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August 12, 2019

Give workers more paid holiday and raise their wages to boost productivity, says UK think tank

Give workers more paid holiday and raise their wages to boost productivity, says UK think tank

British workers should be given pay rises and more time off work to spend their earnings in order to solve the country’s productivity crisis, according to new research from the New Economics Foundation.

UK productivity—measured by economic output per hour worked—has been growing slowly since the financial crisis (0.7% per year), having fallen sharply from its pre-crisis level (2% per year). While policymakers have looked to the supply side of the economy (the ways in which goods are made and services delivered) for an explanation of this slow growth, the New Economics Foundation believes that austerity and weak wage growth have eroded demand, with an impact on UK firms’ investment plans.

“Average productivity, wages and living standards have experienced their worst decade in almost two centuries. It is increasingly clear that weak demand has been the overlooked problem,” says Alfie Stirling, head of economics at the foundation. 

Firms have been discouraged from making costly investments and have come to rely on cheap labor that can be more easily laid-off in a downturn. According to the think tank’s research, since 2012, relative to all employees, the proportion of zero-hour and self-employed workers, as well as one-person “micro-companies,” has grown by two-fifths. 

The foundation sets out a number of measures it believes will lift demand, including gradual increases in statutory paid holiday and faster rises in the minimum wage: “The evidence shows that increased leisure time for workers can be expected to increase economy-wide demand,” it says.

Stirling, says: “Raising demand by putting more cash in the pockets of the UK’s poorest workers, while giving people more paid time off from work to spend it, should now be part of a radical mix of options for any government that is serious about increasing productivity in a way that works for people and society.”

Professor Peter Dolton writes about working hours for IZA World of Labor, he notes that “The dilemma in thinking about working hours is that they are traditionally regarded as something one wishes to minimize in order to maximize leisure time.” He cautions that “individuals must be cognizant of their budget constraints—desiring fewer working hours is all well and good, so long as people can pay their bills and maintain their standard of living.”

He stresses that the question of how reducing working hours affects productivity is significant. “In addition,” Dolton says that “how individuals divide up their leisure and work time and what the appropriate work–life balance is in an increasingly technological future are important concerns.”

Looking ahead, Dolton feels that achieving the optimal balance between these factors will be a major challenge for policymakers.