Monday 10 August 2015 10:56 am

Think tank Institute for Public Policy Research says government needs to support low-skill sectors to solve the productivity puzzle

As concerns over UK productivity linger on, think tank the Institute for Public Policy Research (IPPR) has suggested one way to solve the so-called "productivity puzzle" is for the government to focus on low-skill sectors such as retail and service.

The IPPR’s chief economist Tony Dolphin said despite the government targeting support at highly skilled industries, it is staff in lower-skilled industries whose performance may be critical to Britain’s economic recovery.

Dolphin said:

Our analysis of the UK’s productivity performance shows that an unfavourable shift in the structure of the workforce towards relatively low-productivity sectors has been a significant factor holding back aggregate productivity in the last three years.

The IPPR report, published ahead of unemployment figures on Wednesday, showed productivity fell 1.15 per cent between 2012 and the end of 2014.

During that time period, the economy also grew at a “reasonable pace but productivity stalled – a combination that is unprecedented since the Second World War”.

The report showed UK productivity ranked 18 out of 34 OECD countries in terms of GDP per hour worked. Against 17 western European countries, the UK ranked number 15. There is a "productivity gap" of between 23 and 32 per cent between the UK and otherwise comparable countries, such as Germany, France, the Netherlands and Belgium, it added.

“There is therefore plenty of scope for the UK to make productivity gains, although closing the gap between it and other European countries will take many years,” the report said.

The IPPR suggested there needs to be a shift in government policy, including expanding government support to more sectors of the economy, not just high-tech industries.

There are currently nine catapult centres covering areas such as high-value manufacturing, digital, precision medicine and energy systems, but none for the domestic, service sectors – such as hotels, restaurants, retail and social care – where millions of people are employed.

The government, therefore, needs to “think more carefully about how its spending can help to boost productivity in these sectors of the economy”, the IPPR said.

Another five years of stalled productivity is not something the chancellor can allow to happen, Dolphin added.

"Using public spending to support productivity by introducing industrial policies for the domestic sectors of the economy are steps the chancellor could take in the spending review."