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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
www.ippr.org/tomorrowscapitalism
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:info@ippr.orgRegisteredCharityNo.800065
ThispaperwasfirstpublishedinJuly2009.ippr2009
TomorrowsCapitalism
TomorrowsCapitalismisamajorprogrammeofworkpresentedbyipprinconjunction
withFriendsProvidentFoundation.Itaimstoexplorethefutureofourfinancialand
economicsystem.Formoredetailsandtoaccessotherpapersfromtheprogrammevisit
www.ippr.org/tomorrowscapitalism
Theviewsinthispaperarethoseoftheauthorsonlyanddonotnecessarilyrepresent
thoseofipprorFriendsProvidentFoundation.
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy3
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
www.ippr.org/tomorrowscapitalism
Contents
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy4
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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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy7
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.
www.ippr.org/tomorrowscapitalism
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy9
Therewasareasonablyevensplitofemploymentbyoccupation(Figure2.2).Intermsofthe
broadcategoriesidentifiedbytheOfficeforNationalStatistics(ONS),managersandsenior
officialsarenowthebiggestgroupingintheworkforce,accountingforjustunderone-sixth
ofthetotal.Ifmanagers,professionals,associateprofessionalsandskilledtradesare
categorisedasbeingskilledworkers,thenjustoverhalfoftheworkforcefallsintothis
grouping.
www.ippr.org/tomorrowscapitalism
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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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy10
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).
www.ippr.org/tomorrowscapitalism
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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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy11
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
Employment(000s) Change
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
Source:OfficeforNationalStatistics
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy12
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.
www.ippr.org/tomorrowscapitalism
- 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
Source:OfficeforNationalStatistics
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy13
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
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Table3.3:Changesinemploymentinselectedindustries,2001Q2to2008Q2
Employment(000s) Change
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
Source:OfficeforNationalStatistics
2.AsurveyforthemanufacturersorganisationEEFfoundthat78percentofmanufacturershad
transferredsomeoralloftheirmanufacturingoverseas(EEF2009).
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy14
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.
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3.AlmosthalfofmanufacturersinEEFssurveybelievemoreoftheirproductionwilltakeplaceoverseas
overthenextfiveyears,withtheneedforcostreductionbeingthemainincentive(EEF2009).
Table3.4:Changesinworkforcejobsbyindustry,June2008toMarch2009
Employment(000s) Change
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
Source:OfficeforNationalStatistics
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy15
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.
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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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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy16
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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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy17
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).
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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
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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.
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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
Source:OfficeforNationalStatistics
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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.
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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
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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
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy23
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.
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9.Fordetailsofthedebateonpayingforlong-termcareseeHinsliff2009.10.However,giventheincreasingimportanceofotherservicestotheeconomyasawhole,wewould
recommendthattheONSconsiderbreakingdownthissectortoenableabetteranalysisofthedataand
employmentprospects.
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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
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11.Foranalternativeprojection,basedonvalue-addedratherthanemployment,seeAppendix2.
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy25
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.
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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
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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
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5.BringingaboutabetterbalanceintheUKworkforce
IfwearetorebalancetheUKeconomyandreturntofullemploymentwithinareasonableperiodoftime,governmentcannotbepassiveinitsapproachtothe
economy.Successfulrebalancingwilldependonamoreactivestate.
Thechoiceisnotjustbetweenhands-offgovernmentandpickingwinnersthereareanumberofareaswheregovernmentcansupportthemarketwithoutactually
owningfirmsormakinginvestmentdecisions.
Theroleofgovernmentinfosteringaneweconomydoesnotendwhentherecessiondoes;thereisalongertermroleforgovernmentactivismineconomicpolicy.
Thenecessaryareasforgovernmentactionoverthelongertermcanbegatheredundersixheadings:innovation,skills,smallbusinessgrowth,highsunkcostsand
infrastructure,regionalpolicyandasupportivefinancialservicessector.Combined
withacommitmenttoenvironmentalsustainabilityacrossallpolicyareas,actionontheseissueswillhelpbuildamorebalancedandresilienteconomy.
12.PeterMandelsonhasbeencallingforanewindustrialactivismforexample(seeBERR2009).
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TomorrowsCapitalism|BuildingaBetterBalancedUKeconomy27
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
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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
www.ippr.org/tomorrowscapitalism
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
www.ippr.org/tomorrowscapitalism
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
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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
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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.
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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.
www.ippr.org/tomorrowscapitalism
17.Asanaside,Hanleyetal (2006)useempiricalevidencetoshowthattheeffectofmergeractivityin
thebankingsectorresultsinhighermarginschargedbythebanksastheyusetheirmarketpowerto
increasereturns.Thissuggeststhatrecentbankmergersthroughthecreditcrunchcouldprovecostly
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