The political love-in with business is long overdue

The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England

British politicians spent the first few weeks of the year love-bombing business. Prime Minister Rishi Sunak has announced a new advisory business council, while opposition leader Sir Keir Starmer hosted a forum for 400 UK companies fostering a closer partnership with Labour. These are welcome steps to re-engage business and rekindle UK growth.

They follow a period when both political parties viewed business with suspicion — at times with outright hostility. Business then was seen as part of the problem, rather than solution, to economic growth. The inconvenient truth is that they are both.

There are only two ways to grow sustainably: increase the workforce or boost its productivity. The stalling since the global financial crisis was caused initially by UK productivity growth falling to sharply below its pre-crisis trend. Since the pandemic, this has been compounded by a contraction in the UK workforce of about half a million, mostly older, workers. This leaves both engines now misfiring.

The macroeconomic consequences are clear: flatlining productivity mirrored in static real wages, with many workers poorer today than in 2007, while there are about 1mn unfilled job vacancies.

The lion’s share of the responsibility lies with British businesses. That is true as a matter of arithmetic since companies account for the majority of our output and employment. But it also reflects fundamental deficiencies in UK business practices, particularly in training and retaining staff.

UK companies occupy an internationally unenviable position on investing in people. Spending on training, per worker, is about half the average among EU companies. In international league tables, UK companies rank a lowly 29th.

This pattern has worsened. Spending on training by UK companies per employee fell by about 27 per cent between 2011 and 2022. The past few days have been Apprentice Week. Yet the introduction of the apprentice levy in 2017, intended to boost business investment in skills, has instead resulted in the number of apprentices falling by over 30 per cent.

This failure has resulted in a large and widening skills deficit in the UK. Some estimates suggest more than 10mn workers do not have the skills they need to do their job effectively. This deficit is, in turn, one of the largest contributors to the UK’s recent stagnant productivity.

When it comes to retaining staff, especially older workers, it’s a similar picture. Rates of employment tail away rapidly for the over-50s, falling by about 2 percentage points every additional year. By the statutory pension age of 66, only about 1 in 3 workers remain in employment — a chronic loss of talent and experience.

This problem is set to worsen. By 2050, the fraction of the over-65s in the population will have risen to one in four. With current participation rates, that would reduce the workforce by more than another 1mn. Many other countries face ageing workforces. But the UK’s starting position, ranking 21st internationally for employment of older workers, according to PWC’s Golden Age Index, is worse.

The most important reason for low employment of older workers is endemic ageism: discriminatory recruitment, retraining and business practices in companies, including around occupational health and job flexibility. How many of those one million unfilled vacancies are tailored to someone my age, much less (perish the thought) someone older? Tellingly, there is no statutory reporting requirement on the age profile of staff.

The question this raises is why companies are not helping themselves by investing more in staff and skills? The problem is not lack of self-awareness: in surveys, shortages of staff and skills regularly rank as the single-biggest impediment to growth. Rather it is because these problems are both everyone’s and no one’s — a collective action problem.

It is both cheaper and easier for a company to freeride on others’ efforts, hiring new people with skills rather than investing in existing staff. But these actions are ultimately self-defeating: they reshuffle the gaps in staff and skills rather than filling them. So employers need to be persuaded to act in their collective, rather than individual, best interests.

One way would be to draw up a voluntary compact among companies of all sectors and sizes, committing them to targets for staff training and to employment practices that encourage older workers. The latter might include occupational health, retraining and job flexibility — the main reasons why more than half of workers over 65 say they are reluctant to return to work.

Those signing up to it could be required to report publicly on progress, sharpening incentives for compliance. Those incentives might also include tax credits for training, National Insurance deductions for hiring older workers, or pooled provision of occupational health and training for smaller companies. The compacts could be co-ordinated at a local level through the new local skills improvement plans.

Everyone stands to benefit from rekindling growth in businesses, employment and the wider economy. The new “avocado offensive” by politicians will not achieve that on their own. A collective commitment by businesses to train and retain their most precious asset — people — could do the job.