otheroccupationsthat

sawlargeincreasesinemploymentbetween2001and2008arehighlightedinTable3.1.

Occupationsthathaveseentheirshareofthejobsmarketsreducemostoverthelastseven

yearsincludeadministrativeoccupationsinfinanceandrecords,personalassistantsand

secretaries,process,plantandmachineoperativesandassemblersandroutineoperatives.In

thesecondquarterof2008therewere289,000assemblersandroutineoperativesintheUK,

adecreaseof173,000(37percent)onsevenyearsearlier.Otheroccupationsseeinglarge

decreasesinemploymentbetween2001and2008arehighlightedinTable3.2.

Asaresultofthesechanges,therehasbeenabigincreaseintheshareofknowledge-based

jobsintheUKworkforce.AccordingtotheWorkFoundation,knowledgeworkersaccountedforabout42percentofallworkersintheUKin2006,comparedwithafigureof

31percentin1984(Brinkley2006).Giventhecontinueddeclineofmanualandlowskilled

jobsinmanufacturing,itislikelythatthissharehadincreasedby2008.www.ippr.org/tomorrowscapitalism

Table3.1:Increasesinemploymentinselectedoccupations,2001Q2to2008Q2

Employment(000s) Change

Occupation 2001Q2 2008Q2 000s %

Functionalmanagers 1,061 1,394 333 31Personalserviceschildcare 569 804 235 41

Constructiontrades 773 939 165 21

Teachingprofessionals 1,140 1,298 159 14

Personalserviceshealthcare 879 1,006 127 14

Associateprofessionalshealth 603 722 119 20

Officemanagers 335 451 116 35

Associateprofessionalssocialwelfare 181 286 104 58

Source:OfficeforNationalStatistics

Table3.2:Decreasesinemploymentinselectedoccupations,2001Q2to2008Q2


Occupation 2001Q2 2008Q2 000s %

Secretarialandrelated 986 779 -207 -21Assemblersandroutineoperatives 462 289 -173 -37

Administrativerecords 653 533 -120 -18

Metalmachining 422 315 -106 -25

Processoperatives 422 338 -84 -20

Administrativefinance 856 783 -73 -9

Plantandmachineoperatives 265 195 -70 -26



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TrendsinUKemploymentbyindustry

Lookingatemploymentpatternsbyindustryratherthanbyoccupationshowsthat,atthe

broadestlevel,thebulkoftheincreaseinjobsoverthelastsevenyearshasbeen

concentratedintwosectors:publicadministration,educationandhealthontheonehand

andbanking,finance,insuranceandbusinessservicesontheother.Indeed,employmentinthesesectorsincreasedby1,940,000between2001Q2and2008Q2,morethanaccounting

foralltheincreaseinemploymentovertheperiod(Figure3.2).

Therewasalsoanincreaseof350,000peopleemployedinconstruction,equivalentto2.5

percentgrowthperyear.Thiswasthebiggestpercentagegaininanysector.Employmentin

manufacturing,ontheotherhand,fellby950,000overthesameperiodanannualrateof

declineof3.7percent.Employmentdeclinedineverybranchofmanufacturingoverthelast

sevenyears.Amongthesectorsseeingthesteepestfallsinemploymentweretextilesand

leathergoods(includingfootwear),basicmetalsandelectricalandopticalequipment.

Therewasmodestgrowthinemploymentinthedistribution,hotelsandrestaurantssector

overthisperiod,theresultofgainsinsomeareasbeingoffsetbylossesinothers.For

example,employmentincreasedstronglyinfoodretailersandrestaurants,butcontractedin

specialisedretailers.Thisreflectstwotrendswithinretailingoverthisperiod:the

diversificationofthemajorfoodsupermarketchainsintomorenon-fooditemsandthe

growthofinternetshopping.

Withinthefinancialsectortherewerealsoareasofjobgainsandlosses.Whiletherewasa

largeincreaseinemploymentinactivitiesauxiliarytofinancialintermediation,which

includesmostactivitiesofinvestmentbanks,assetmanagersandhedgefunds,employment

inbanksandininsuranceandpensionfundingdeclined.TheCitymayhavethrivedbetween

2001and2008buttechnologicalprogressandthetransferofjobsoverseasresultedina

reductioninjobsinmoretraditionalareasofretailbankingandintheprovisionofpensions

andinsurance.

Otherareasofnotablejobsgrowthwithintheprivatesectorwereinrecreation,market

research,consultancyandlabourrecruitmentandtherewerealsosubstantialincreasesin

employmentineducation,thehealthserviceandsocialwork.Table3.3highlightsindustries

seeingsignificantincreasesordecreasesinemploymentbetween2001and2008.


- 1 0 0 0 - 5 0 0 0 5 0 0 1 0 0 0 1 5 0 0 2 0 0 0

TOTAL

Other services

Public administration, education & health

Banking, finance, insurance, business services

Transport, storage & communication

Distribution, hotels & restaurants

Construction

Manufacturing

Energy & water

Agriculture, hunting, forestry & fishing

Figure3.2.

ChangeinUK

employmentby

industry,2001

Q2to2008Q2



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UnderlyingcausesoftrendsinUKemployment

Thisanalysisofemploymentbyoccupationandindustrysuggeststherewerefourkeydrivers

ofdevelopmentswithinthejobsmarketoverthelastsevenyears.1.Government: Largeincreasesinjobsintheeducationandhealthsectorsreflectthe

prioritiesoftheGovernment,whichsteppedupthegrowthofrealspendingintheseareas

from2001.

2.Housing:Thehousingboomhasbeenassociatedwithlargeincreasesinemploymentin

theconstructionsectorandinrealestate.

3.Overseascompetition:ManufacturingoutputintheUKhasstagnated,inpartdueto

competitionfromlow-wageemergingeconomiesincludingChinawhichhasledtolost

businessforUKfirmsandtoUKmanufacturerstransferringproductionoverseas2.Combined

withcontinuedproductivitygrowth,thishasledtodeclinesinemploymentin

manufacturing,particularlyinunskilledandlow-skilledjobs.Anincreaseinoutsourcingof

somefunctionswithinserviceindustrieshasalsocontributedtodeclinesinlow-skilledand

unskilledjobsinthatsector.

4.Technologicalprogress:Ascomputershavebecomemorepowerfulandsoftwarehasbeen

developedtoenablethemtoperformawiderrangeoffunctions,companiessuchasretail

banks,cancopewithfeweradministrativestaffandsecretaries.

Overthenextsevenyears,twoofthesefourdriversmightbeexpectedtopersistandtwoto

diminish,oreventogointoreverse.Technologicalprogressallowingfirmstocontinueto

replacelessskilledandunskilledworkerswithcomputersandcompetitionfromemerging


Table3.3:Changesinemploymentinselectedindustries,2001Q2to2008Q2


Industry 2001Q2 2008Q2 000s %

Education 2,027 2,348 322 16

Health 1,805 2,123 319 18

Socialwork 990 1,182 191 19

Miscellaneousbusinessactivities 378 530 152 40

Marketresearchandconsultancy 246 389 143 58

Construction 1,140 1,275 136 12

Restaurants 509 635 126 25

Realestate 360 445 85 24

Recreational,cultural 691 773 83 12

Labourrecruitment 680 762 82 12

Retailmainlyfood/beverages 932 1,013 82 9

Postandtelecommunications 545 464 -82 -15

Manufactureofpulp,paperetc. 445 348 -98 -22

Manufactureofbasicmetals 484 366 -118 -24

Manufactureoftextilesetc. 210 91 -120 -57

Manufactureofelectricalequipment 468 287 -181 -39


2.AsurveyforthemanufacturersorganisationEEFfoundthat78percentofmanufacturershad

transferredsomeoralloftheirmanufacturingoverseas(EEF2009).


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economieswillbesustainedorintensify,puttingpressureontheUKsmanufacturing

industryandleadingtomoreoutsourcinginthemanufacturingandservicesectors3.Onthe

otherhand,thegrowthofpublicspendingwillbesignificantlylowerincomingyearsasthe

Governmentseekstoreducethehugefiscaldeficitthathasbuiltupasaresultofthe

recession.Thiswilllimitgrowthinemploymentinareassuchashealthandeducation(althoughincreasedprivateprovisionmayprovidesomeoffset).Meanwhile,thehousing

marketseemslikelytobesubduedforanumberofyears,sotheoutlookforemploymentin

areassuchasrealestateandintheconstructionsectorhasdeteriorated.

Theunhappyconclusionisthatthedriversthathavecausedthenumberofjobsinsome

areasoftheeconomytodeclineinrecentyearsarelikelytoremaininplace,whilethedrivers

thathaveledtostronggrowthinjobsinotherareaslooksettodisappear.

Developmentsintheearlymonthsoftherecession

ThelatestfiguresshowemploymentintheUKpeakedinthesecondquarterof2008.

BetweenJune2008andMarch2009thenumberofworkforcejobsfellby473,000or1.5

percentinaggregate.Table3.4showsabreakdownbyindustryofthechangeinjobsover

thisperiod.

Unsurprisingly,someofthebiggestjoblosseshavebeeninthefinanceandbusinessservices

sector.Manybanksandotherfinancialinstitutionshaveannouncedredundanciesonalargescaleastheyseektocontrolcostsfollowingasharpreductioninrevenuesandinvestment

losses.Therehavealsobeenlargecut-backsinjobsinthedistribution,hotelsandrestaurant

sectors,asconsumersspendless.However,thebiggestproportionatefallinjobsat3.3per

centhasbeeninmanufacturing.Thisreflectsthreefactors.First,manufacturingjobshave

beendecliningsteadilyforthelastdecade,sothisisacontinuationofthewell-established

trend.Second,manufacturingoutputhasbeenhitbytheslumpinworldtrade.Third,

manufacturersinsomeindustrieshavecutproductionaggressively,andlaidoffworkers,as

theyseektoreduceinventorylevels.


3.AlmosthalfofmanufacturersinEEFssurveybelievemoreoftheirproductionwilltakeplaceoverseas

overthenextfiveyears,withtheneedforcostreductionbeingthemainincentive(EEF2009).

Table3.4:Changesinworkforcejobsbyindustry,June2008toMarch2009


Industry Jun2008 Mar2008 000s %

Agriculture,forestry&fishing 499 492 -7 -1.4

Mining,energy&watersupply 198 197 -1 -0.5

Manufacturing 3,138 2,942 -196 -6.2

Construction 2,252 2,246 -6 -0.3

Distribution,hotels&restaurants 7,037 6,857 -180 -2.6

Transport&communications 1,872 1,845 -27 -1.4

Finance&businessservices 6,668 6,483 -185 -2.8

Education,health&publicadmin. 8,009 8,145 136 1.7

Otherservices 1,987 1,981 -6 -0.3

Total 31,661 31,188 -473 -1.5



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Sofar,education,healthandpublicadministrationandotherserviceshaveavoidedoverall

joblosses.

Employmentintherestoftherecession

Economicforecastersexpectemploymenttofallby2.7percentin2009andbyafurther1.3percentin2010(HMTreasury,ForecastsfortheUKeconomy,June2009).Thissuggests

totalemploymentcouldfallbyabout1.25millionfromitspeaklevelofalmost31.75million

inthesecondquarterof2008toaround30.5millioninmid-2010.Basedontrendssofar,

anecdotalevidenceandlikelydevelopmentsinindividualsectors,whicharediscussedin

moredetailinSection4,thepatternofjoblossesduringtherecessionmightbealongthe

linessetoutinTable3.5.

Aftereachofthelasttworecessions,ittookroughlyeightyearsforemploymentintheUK

toreturntoitspreviouspeaklevel,beforegoingontoevenhigherlevels(Figure3.3).Inthe

lastcycle,employmentpeakedinthesecondquarterof2008,sorecenthistoricalexperience

suggestsareturntoanemploymentlevelof31.7milliononlyin2016,iftherecoveryfollows

thesamepatternaspreviousones.


Table3.5:Projectedchangesinjobsbyindustry,peaktotrough

Industry Employment(000s) Change

Mid2008 Mid2010 000s %

Agriculture,forestry&fishing 499 500 1 0.2

Mining,energy&watersupply 198 200 2 1.0

Manufacturing 3,138 2,850 -288 -9.2

Construction 2,252 2,200 -52 -2.3

Distribution,hotels&restaurants 7,037 6,700 -337 -4.8

Transport&communications 1,872 1,800 -72 -3.8

Finance&businessservices 6,668 6,275 -393 -5.9

Education,health&publicadmin. 8,009 8,000 -9 -0.1

Otherservices 1,987 1,975 -12 -0.6

Total 31,661 30,500 -1,160 -3.7

Source:OfficeforNationalStatisticsandauthorscalculations

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

Figure3.3.UK

employment

(thousands)

Source:Officefor

NationalStatistics


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Somewouldarguethisrepresentsabest-casescenario.Thedepthandnatureofthecurrent

recessioncouldmeanthatittakeslongertogetbacktopeakemployment.Researchbythe

InternationalMonetaryFundhasshownrecoveriesthatfollowbalancesheetrecessions,like

thecurrentone,tendtoberelativelysluggish(IMF2009:112-7).Thecaseforthe

Governmenttodoallthatitcantohelprestoreemploymenttoitspreviouspeakby2016andpreferablysooneris,therefore,astrongone.InSection5,welookatsomeofthe

measuresthatcouldbetakentoachievethisaim,butthatdosoinawaythatproducesa

betterbalanceintheeconomy.

Beforethat,inSection4,welookatprobabletrendsinemploymentinkeysectorsoverthe

nextfewyears,toillustratethescaleofthechangesrequirediftheUKeconomyisto

rebalance.Theconventionalwisdomisthatemploymentinmanufacturingwillcontinueto

decline,thoughatalessrapidpacethanseeninthesecondhalfof2008,thatemployment

indistribution,hotelsandrestaurantswillreboundreasonablyquicklyintherecovery,while

employmentinthefinancialsectorincreasesverylittle,ifatall.Nextwelookinmoredetail

attheassumptionsunderlyingtheseviewsandassesslikelytrendsinemploymentduringtheeconomicrecovery.



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InthissectionweanalyseprobabledevelopmentsinemploymentinkeypartsoftheUK

economyovertheperiodto2016theyearwhen,inanormalrecovery,employment

mightbeexpectedtoreturntoitspreviouspeaklevel.Thisallowsustojudgethelikelihood

ofemploymentrecoveringwithoutgovernmentinterventionandthescopeforashiftinthe

balanceofemploymentintheeconomy.

Thepublicsector

ThemostsignificantchangeinUKemploymenttrendsinthenextsevenyearscompared

withthelastsevenwilloccurinthepublicsector.AccordingtotherecentBudget,realpublic

spending(totalmanagedexpenditure)increasedatanannualrateof4.2percentbetween

200001and200708(HMTreasury2009:253).Recentyearshaveseenthemostsustained

realincreasesinpublicspending,onthisdefinition,sincethefirsthalfofthe1970s.However,thingsareabouttochange.TheBudgetenvisagesasharpfallinrealspending

growthin201011.Overthethreeyearsafterthat,realcurrentspendingisprojectedto

increasebyjust0.7percentayear,onaverage,whiletotalspending(thatis,including

capitalspending)isnotprojectedtogrowatall(Figure4.1).


4.Employmentinthenextrecovery

Thereislittleprospectofanincreaseinemploymentinthepublicsector,thefinancialsectorortheretailsectorbetweennowand2016.

ItwouldbeamajorchangeintrendifUKmanufacturingemploymentweretostopdeclining.

Ifemploymentistogetbacktoitspreviouspeakby2016,therewillhavetobelargeincreasesintheothersectorsoftheeconomy,whichcurrentlyaccountforonly

around30percentoftotalemployment.

Thiscanhappenbutonlywiththerightcombinationofentrepreneurship,aglobaleconomicrecoveryandgovernmentaction.

-1

0

1

2

3

4

5

6

7

8

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

Figure4.1.Real

growthintotal

managed

expenditure(%)

Source:HM

Treasury,Budget

2009,April2009


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Furthermore,largefiscaldeficitswillincreasepublicdebtandfuturedebtinterestpayments,

whileincreasedunemploymentresultsinhigherpaymentsonwelfarebenefits.Extramoney

spentintheseareasmeanstherewillbelesstospendbygovernmentdepartments.Since

departmentalspendingisthesortofspendingthatproducesjobsinthepublicsector,from

anemploymentperspectivetheoutlookisevengloomierthansuggestedbyFigure4.1.Theeffectofthesurgeinrealpublicspendinginrecentyearscanbeseeninemployment

levelsinpublicadministration,educationandhealth(thoughsomeofthejobsineducation

andhealthareintheprivatesector).Afterstagnatinginthe1990s,thenumberofjobsin

thesesectorssoaredfromaround5.8millionin1999to7millionin2006(Figure4.2).Since

then,employmenthascontinuedtoincrease,butatamuchslowerpace.

AsFigure4.2shows,employmentinthesesectorswasunchangedthroughoutmuchofthe

1990s,anditevendeclinedslightlyinthesecondhalfofthedecade.Thiswasthelasttime

thatrealpublicspendingwasconstrainedintheUK(itfellby2percentinaggregate

between199596and199899).Thelikelihood,therefore,isthatemploymentinthese

sectorsoftheeconomywhichtogetheraccountedforonequarteroftotalUKemployment

in2008andfor57percentofemploymentgrowthoverthelastsevenyearswillnot

increaseforseveralyears.Infact,giventheGovernmentsfiscaldeficit,thereisastrong

possibilitythatitwilldecline.

Thefinancialsector

Therehasalreadybeenasubstantialfallinemploymentinthefinancialsectorsincethe

middleoflastyear(seeTable3.5,above)andthereareconcernsthatdecliningemployment

intheCityofLondonwillhaveamajorimpactonoverallemploymenttrendsintheUK.

Infact,theCityislessimportantfordirectemploymentthanisgenerallyunderstood(though

ithasbeenmoreimportantforaggregateincomes,profitsandtaxrevenues).Accordingto

theCityofLondonCorporation,totalemploymentintheCity,itsfringeandCanaryWharf,in

financeandrelatedareas,was326,000in2006just1percentoftotalUKemployment

(CityResearchFocus2008).

Thisdoesnot,ofcourse,includehedgefundmanagersandotherfinancialintermediarieswhohavesetupbusinessintheWestEndofLondon.However,thepointstandsthatCity

employmentissmallinrelationtothetotalemploymentoftheUK.www.ippr.org/tomorrowscapitalism

5,600

6,000

6,400

6,800

7,200

96 97 98 99 00 01 02 03 04 05 06 07 08

Figure4.2.Total

employmentin

public

administration,educationand

health

(thousands)

Source:Officefor

NationalStatistics


19/51


Thebroaderemploymentstatisticsshowfinancialintermediationinaggregateismore

significant,accountingfor4percentoftotalemployment.However,aggregateemployment

inthissectordeclinedoverthesevenyearsto2008,by41,600.

OneestimatebyCharlesDavisattheCentreforEconomicandBusinessResearch

suggestsemploymentinLondonsfinancialsector(excludingaccountancyandlaw)increased

byover150,000between2003and2008(TheObserver, 5April2009).Someofthesejobs

havealreadybeenlost.DaviesbelievesstafflevelsinLondonsfinancialsectorwillbedown

to290,000in2009againstapeakof360,000inearly2008andThereisadangerofthe

numberscontractingfurthertoaround[]200,000(ibid).Analternativeestimateona

broaderdefinitioncanbefoundinAppendix1.

Ofcourse,thereisalsoadangerthatthedepthofthefinancialcrisisiscausingexcessive

pessimismaboutthemedium-termoutlookforthissectoranditwouldbewrongtowriteoff

thefinancialindustrycompletely.TheUKhasacomparativeadvantageinareasoffinance,

suchasassetmanagement,corporatefinanceandadvisingonmergersandacquisitions,

whichwillsurvivethecurrentturmoil.Itwouldbewrong,therefore,toprojecteverdeclining

employmentnumbersintheCity.Furthermore,thefinancialsectorasawholeismorediversethantheCityandaroundthree-quartersofthoseemployedinitareoutsideLondon.


Table4.1:EmploymentintheCityofLondon,2006(thousands)

Geographicalarea Finance(1) Relatedbusinessservices(2) Total

City 130.5 58.5 189.0

Cityfringe 42.0 36.9 78.8

CanaryWharf 53.5 4.3 57.9

Total 226.0 99.7 325.7

Notes:(1)Financialintermediation,insuranceandpensionfundsandotherfinancialactivities;(2)Legalandaccountancy

Source:CityResearchFocus2008

Table4.2:Employmentinfinancialintermediation(thousands)

Occupation Employment Change

2001Q2 2008Q2

Financialintermediation 1,071.9 1,030.3 -41.6

Financialintermediationexceptinsurance 605.3 567.5 -38.7andpensionfunding

Centralbankingandotherbanks 512.3 464.0 -48.3

Otherfinancialintermediation 93.0 103.5 10.5

Insuranceandpensionfunding 225.8 177.6 -48.2

Activitiesauxiliarytofinancialintermediation 240.8 285.3 44.5

Exceptinsuranceandpensionfunding 107.3 150.3 43.0

Auxiliarytoinsuranceandpensionfunds 133.5 135.0 1.5



20/51


Equally,though,financialinstitutions,aspartoftheireffortstorebuildprofitmargins,are

likelytokeepatightcontroloncosts,includinglabourcosts,overthenextfewyears.Todo

so,theymightstepupeffortstooutsourceemploymentandintroducenewtechnology.

Overall,therefore,employmentinfinancialintermediationwillprobablycontinuetodecline

inthecomingyears.Theconventionalwisdomthatthefinancialindustrywillnotbeasourceofjobsgrowthintherecoveryis,therefore,probablycorrect.

Retailandassociatedsectors

RebalancingtheUKeconomywillrequireashiftinemphasisfromconsumptiontoexports.

Growthinthelastdecadewasfuelledbydebt-financedconsumerspending,whichincreased

atanannualrateof3.2percentinrealterms,fasterthantherateofGDPgrowth,which

was2.6percent.Meanwhile,importsincreasedby4.9percentayearandexportsbyjust

3.7percent.Thetradedeficitballoonedto44billionin2008.Householddebtin2007was

176percentofdisposableincome,upfrom109percentin1999andhigherthaninany

otherdevelopedeconomy.

Noonebelievesthisissustainable.Growthinfuturewillneedtobedrivenlessby

consumptionandmorebyexportsandinvestment.Thepresentcrisisislikelytobetheevent

thatleadstoareversalofpasttrends.Itisnecessaryforconsumerspendingtogrowby

roughly0.5percentayearlessthanrealGDPformuchofthenextdecadethatis,by

around2percentayeartorestorebalanceintheeconomy.Suchaslowdownwillhave

implicationsforemploymentintheretailsector.

Overthelastdecade,althoughconsumerspendinggrowthhasbeensignificantlystronger

thangrowthintheaggregateeconomy,employmentinthewholesaleandretailsectorshas

increasedlessrapidlythanemploymentintheeconomyasawholeby0.6percentayear,

comparedwith0.9percent.Thissuggeststhatproductivitygainsinwholesalingandretailing

havebeengreaterthanintheoveralleconomy,probablyasaresultofretailersandwholesalersabilitytotakeadvantageoftechnologicalchange.

Itisdifficulttosaywithanycertaintywhetherwholesalersandretailerswillcontinuetoenjoy

suchanadvantageinproductivitygrowthbutthepresumptionisthattheywill.Ifso,andif

consumerspendinggrowthslowsfromabove3percentayeartoaround2percentayear,

thenthereseemstobelittleprospectofgrowthinemploymentinthesesectors.Thismatters

becausetogethertheyemployed4.5millionpeopleinthemiddleoflastyear.

Employmentinothersectorsisalsolikelytobehitbyweakerconsumerspendinggrowth.

Forexample,thehotelandrestaurantsector,whichemployed1.75millionpeopleinthe

middleoflastyear,experiencedanincreaseinemploymentof133,000between2001and

2008anannualrateof1.1percent.Toughertimesforhouseholdswillprobablymeanless

rapidgrowthinthesesectorstoo.

OneoffsetcouldresultfromSterlingsrecentsharpdecline.Ariseinforeignerscomingto

theUKonholidayandmoredomesticholidays,ratherthanoverseastrips,forBritons,will

addtospendingintheUK.

Takentogether,retailandassociatedsectorsemployed6,247,000peopleinthesecond

quarterof2008almostone-fifthoftotalUKemployment.Thiswasanincreaseof209,000

comparedtosevenyearsearlier.Itislikelythatfewer,ifany,jobswillbeaddedinthese

sectorsoverthenextsevenyears.



21/51


Constructionandrealestate

Employmentinconstructionandrealestaterosebyalmost250,000overthesevenyearsto

2008.Agoodpart,thoughnotall,ofthisincreasewasduetothestrengthoftheUK

housingmarket.Thefallinhousepricesandthecollapseinhousebuildingmeansmanyof

thesejobswillbelostin2009and2010.Pastexperiencesuggeststhatthehousingmarketwillrecovermoreslowlythantherestoftheeconomy.Inaddition,theGovernmentislikely

tobebuildingfewerschoolsandhospitalsinthefuture.Soemploymentgrowthinthese

sectorsisunlikelytobestronginthefirsthalfofthenextdecade.

Manufacturing

Definingthemanufacturingsectorisnotaseasyasitseemsandthereissomedebateabout

itstrueimportancetotheUKeconomy.Rawdatashowrapiddeclinesinemploymentinthe

sector.However,theincreasedtendencytooutsourcefunctionssuchassupportservicesand

cateringmayobscurethetruepicture.Whenamanufactureremploysacanteenworker,that

personisclassifiedasworkinginthemanufacturingsector.Whenthemanufacturer

outsourcestheprovisionoffoodtoanexternalcateringcompany,thecanteenworker

becomesaservicesectoremployee.

Inaddition,somemanufacturingfirmshavemovedintopost-productionservicesbecause

theyaremoreprofitable.RollsRoyce,forexample,reliesonprofitsfromservicingaeroplane

engines,notfrommakingthem,andex-metalfabricatorsintheTeesValleyhaveswitchedto

projectmanagingmajorconstructionprojectsratherthanmanufacturingmetal.These

activitiesarefunctionallylinkedtomanufacturingbutarenottechnicallymanufacturing

jobs.

Nonetheless,itishardtoarguewiththepropositionthatBritainsmanufacturingindustry

hasbeeninrelativedeclinefordecades.Outputatthepeakofthiseconomiccyclein2008

wasnohigherthanoutputatthepeakofthelastcyclein2000.Meanwhile,overthisperiod,

employmentinmanufacturingfellbyover1millionanannualrateofdeclineof3.7per

cent(Figure4.3).

Dataonemploymentbyoccupationshowthatwelloverhalfthisfallisexplainedbyareductioninnumbersemployedinskilled,semi-skilledandunskilledprocessingandmachine

operativejobs.Outsourcingofservicesisonlyasmallpartoftheexplanation.Muchmore


60

70

80

90

100

110

120

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Output

Employment

Figure4.3.UK

manufacturing

outputand

employment

19932008

(1993Q1=100)

Source:Officefor

NationalStatistics


22/51


23/51


Overall,therefore,manufacturingoverthenextfewyearsmightbeexpectedtodobetter

thaninthelastdecade,butitislikelytostruggletomeettheexpectationsofitsmost

optimisticsupporters.Atbest,itseemsoutputwillgrowfastenoughtostabiliseemployment

inthesector.Ifthepotentialofmanufacturingtorebalancetheeconomyistoberealised,

someformofgovernmentinterventionwillbenecessary.

Otherservices

Whilehigh-endmanufacturing,pharmaceuticalsandgreentechnologiesarelikelytobea

partoftheUKsfuture,theUKisalsoagloballeaderinthecreativeandculturalindustries,

whichprovidehigh-skilled,highvalue-addedjobsintheservicesector.Morebooktitlesare

publishedinBritainthanintheUSandfarmorethananywhereelseintheworld.Morethan

halfofrealityTVprogrammesareownedbyBritishcompanies.Industrieslikethesearelikely

toformanincreasingshareofjobsandoutputinthefuture.

Other,lessglamorous,jobswillalsobecreatedintheservicesector.Projectionsfromthe

ONSsuggestthatthenumberofpeopleaged75andoverintheUKwillincreasefrom4.7

millionin2006to5.5millionby2015(and8.2millionby2031)(OfficeforNational

Statistics2007).Thiswillcreateasignificantdemandforcaringandhealthservicework,with

somesuggestingtheUKwillneedanadditional1.1millioncareworkersby2025(Eborall

andGriffith2008).Thegrowingnumberofolderpeoplealsorepresentsasignificantgroup

ofconsumers,andmanycompaniesarelookingtoenterthismarketfromdesigningage-

friendlytechnologytobuildinghousesbettersuitedtoolderpeople.Whilethedemandfor

jobsintheseareaswillincrease,thereisadegreeofuncertaintyastohowsuchjobswillbe

paidfor.TheGovernmentsfinancialpositionsuggeststherewillbearelianceonprivate

sectorprovisionorasignificantchangeinhowrevenueisgenerated,forexampleplacinga

levyoninheritancetaxtopayforlong-termcareorrequiringpensionerstocontributealump

sumtowardscarecostsontheirretirement.9

Therearemyriadotherindustrieslumpedtogetherundertheheadingotherservicesandit

isbeyondthescopeofthispapertoassesswhichmightbesourcesofemploymentgrowthin

thefuture.10 Itisclearfromtheoutlookfortherestoftheeconomythatwewillberelying

onotherservices(includingnon-financebusinessservices)foralargeproportionofthe

growthneededtogetemploymentbacktoitspreviouspeaklevel.

Self-employment

Since2001therehasbeenadisproportionateincreaseinthenumberofself-employed:

althoughtheywereonly12percentoftheworkforcein2001,theself-employedaccounted

for550,00030percentofthe1,830,000increaseintotalemploymentovertheseven

yearsto2008.Asaresult,theynowrepresent13percentofthetotal.However,alargepart

oftheincreaseinthenumberofself-employedpeople213,000wasinpart-time

employment.Andalmosthalftheincreaseinthenumberoffull-timeself-employedpeople

isaccountedforbytwooccupations:constructiontradesandbuildingtrades.Theoutlookfor

bothisrelativelypoor.Outsidethesetwooccupations,thereisnoevidenceofsignificant

growthinthenumberoffull-time,self-employedworkers.Ifself-employmentisgoingtobe

animportantsourceofjobsgrowthintheUKduringthenextrecovery,governmentaction

maybeneededtosupportitsexpansion.


9.Fordetailsofthedebateonpayingforlong-termcareseeHinsliff2009.10.However,giventheincreasingimportanceofotherservicestotheeconomyasawhole,wewould

recommendthattheONSconsiderbreakingdownthissectortoenableabetteranalysisofthedataand

employmentprospects.


24/51


Thejobsdeficit

ForecasterssuggestthatemploymentintheUKwillfallbyaround1.25millionbetweenthe

middleof2008andthemiddleof2010andthatunemploymentwillrisetoover3million.If

theeconomicrecoverythatfollowsthisrecessionistobeanormalone,employmentwill

havetoincreasebythesame1.25millionbetweenmid-2010andmid-2016,atwhichpointitwillbebacktoitspeakofmid-2008.

However,likelytrendsinkeyareasoftheeconomyarenotsupportiveofsuchanincrease:

Employmentinthepublicsector(25percentofthetotal)coulddeclineastheGovernmentseekstoreduceitsfiscaldeficitoncetheeconomyisrecovering.

Employmentinfinancialintermediation(4percentofthetotal)hasdeclinedby42,000overthelastsevenyearsandislikelytocontinuetodeclineasfinancial

institutionsseektorebuildtheirprofitmarginsandadoptamorecautiousapproachto

innovation.

Employmentinwholesaling,retailing,hotelsandrestaurants(24percentofthetotal)maystagnateifconsumerspendingincreaseslessrapidlythanthetotaloutputofthe

economy

Employmentinconstructionandrealestate(6percentofthetotal)islikelytobeheldbackbyanextendedperiodofweaknessintheUKhousingmarket.

Employmentinmanufacturing(10percentofthetotal)hasbeenshrinkingatanannualrateof3.7percent,sojusthaltingthisdeclineinthefaceoftechnological

changeandincreasedcompetitionfromoverseaswouldbeamajorchangeintrend.

Ofcourse,thereisadangerthattheseassumptionsaretoopessimistic.Itisalltooeasyina

recessiontoseeonlydownsiderisksforoutputandemployment,yethistoryshowseconomiesdorecoverasspendingpicksupand,afteralag,newjobsarecreated.Thiscycle

mightbenodifferentfromothersinthisrespect.Jobswillbelostthisyearandnextbutnew

jobscouldbecreatedinfollowingyears.Inretailing,forexample,storesareclosinginthe

recessionbutnewoneswillopenintherecovery.Theveryfactthatemploymentfundedby

governmentspendinghasincreasedsorapidlyoverthelastsevenyearsmayhavecrowded

outemploymentgrowthintheprivatesector.Ifthenumberofpublicsectorjobsnow

shrinks,privatesectorjobsmaybecrowdedin.

However,wehaveshownthatareaswherejobsgrowthhasbeenstronginrecentyears

suchasthepublicsectorandconstructionarelikelytobemuchlessbuoyant.Thisleavesa

lotofslackforothersectorstotakeup.Table4.3presentsonescenarioofhowemploymentmightchangeoverthenextsevenyears,ifitistorecoverstronglyenoughtoreturn

employmentlevelstotheirpreviouspeakandiftheeconomyandlabourmarketaregoingto

endupbetterbalanced.11


11.Foranalternativeprojection,basedonvalue-addedratherthanemployment,seeAppendix2.


25/51


Followingtheanalysisabove,thisprojectionassumestherewillbefewerjobsinthepublic

sector,retailingandconstructionifemploymentreturnstoitsmid-2008levelbymid-2016.It

alsoassumestherewillbefewerjobsinmanufacturing,thoughtheprojectedfallisaround

0.5percentayear,comparedwithafallof3.7percentayearinthelasteconomiccycle.

Otherassumptionsarethatenoughjobswillbecreatedinbusinessservicestooffsetthe

expectedcontractioninjobsinthefinancialsectorandthattheremainingslackwillbetaken

upbytheotherservicessector.

Servicesectorjobsarelikelytobespreadacrossarangeofindustries.Somemightbe

entirelynewbut,forthemostpart,growthislikelytobestrongestinareaswheretheUK

hasalreadydemonstratedacomparativeadvantage,suchasmedia,design,R&D,publishingandthecreativeindustriesandinareasthatwillgeneratesignificantdemand,suchassocial

care.Meanwhile,thepartsofmanufacturingthatmightbestrongestcouldinclude

pharmaceuticalsandgreentechnology.

Ifthisprojectionturnsouttobebroadlyright,theeconomywillhaverebalancedalittle.

Employmentwillbelessreliantonpublicspending,thehousingmarket,theCityand

increasinghouseholddebt.However,itisonlyaprojectionanditisbestseennotasa

forecastbutasanexercisedesignedtohighlighttwouncomfortabletruths:first,thescaleof

theturnaroundneededinemploymentinmanufacturingandsecond,therelianceoftheUK

economyonnon-finance,non-retailingandnon-public-sectorservicesforjobsgrowthinthe

nextsevenyears.Webelievetherightcombinationofentrepreneurship,arecoveryintheglobaleconomyand

tradeand,importantly,governmentpoliciescanleadtothenecessarynumberofjobsbeing

createdacrossadiverserangeofmanufacturingandservicesectors.Thenextsectionlooks

attheroleofgovernmentinhelpingtosupportjobsgrowthintheseareas.


Table4.3:Projectedchangesinjobsbyindustry,peaktotroughtopeak

Employment(000s)

Industry Mid2008 Mid2010 Mid2016

Agriculture,forestry&fishing 499 500 500 1

Mining,energy&watersupply 198 200 200 2

Manufacturing 3,138 2,850 3,000 -138

Construction 2,252 2,200 2,200 -52

Distribution,hotels&restaurants 7,037 6,700 7,000 -37

Transport&communications 1,872 1,800 1,900 28

Finance&businessservices 6,668 6,275 6,700 32

Education,health&publicadmin. 8,009 8,000 7,800 -209

Otherservices 1,987 1,975 2,400 413

Total 31,661 30,500 31,700 39

Source:OfficeforNationalStatisticsandauthorscalculations

Change2008to2016


26/51


Debateshaveresurfacedinthewakeoftheeconomiccrisisabouttherolegovernment

shouldplayinshapingtheeconomy.Giventhevisibleflawsoftheneo-liberalideology

predicatedonminimumgovernmentintervention,callsforamoreactiveroleforgovernment

arestrong12.YethistoryalsoteachesusthatexcessiveGovernmentinvolvementinthe

economy,includingthenationalisationofindustries,candistortthedistributionofresources,

breedinefficienciesandreducecompetitiveadvantage.Abalance,therefore,hastobe

found.Inthissection,weoutlinewherewebelievethisbalanceshouldlieandtheactions

governmentcantaketohelptheeconomyachievemorebalancedandsustainableemploymentinthefuture.

Itiscleartousthatamorebalancedanddiverseindustrialstructurewouldbebeneficialfor

theUK,offeringthepotentialofhigherqualityjobsforworkers,alessvolatileeconomyand

amoresustainabletax-baseforthegovernment.Butitisunlikelysuchaneconomywill

developbychance.IfUKcompaniesaretocompeteinnewtechnologieswiththebest

producersintheworld,moregovernmentsupportislikelytobeneeded.Experiencefrom

othercountriesdemonstratesthatstrategicandactivegovernmentinterventioncanhelp

generateinnovationandstimulategrowth.Germanyhasinvestedheavilyingenerating

supplychainsandtechnologytosupportproductionintherenewableenergysectorandis

nowaleaderinthisfield(TUC2009).TheUSgovernmentleveredlargeamountsofmoneyintoSiliconValleywhereindustriesarenowleadersinbusinessinnovation(Wonglimpiyarat

2006).Sincethe1980s,SouthKoreahasdevelopedahigh-techmanufacturingbasevirtually

fromscratch(Gregory2009).Allofthesereliedongovernmentinterventionbutaformof

interventionwherethestatedidnotassumeownershipoffirmsormakeindividual

investmentdecisions.

Webelievegovernmenthastohaveavisionofthefutureshapeoftheeconomyandtarget

itsactionsaccordingly.Atapivotalpointlikethepresent,thisisevenmorenecessary.Critics

ofactivegovernmentinvolvementarguethatnobodycanpredictwhichindustriesand

companieswillbesuccessfulinthefuture,andthatgovernmentshouldnottrytosteer


5.BringingaboutabetterbalanceintheUKworkforce

IfwearetorebalancetheUKeconomyandreturntofullemploymentwithinareasonableperiodoftime,governmentcannotbepassiveinitsapproachtothe

economy.Successfulrebalancingwilldependonamoreactivestate.

Thechoiceisnotjustbetweenhands-offgovernmentandpickingwinnersthereareanumberofareaswheregovernmentcansupportthemarketwithoutactually

owningfirmsormakinginvestmentdecisions.

Theroleofgovernmentinfosteringaneweconomydoesnotendwhentherecessiondoes;thereisalongertermroleforgovernmentactivismineconomicpolicy.

Thenecessaryareasforgovernmentactionoverthelongertermcanbegatheredundersixheadings:innovation,skills,smallbusinessgrowth,highsunkcostsand

infrastructure,regionalpolicyandasupportivefinancialservicessector.Combined

withacommitmenttoenvironmentalsustainabilityacrossallpolicyareas,actionontheseissueswillhelpbuildamorebalancedandresilienteconomy.

12.PeterMandelsonhasbeencallingforanewindustrialactivismforexample(seeBERR2009).


27/51


economicdevelopment.Whiletheyarerightthatindividualinvestmentdecisionsarebest

lefttotheprivatesector,theyarewrongtoassumethatthismeansgovernmentshouldnot

trytoshapethebroaderstructureoftheeconomyandprovideaframeworkconduciveto

businessessuccess.Infact,wheremarketfailuresorcoordinationproblemsexist,government

interventionisessentialtohelpmaximiseeconomicpossibilities.Moreover,althoughtherearemanyunknowns,somethingsarepredictable.Weknowthatthe

publicsectorwillbeunabletocreatejobs,inaggregate,astheGovernmentwrestlestoreduce

itsfiscaldeficit.WeknowthatBritainwillhavetobecompetitiveinhigh-skilledindustries,as

itwillnotbeabletocompeteforunskilledjobswithemerginglow-wageeconomiesinthe

developingworld.WeknowthatBritainsexistingstrengthsandcomparativeadvantagelie,

forexample,inthecreativeandpharmaceuticalindustriesandprofessionalservices.Weknow

thatoilisfiniteandpriceswillriseassuppliesrunoutandalternativeenergysourcesare

thereforeneeded.Inthislight,itissensibleforgovernmenttotargetitssupportforindustry

inparticularways,forexampletargetingscientificandtechnologicalskillsandbyensuring

financeisleveragedintohigh-techandgreenenergyindustries.Criticsofactivegovernmentinvolvementinindustryoftenpresentadichotomybetween

hands-offontheonehandandstateownershiporpickingwinnersontheother.Thisis

toosimplistic.Governmentactionwillalwayshaveahugeimpactontheeconomy:thepublic

sectoristhelargestcustomerintheUK,spendingabout175billionannually;itshapesthe

skillsbasewithanearmonopolyoneducationsupply;itprovidesthevastmajorityofthe

countrysinfrastructure;ittaxesandregulates;itbuildsinstitutions.Inordertoensurestrong

employmentgrowththatresultsinamorediverseandsustainableemploymentbase,

governmentmustthinkstrategicallyabouthowitcaninfluencetheeconomywithout

actuallyowningfirmsormakingspecificinvestmentdecisions.

Thereisapermanentroleforgovernmentinsupportingindustrybyprovidingfunctionsthatthemarketcannotsupply.Industrialactivism,asrecentlyadvocatedbytheDepartmentfor

Business,Enterprise&RegulatoryReform(nowBusiness,InnovationandSkillsorBIS)(BERR

2009),isamoveinthisdirection,butitdoesnotgofarenough.BERRsdefinitionof

activismsuggestedgovernmentstepsinonlywhenmarketsfail.Theimplicitassumptionis

thatoncethingsarebacktonormal,thestatecanonceagainleavethemarkettoit.As

such,BERRsfocushasbeenoninitiativesandschemesthatcanberolledbackoncethe

economyrecovers.BERRsrhetoricisalsostrikinglysimilartothatofpreviousgovernments

indeedStephenByers,asSecretaryofStateforTradeandIndustry,declaredin2000thatthe

Governmentshouldhaveanactivistbutnotinterventionistapproachtoindustrialpolicy

yetsignificantimprovementinthisareahasnotbeenforthcoming.

Onereasonfortheslowrateofimprovementisthatpolicyresponseshavebeenbasedon

correctingshort-termfailures.Anotheristhattherehasbeenarelianceongovernment

makingstatementsandsimplyexpectingbusinessestorespondrhetorichasnotbeen

matchedwiththeinstitutionstodelivertherequiredchange.Theapproachweadoptinthis

papersuggestsamorestructuralroleforthestateandadvocatesmorepermanent

institutionsandfundstofixthisapproachintheeconomy.Itappreciatestherearealways

somefunctionsthatmarketforces,drivenbythepricemechanismandprofit-makingmotive,

cannotachieve.

Forexample,financeforsmallgrowingbusinessesandforinvestmentinnewanduncertain

technologiesisnotoriouslyhardtocomebyasinvestorswantquickerandsaferreturnsthan

theseallow.Similarly,financeforgreentechnologymaybeinadequate,asenvironmentaland

socialbenefitswillnotbecalculatedinpotentialprofitandbecauseoftheriskcombined

withthelargesunkcostsofinfrastructure.Somefirmsdonottrainandimprovetheskillsofwww.ippr.org/tomorrowscapitalism


28/51


theirworkforceforfearstaffwillleaveorworkforacompetitorinthelongterm.Itisinareas

suchasthesethatthereisapermanentrolefortheGovernment.Itshouldensurestructural

marketfailingsdonothinderinnovationandeconomicgrowth.

WehavegroupedthetypesofpolicytheGovernmentcangoforundersixbroadheadings:

1.Fosteringacultureofinnovation

2.Investinginskillsandtraining

3.Supportingsmallandnewbusinessgrowth

4.Assistingwithinvestmentinhighsunkcostsandinfrastructure

5.Targetingregionallybalancedgrowth

6.Recognisingtheimportanceoffinancialservices

Runningthroughouteachofthesethemesisacommitmenttoenvironmentalsustainability.

Creatingagreeneconomyisnotsomethingthatcanbeachievedthroughonesectororpolicyarea;itshouldbeintegraltoallareasofenterpriseandpolicy.

Theseideasaredevelopedinmoredetailbelow.Thepolicysuggestionsincludedarenot

meanttobeexhaustiveoracompletemanifestoforchange.Rather,theyareintendedto

showthedirectionpolicyshouldtakeandhighlightthestrategicrolegovernmentcanplayin

buildingamorebalancedeconomy.

Fosteringacultureofinnovation

Theabilityoffirmsandorganisationstoinnovateiscriticaltothefunctioningofany

economy.Tostayatthecuttingedgeinanysectorrequiresconstantlyrethinkingwhatyou

doandhowyoudoit.Innovationcanhelpdevelopnewgoodsandservices,produceand

delivertheminnewwaysandatlowercosts.ItwillbeessentialiftheUKistogenerateamoresustainableeconomywhileadaptingtomeetfuturechallengesincludingclimate

change.Thereisapositivelinkbetweeninnovationandprofitability(LambertandFrenz

2008),andactivitiessuchasresearchanddevelopmentcangeneratepositivespill-oversto

otherresearchers,businessesandsectors.Innovationcangeneratejobsdirectly(forexample

intheR&Danddesignindustries),andindirectlyasnewbusinessesarestartedandexisting

businessesbecomemoresuccessful.Aneconomythatcancontinuouslyinnovatewillalsobe

moresustainable,asitcanreacttochangesinthebusinessenvironment.

Innovationisinherentlyweaklydefinedandhardtomeasure;itcapturesawholerangeof

activitiesthatenableorganisationstoimprovethewaytheyoperate.Itincludeseverything

fromdevelopinganewproductorstartinganewbusinessthroughtomanagingasupplychainordeliveringaserviceinanewway.Investmentcantaketheformoftangibleassets

(forexample,inmachinery,buildingsandhardware)orintangibles(forexample,inwork

organisation,design,R&D,humancapital,brandingandmarketing).Inourincreasingly

knowledge-basedeconomy,investmentinintangibleassetsisessentialtostaycompetitive

(TheWorkFoundation2008).Theexactforminnovationtakesvariesbysector.High-tech

industries,suchaspharmaceuticals,relyontechnology-basedinnovationandR&D.However,

inthecreative,retailandfinancialservicessectors,innovationisconcentratedinareassuch

asmarketing,brandingandbusinessorganisation.13


13.TheDepartmentforInnovation,UniversitiesandSkills(DIUS)notesthat:R&Daccountsforaboutatenthofinnovationexpenditureintheprimarysector,constructionandretailservices.However,it

accountsforoverhalfoftotalexpenditureinengineering-basedmanufacturingandtwofifthsin

knowledgeintensiveservices.Incontrast,nearlyhalfofallretailsectorexpenditureoninnovationgoes

onmarketing.(DIUS2008:13)


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IftheUKeconomyistosuccessfullyrebalance,innovationwillbeessentialforthefollowing

reasons:

BuildingontheUKsexistingstrengthssuggestsknowledgeindustrieswillbeincreasinglyimportantinthefuture.Knowledge-basedsectorsrequirehighlevelsof

investmentininnovationandintangibleassets.

Demandforknowledge-intensiveservicesislikelytoincreaseasemergingeconomiesdevelopandincreaseconsumption;aspopulationsage,generatingdemandfornew

services;andastheneedforalternativesourcesofenergyincrease.

Newtechnologieswillcontinuetodriveeconomicdevelopment,stimulatinginnovationtostayaheadofthecompetition.

ReducingtheUKscarbonfootprintwillrequirenewwaysofgeneratingandconservingenergyandmaking,transportingandsellinggoods.Allwillrequire

significantresearchandinnovation.

TherewillbeincreasingcompetitionininnovationfromChinaandothereconomies.R&Disanincreasinglyglobalbusinessthatpayslittleheedtonationalboundaries:

foreigncontrolledR&DintheOECDeconomiesincreasedby71percentinrealterms

between1995and2003.ChinahasalsoseenasharpincreaseinR&Dinvestmentfrom

overseas(OECD2006a,Griffithetal2005,OECD2008).TheUKwillthereforehaveto

investininnovationinordertoremaincompetitiveandkeepactivitybasedhere.

TheUKsrecordoninnovationismixed.TheUKtrailstheG7economiesontraditional

measuresofinnovationsuchasR&Dandpatenting.R&DasashareofGDPintheUKhas

declinedsteadilyoverthelast25years.ThisisparticularlyworryingifR&D-intensive

industriesareneededtogeneratejobsastheeconomyrecovers.However,onbroader

measuresofinnovationtheUKfaresbetter.Forexample,the2005CommunityInnovationSurvey(whichincludesawidernumberofmeasurements)placedtheUKrateofbusiness

innovationclosetotheEuropeanaverage(DIUS2008).Theseresultspartlyreflectthefact

thattheUKhasahighproportionofsectorsthatarenotR&D-intensiveandinstead

innovateinotherways.Neverthelessitisclearthat,iftheUKeconomyistorebalanceand

growinthefuture,itsrecordoninnovationneedstobeimproved.

Anumberoffactorspreventinnovationfromcomingtofruition,someofwhichsuggesta

greaterroleforgovernmentincoordinatingactivity,ensuringasociallyoptimallevelof

investment.

First,financeforinnovationcanbehardtogenerate.Loansfordevelopingnewideas,

processesandbusinessesarehardtosecure.Investmentisriskyforunprovenideas;thereisa

longreturntimeonsomeinvestmentsininnovation;developmentcostsareinitiallyhigh;

andnewbusinesseslackcollateralforlargeloans.Fundingforinvestmentinintangiblescan

beparticularlyhardtosecureasbanksprefertofundinvestmentinphysicalassetsthat

providebettercollateralforaloan.Thisisveryconcerninggiventheimportanceof

intangiblestoinnovationintheknowledgeeconomy.14

Second,privatereturnstoinvestingininnovationcanbehighlyuncertain.Thedifficultiesin

capturingthereturnstoinvestmentininnovationreflectthefactthatknowledgeisnon-rival


14.BrinkleynotesthiswasaparticularlybigprobleminJapaninthe1990sasthecountrystruggledto

beatdeflationandbankswerecautiouswithlending.SeeBrinkley2009.


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onepersonsconsumptionofknowledgedoesnotreducetheamountavailableforanother

personandpartiallynon-excludableonepersoncannotstopothersbenefitingfromtheir

research.Therecanneverbeperfectintellectualpropertyrightsandknowledgespreads

throughpublications,informationnetworks,observationandsoon.Thisspreadof

knowledgeisgoodforthewholeeconomy,butbadforprovidingincentivesforindividualfirmstoinvest.Thereis,therefore,areducedincentivetoinvestinthesociallyoptimal

amountofnewknowledgesincetheprivatereturnsarelowerthanthereturnstothewhole

economy(Griffith2000andBloomandGriffith2001).

Thethirdsetofbarriersreflectsdifficultiesincommercialisingresearch.WhiletheUKisgood

atinventionitisrelativelypooratthecommercialexploitationofnewideas.Thisisanarea

welookatbelowinrelationtosupportingsmallbusinessesseekingtogrow.

Sincethemarketcannotprovidethesociallyoptimallevelofinnovation,thereisarolefor

governmenttoaddressmarketfailures.Thecurrentgovernmentrecognisesthisandhas

mademovestosupportinnovation.Theflagshipinnovationpolicysince2000hasbeenR&D

taxcredits,whichhavehelpeddelivermorethan2.3billionofsupportthroughalmost30,000claims.Recentincreasesintherateofreliefandtheextensionoftheschemefor

SMEsshouldincreasethetake-upandlevelofR&DcarriedoutvitaliftheUKistoseea

growthofR&D-intensiveindustriessuchashigh-techmanufacturing.

The InnovationNation WhitePaperin2008demonstratedanunderstandingthatinnovation

isnotrestrictedtoR&Dandcanbeencouragedinabroaderrangeofactivities.The

introductionofinnovationvouchers,whichallowbusinessestobuyinitialengagement

witharesearchinstitutionusuallyafurtherorhighereducationinstitutetolearnfrom

theirresearchknowledgeorusetheirinfrastructure,andtheexpansionofKnowledge

TransferPartnershipsshouldhelpencouragelinksbetweenresearchersandbusinessesand

improvethecommercialisationofresearch.Wesupportthesemovesandbelievethereisconsiderablescopeforextendingtheiruseimprovingawareness,fosteringstrongerlinks

betweenbusinessandFurtherandHigherEducation(FEandHE)andrecognisingthatthe

benefitsworkbothwaysuniversitieshavemoretolearnfrombusiness,asdiscussedbelow.

Despitethesepositivemoves,thereismorethatgovernmentcanandshoulddotoplugthe

marketfailuresinherenttoinnovation.Inparticular,itshouldmoveawayfromarelianceon

complexgovernment-administeredschemestowardsgeneratingindependentinstitutions

thatcansupportthemarket.

OneexamplewouldbethecreationofanIdeasBankchargedwithprovidingfinancefor

innovation,particularlyinitialresearch,proofofconceptwork,universityspin-outsand

businessstart-upsandlesstraditionalformsofinnovationsuchasimprovementstobusinessorganisationandmanagement.ThisBankwouldbemanagedasaprivateinstitution,in

recognitionthatthisensuresbetterinvestmentdecisions.HowevertheGovernmentwould

underwriteaminimumamountoftheloanstooffsetthedifficultiesassociatedwithlong-

terminvestmentinunprovenideas.

TheGovernmentalreadyacknowledgesthebenefitsofsuchanapproachwithitssmall

businessloan-guaranteescheme.Ratherthanseeingthisschemeasashort-termrecession

bustingmeasure,webelievethereisaroleforaninstitutiontopermanentlyservethis

functionfornewaswellasexistingbusinesses.Suchabankcouldalsoimposetough

environmentalstandardsorprovideloansatpreferableratesforbusinesseswithapositive

environmentalimpact,forexample,onlylendingforprojectsthatwillreducetheUKscarbonfootprint,thusencouraginginvestmentingreentechnologies.



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Governmentcanalsobemorestrategicaboutthewayitprocuresanddeliversgoodsand

services.AsthelargestcustomerandemployerintheUK,theGovernmentcanfoster

innovationthroughstrategicprocurementpractices(itisnotanaccidentthattheUKs

strengthsinpharmaceuticals,aerospaceanddigitaltechnologiesmirrorlargegovernment

institutionsliketheNHS,militaryandBBC).Offeringpubliccontractstosmallerfirmscanhelpwithbusinessdevelopment.Somesimplemeasures,includingsimplifyingthe

procurementprocess,canhelpsmallbusinessesparticipateandprosper.Movinggovernment

bodiestodepressedregionscanalsoaidregenerationandthecrowding-inofprivate

investment.Encouragingtheprivatesectortogeneratenewwaysofmanagingand

deliveringpublicservices,perhapsbyofferingthemtheintellectualpropertyrightsonany

innovation,canbothimproveservicedeliveryandincreasedemandforinnovation.

TheGovernmentcouldreformthetaxandpatentsystemstoprovidebetterincentivesto

universitiesandresearcherstocommercialisetheirresearch,allowingtheresearchinstitutions

toharnessmoreofthepotentialgainsfromuniversityspin-outs.Thishasbeensuccessfulin

theUS,forexample,andisbeingpilotedatsomeUKinstitutions.Regulationcanbeusedtospurinnovationbyimposingstandardsongoodsandservices.

Thisislikelytobeparticularlyimportantforgeneratinganenvironmentallysustainable

economy.Forexample,ahigherpriceoncarboncouldencourageinnovativewaysof

generatingandconservingenergyandgivefirmstheincentivesandcertaintytheyneedto

fundlong-terminvestmentinthiscrucialsector.Equally,excessiveormisplacedregulation

canstiflebusinessgrowthandthereisgrowingconcernthatthetaxandregulatorysystemis

toocomplexandplacestoogreataburdenonSMEsinparticular.

Investinginskillsandtraining

Perhapsthemostestablishedgovernmentroleintheeconomyistheprovisionofskillsand

training.Skillsandtrainingarekeyleversforimprovingproductivityandjobcreationandlielargelywithingovernmentcontrol.

Skillsarecrucialforemploymentwhilenearly90percentofthosewithgraduate

qualificationsareinwork,fewerthanhalfofthosewithnoqualificationsareinemployment.

Aswellasbeingabarriertoemployment,lowskillscanleadtolowlevelsofproductivity.The

LeitchReviewofSkillsestimatesthatafifthoftheUKsproductivitygapwithcountriessuch

asFranceandGermanyisduetoourskillsdeficit(Leitch2006).Thebenefitsofupskilling

theUKworkforcearehugewithLeitchestimatingpotentialincreasesintheUK

employmentrateofaround10percentoverthirtyyearsifadultskilllevelsaresignificantly

improved(ibid).

WhendevelopinganapproachtocreatingaUKskills-basefitforarebalancedknowledge

economy,thefollowingthingsarerelativelycertainandshouldbetakenintoaccount:

Competitionfromotherhigh-skilleconomieswillincreaseinthecomingyears.Emergingeconomies,especiallyChinaandSouthEastAsia,areimprovingtheirskills-

baseveryfastandOECDcountriesarealsoincreasingskillsinvestment,oftenfroma

higherstartingpointthantheUK(OECD2006b).

Aknowledge-basedeconomyreliesmoreonhigh-levelskillsthantheeconomiesofthepast.Higherintermediate(Level3)skillsanddegreequalificationswillbe

increasinglyimportant.Thebenefitstoanindividualwithhigh-levelskillswillincrease,

aswillthepenaltiesforthoseholdinglow-levelskills.Thesectorslikelytoseegrowth(includinghigh-valuemanufacturing,digitaland

creativeindustries,pharmaceuticals)requireSTEM(Science,Technology,Engineeringwww.ippr.org/tomorrowscapitalism


32/51


andMaths)skills,whicharealsocrucialtothesuccessofgreentechnologies.

TheUKneedsaneconomythatcanadapttoexternalchanges,newbusinesspracticesandtechnologies.Flexibilitycanbederivedfromtransferableskillsandtheabilityto

re-trainthroughoutworkinglife.

Giventhatthree-quartersoftheUKs2020workforcehavealreadyleftfull-timecompulsoryeducation,changesintheschoolsystemwillnotbesufficienttogenerate

significantchangeinskillscompositioninthelabourmarket.

Despitetheeconomicadvantagesfromfirmsinvestinginskills,anumberofmarketfailures

preventthedesiredlevelofinvestmentfromtakingplace.Thereturnstotrainingarelong

term,especiallyiftrainingsomebodyfromscratch,discouraginginvestment.Thebenefitsof

trainingarelargelycapturedbytheworker,meaningiftheymovetheytakemanyofthe

benefitsofthatinvestmentwiththem.TraininginSTEMskillscanbeparticularlycostlygiven

theneedforequipmentandashortageofqualifiedteachers.Andthesupplyofinformation

abouttrainingneedsandopportunitiesisfarfromperfect,leadingtoaproblemof

coordinatingsupplyanddemand.

Thesefactorsleadtoatragedyofthecommonsproblemwherefirmsseektobenefitfroma

pooloftalentedlabourtrainedbyothers,withoutactuallyinvestingintrainingthemselves.It

isalsopossibleforalowskillequilibriumtodevelop,wherealackofskillsandalackof

skilledjobsbecomeself-perpetuating(seeFeingoldandSoskice1988,AghionandHowitt

1992).

Theinabilityofthemarkettoencouragefirmstoinvestintheoptimumleveloftrainingcan

beseeninthedata.Aroundonethirdoffirmsdonotrainingatall,andthisrisestoonehalf

insomesectors(Leitch2006).Thereisaparticulardeficitintechnicalskillstrainingand

trainingthoseatanintermediatelevel(seeCBI2007survey,citedinConservativePolicyGreenPaper7).Thelackoftechnicalskillsisespeciallyconcerninggiventheneedforthem

inpotentialgrowthindustries.Arecentreportidentifiedanumberofskillsshortagesfor

firmsworkinginrenewableenergyproduction(SQWEnergy2008).Poorlevelsofbasic

numeracyandliteracycompoundtheskillsdeficitatthelowandintermediatelevelthe

OECDrankedBritaintwentiethforsomemeasuresofskillsattheintermediatelevel,lagging

seriouslybehindourprincipalcompetitors(OECD2006b).

Evenifthemarketdoesprovideapullandameansforpeopletobetrained,culturaland

institutionalfactorsoftenpreventithappening.Aculturalshiftabouttheimportanceof

educationintheneweconomy,theneedforlife-longlearning,andashiftintheinstitutions

thatprovideeducation,isneeded.Marketfailuresasoutlinedabove,coupledwiththeevidenceoftheUKspoortrackrecord

onskills,suggestaneedforenhancedgovernmentinvolvementinsupportinginvestmentin

thiskeyarea.Lessonshavebeenlearntabouttheinabilityofcentrallyplannedskillssystems

suchastheIndustrialTrainingBoardsandManpowerServicesCommissionsofthe1960sand

1970s.Suchcentralpredictandprovidesystemswereunabletoaccuratelymeettheneeds

ofemployers,andtrainingproviderssimplyworkedtoout-of-dateplans.

ConsensusisnowbuildingfollowingthereviewsbyLeitch(intoskills)andFoster(intothe

FurtherEducationsystem)abouttheextentanddirectionofreformneeded.Thereiscross-

partysupportforademand-ledsystemwheretheskillsagendaisdrivenbyemployersthat

needtheskillsratherthanthecollegesanduniversitiesthatsupplythem.Ratherthangoingdirectlytocolleges,fundingisbeingreroutedviaemployersandindividualswhodecide

wheretospendtheirfunds.TheintroductionofTraintoGain(wheretheGovernmentwww.ippr.org/tomorrowscapitalism


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assistsfirmstofundtheirtrainingplans)andofSkillsAccounts(whereindividualshaveset

amountstospendontrainingintheworkplace)areattemptstofindnewwaysof

articulatingandmeetingthedemandforskills.Therehasbeenconsiderableactivityinthese

areasrecentlyanditistooearlytotellwhethersuchprogrammeswillbeasuccess.

Areasforpotentialgovernmentinvolvement

Anyfuturemodelmustrecognisethatemployersshouldbeexpectedtocontributemostto

skillsdevelopmentwheretheyderivethemostreturns,withgovernmentconcentratingon

thoseareaswhereeffectiveincentivesarenotinplace.Thereispotentialforgovernment

involvementinseveralareas.

First,theGovernmentshouldexplicitlytargetSTEMskills.Simplyimprovingsyllabusesto

makeSTEMsubjectsmoreattractiveisnotenough.Increasedcontacttimeinthesesubject

areas,perhapsbyextendingtheschooldayorweightingtimetablestowardsthem,maybe

required.TargetedfundinginFEandHE,suchasmoregenerousloansandbursariesfor

thosestudyingSTEMskills,shouldalsobeconsidered.Second,aradicalshiftintheprovisionoffurthereducationisneededtoencouragelife-long

learning.Akeyfeatureoftomorrowscapitalismwillbethatpeoplecontinuelearning

throughouttheircareersinordertoimprovetheirskillsandadapttonewbusinessrealities

andtechnologies.Provisionthereforehastobedesignedtomeettheneedsofadultlearners

withjobsandfamilies,whowillrequiretheabilitytodipinandoutofcoursesthroughout

theircareer.Anationallyrecognisedcreditsystemforcoursesinallareasofthecountryand

alleducationinstitutions(wheredifferentcoursesreceiveacreditwhichistransferableacross

allinstitutions),wouldhelpenablethis.Suchacreditschemecouldalsoincludeemployer-

basedlearning.FEfundingiscurrentlygearedtoproducingformalqualificationsrequiring

longperiodsofstudy.Webelievefundingrequirementsshouldberelaxedtoencouragethe

provisionofshortercourses.

Thecostofstudyingasanadultisalsoabarrier.Part-timecoursesareparticularlycostly,as

upfrontfeesarerequiredandmaintenancesupportismuchhardertocomebythanforfull-

timestudy15.Webelieveadultstudentsonpart-timecoursesshouldhavethesame

entitlementstosupportasthoseonfull-timecourses.Thestudentloanschemeshouldbe

madewidelyavailableforthosestudyingpart-timelaterinlife,asawayofencouragingand

fundingcontinuinglearning.

Third,theemphasisonintermediatetrainingshouldbeextendedfromachievingLevel2

skillstoachievingLevel3skills.Inmanyareas,theGovernmentsfocusisonlyonLevel2

forexampleitwillmeetthefullcostofanover-25-year-oldtakinganinitialLevel2course,butonly50percentofthecostiftheytakeaninitialLevel3course.ItprovidesSkills

Accountsforsomeindividuals,butonlytofunduptoLevel2qualifications.Equallythe

TraintoGainandapprenticeshipschemesaretargetedtowardsLevel2learning.Inallthese

areasgovernmentprovisionshouldbeextendedtoLevel3learning,sincethisisthelevelof

skillthatislikelytoberequiredinanincreasinglyknowledge-basedeconomyandis

consistentwithextendingtheschoolleavingageto18.

Fourth,moreeffectivewaysofencouragingfirmstoinvestinskillsmustbefound.

Leveragingemployerstoinvestintrainingandskillsisboththecheapestandmosteffective

wayofensuringskillstrainingmatchestheneedsofemployers.WhiletheTraintoGain


15.ThecombinedFEandHEbudgetformaintenancesupportforpart-timestudyis100million,

comparedwith4.2billionforfull-timestudents(LiberalDemocrats2009).


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schemewasastepinthisdirection,itisbecomingapparentthatgovernmentfundsare

beingusedtopayfortrainingthatfirmswouldhavedoneanywaywithoutextrafunding16.

TraintoGainshouldbebettertargeted.Strongerinvolvementoftradeunionscouldalsohelp

increasepressureonemployerstoprovidetraining.ThesuccessofUnionLearning

Representativesdemonstratestheimportantroletradeunionscanplayintheskillsagenda:arecentsurveyfoundthatmoretrainingwasprovidedinworkplaceswheretrainingwas

negotiatedasopposedtowhereitwasmerelysubjecttoconsultation(TUC2006).Including

trainingincollectivebargaininglegislationcouldincreasethepressureonemployerstoinvest

inskills.

Fifth,thereneedtobestrongerlinksbetweeneducationalinstitutionsandemployers.One

barriertoemployersgettinginvolvedintrainingisthattheyarenotconsultedaboutthe

designofcoursesorqualifications.AllowingSectorSkillsCouncilstoaccreditvocational

courses,orapprovethecontentofcourses,wouldhelpgeneratemoresupportfrom

employersintheFEandHEsystems.Evidencealsosuggeststhatuniversityaccredited

coursesthataredeliveredthroughtheworkplacecanbeaneffectivewaytoensuretrainingistargetedtobusinessneeds.ForexampleMarksandSpencersFoodsUnwrapped

Programmeusedamixtureofuniversity,in-houseandexternaltrainingproviderstotrain

1,500managers.Theprojectwasmodularandpart-time,meaningpeoplecouldfititaround

theirothercommitments,trainingwasalignedwithbusiness-criticalfunctionsandcompany

targetsandtheemployeesreceivedauniversity-accreditedqualification.Onallmeasures,the

programmewasdeemedasuccessfromincreasingsales,tostafftransferringknowledgeto

otheremployees,tofosteringabetterworkcultureandpeersupport(Naish2009).

Governmentbodies,suchastheRegionalDevelopmentAgenciesandLearningSkillsCouncil

couldactivelybeinvolvedinfacilitatingsuchbusiness-universitylinks.

Finally,moreneedstobedonetoencouragetheexpansionofapprenticeshipsandtechnical

learning.Apprenticeshipshavebecomesomethingofatouchstoneforwiderdebatesabout

thefailuresoftheBritisheducationsystem.Theyareimportantbecausetechnicalskillswill

berequiredinarebalancedeconomy,andbecausethosewhodonotgotouniversityoften

havetheirpotentialwastedthroughtherebeingalackofothertrainingopportunities.

Anumberofbarriersexistforfirmswishingtoofferapprenticeshipsandthesecouldbe

removed.Amuchsimplerprocessofaccreditationandinspection,eachinvolvingonebody,

wouldhelpremovecomplexityfromtheschemeandreducethenumberofgovernment

bodiesfirmshavetodealwith.Barrierstostudentswantingtoundertakeapprenticeships

couldalsoberemoved.Forexample,fundingandaccesstoloansforapprenticeshipsshould

beequivalenttothoseavailableintheHEsector.Anationalqualificationshouldresultfrom

apprenticeshipsthatcanberecognisedandtransferredacrossotherareasoftheeducation

system.AnationalapplicationsystemforapprenticeshipssimilartoUCASwouldmore

effectivelymatchsupplyanddemand(somemovesinthisdirectionhavebeenmade

followingtheestablishmentoftheNationalApprenticeshipService).Thepublicsector,asitis

byfarthelargestemployerintheUK,alsohasamassiveopportunitytodirectlyincreasethe

supplyofapprenticeships.

Supportingsmallbusinessgrowth

Thejobsofthefuturewillbecreatedinnewandexistingbusinesseswithgoodideas,

backedupbymanagementcapability,skilledworkersandaccesstofinance.Manyofthese

jobswillbeinsmallfirms,orinfirmsthatdonotyetexist.


16.AsarguedbyboththeLiberalDemocrats(2009)andtheConservativesPolicyGreenPaper7.


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AlreadyhalfoftheUKsworkforceisemployedbysmallbusinesses.Thisshareislikelyto

increaseintheyearstocome.ThesectorswheretheUKeconomyislikelytoexpandnon-

financialbusinessservices,knowledge-based,technologyandcreativeindustriesareover-

representedbysmallbusinessescomparedwiththewholeeconomy.Moreover,SMEsinthe

UKlabourmarketmadeadisproportionatecontributiontonewemploymentgrowthinthelate1990s.Thisisnotsurprising.Thede-industrialisationoftheUKeconomyhasresultedin

ashiftawayfrombigindustrialplantsandtowardsfirmsthatrelyonknowledgeandideasto

growandsucceed(seeBrinkley2008b).Thesesortsoffirmsbenefitlessfromscale

economiesthanmanufacturingormassproductionbusinessesdo.

AsemphasisedinSection4ofthispaper,theUKeconomyislikelytogothroughaprocess

ofstructuralchangeinthenextfewyearsassomesectorscontractandothersexpand.This

willcreateopportunitiesfornewfirmsforexampleindevelopingtechnologiesingreen

energy.Moregenerallyastheallocationofresourcesshiftsfromfinancialservices,

governmentandretail,therewillbemorecapital(physical,intangibleandhuman)available

tonewindustriesandbusinesses.Thepotentialforsmallbusinesseswillalsogrowasglobalisationandtechnologicalprogressmeanthateventhesmallestoffirmscanaccess

globalmarkets.

TheUKsrecordonentrepreneurshipismixed.Thecountryhasahigherproportionofpeople

workingforlargefirmsthanmostEuropeancountries,andismid-leagueforself-

employmentandbusinessownershiprates.InmeasuresofentrepreneurialspirittheUK

scoreslesswellthanitsmajorcompetitors.However,therewerearecordnumberof

businessesintheUK4.5millionatthestartof2006.Moreover,theUKisregardedas

havingthelowestbarrierstoentrepreneurshipintheOECD,rankssecondinEuropeandisin

thetoptengloballyasaplacethatisgoodtodobusiness.TheUKsfinancemarketis

rankedthirdintheworldforsupportingbusiness(seeHMTreasury2008forasummary).

WhileoveralltheUKisregardedasaworldleaderintermsofbusinessfinance,theevidence

suggeststhatsmallfirmsfaceparticulardifficultiesinaccessingfinance.Thisismostacute

forhigh-techstart-upfirmsanduniversityspin-outslookingtogrow.

Whenaskeddirectly,mostbusinessessaytheywantgovernmenttostayoutoftheirway.

Butdigalittledeeperanditbecomesclearthatbusinessesseegovernmentplayingan

importantroleintermsofprovidinghigh-skilledworkers,infrastructureandsupportfor

investment,includinginR&D.Moreover,businessestendtorequiremoresupportatthe

outsetoftheirlives,sogovernmentpolicytowardssupportingsmallbusinessandgetting

businessesoffthegroundisparticularlyimportant.

Giventheupheavalsinfinancialmarketsthroughthecreditcrunch,thechallengesinaccessingfinanceareonlylikelytoincreaseinthefuture.17 Furthertoourproposalfora

government-backedIdeasBank,herewefocusonthebiggestchallengesinaccessing

finance,andalsothesectorwiththemostpotentialintermsofgeneratingnewideas

universityspin-outs.


17.Asanaside,Hanleyetal (2006)useempiricalevidencetoshowthattheeffectofmergeractivityin

thebankingsectorresultsinhighermarginschargedbythebanksastheyusetheirmarketpowerto

increasereturns.Thissuggeststhatrecentbankmergersthroughthecreditcrunchcouldprovecostly

building a better balanced uk economy: where will jobs be created in the next economic cycle?

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