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How will the pandemic change jobs, growth and productivity?

Professor Bart van Ark, Managing Director of The Productivity Institute was joined by Dr. Anna Valero from The London School of Economics and Political Science and Dr. Giles Wilkes from the Institute for Government to give evidence at the UK Treasury Select Committee inquiry on Jobs, growth, and productivity after coronavirus.

The two-and-a-half hour session was wide-ranging in its scope, covering how productivity is measured, the effect of Brexit, the adoption and diffusion of technology and the importance of skills, education and management competencies and more.

Below are some excerpts from Bart’s oral evidence for the Committee.

The K-Shaped recovery

Felicity Buchan, MP for Kensington, asked Bart how economic scarring had impacted UK firms over recent years, particularly through lockdowns.

Bart talked about the risk of a K-shaped recovery from the pandemic for UK firms – where different parts of the economy recover at different speeds, times, and magnitudes.

“Some pockets in society will be doing fine out of the crisis and some will not,” he noted.

The recovery of SMEs is of particular concern. SMEs make up 61% of the total employment in the UK, or 16.8 million employees – around half of turnover of the UK private sector, figures from the Department for Business, Innovation and Skills show.

Bart said companies whose business activities held up during lockdown often owed this to their ability to productively use digital technologies, including a relatively easy switch to home working and on-line business activity. Coming out of the lockdown they moved up the sloping part of the K.

Other firms, in particular SMEs which were digitally challenged, are more likely to fall further behind and slide down the downward slope of the K during the recovery.

“Anything that can be done from a government perspective to support, to improve what we sometimes call absorptive capacity, which is the ability of firms to drive new technologies, to innovate and to retrain skills is going to be very important,” Bart said.

Bart said the key policy question was how to design the winding down of the support programmes in such a way that it didn’t adversely affect the most productive companies because of liquidity issues.

The effects of the K-shaped recovery would also be different across English regions and devolved nations.

“We worry about the fact that the persistence of regional disparities will be exacerbated by the crisis,” he said. “We worry that we will have these pockets where social infrastructure has been hurt even more, because the NHS has been under pressure and because a larger number of pupils in schools have dropped out and have not been able to catch up.”

“All these things could be exacerbated by the weak and underperforming social infrastructure that many regions in the country have. That would really point in the direction, again, that we need a lot of emphasis on education and training.

“Investing in catching up kids in schools and improving the intermediate skills of the workforce, for example, are important government priorities to avoid the scarring effects as we emerge from the crisis.”

The challenges of technology and new ways of working

Anthony Browne, MP for South Cambridgeshire, asked about the impact the pandemic had on working practices.

Bart said companies that had invested significantly in intangibles, such as organisational capital and management capabilities and in re-skilling the workforce, were adapting better.

“Originally, when we entered this crisis, we thought that everyone would be in trouble, but we then found out that these differences got exacerbated,” he said. “Companies that were already on their journey with regards to digital transformation were doing even better.”

“They were able to set people up very quickly to work from home; they had the systems in place very quickly. The companies that were not used to people working from home had to find out how to work with them; they had to reinvent their working methods and their models. What we are seeing now is that this difference has increased.”

In response to another question from Anthony Browne, Bart said managing the new hybrid model of working was also a challenge for firms. Before the pandemic, 5% of employees were hybrid workers. This has surged to 15% and could rise to 25%, or one third of the workforce.

“The key question here … is whether companies can manage to deal with this hybrid model,” Bart said. “Frankly, it is the hardest one. Having everybody in the office or everybody from home, at least for office-type functions, is much easier to do than this hybrid model.”

The effect of technological diffusion and the long tail of less productive firms

Research from Director of the Stanford Digital Economy Lab, Professor Erik Brynjolfsson, found that only 3% of firms have adopted any machine learning technology. But Bart noted that while many companies didn’t yet see how to apply new AI technologies, it was the adoption of more readily available technology that was the problem.

“A lot of the technology challenges that we are seeing are not around the fact that the technology is not available and not even that it does not get diffused but that it does not get absorbed by many companies,” Bart said. “To make this happen, we need to facilitate the companies that can do this and, indeed, the companies that will ultimately not do it should be allowed to fail.”

Bart said businesses needed to restructure, become less hierarchical and encourage their employees to use new technologies more productively.

Assessing the impact of productivity more widely

Bart agreed with the idea that creating new technologies wasn’t always the most important thing, in another response to Anthony Browne.

“Sometimes new technology does not benefit a firm,” Bart said. “It can benefit other firms or it can benefit the consumer. We need to think about productivity in relation to the overall growth of the economy but also in relation to welfare and wellbeing, because those are very important aspects of technology. It is important to take that into account.”

A lack of ambition was also an issue.

“It turns out, again referring back to this long tail of less productive firms, that we have a relatively large number of firms, compared to other countries, where we see that they are locked in particular regions or areas in which they are operating,” he said.

“They are not growing their market; they are not scaling up. They miss the management competencies; they do not have the connections with other firms that are more productive.”

“Skill changes and management competencies are really important here,” he said. “A lot of the research has shown that the UK is really behind several other countries in addressing the long tail.”

The role for policy and government

Bart said the role for policy and government was to facilitate the connections between firms and the education sector on a regional level.

“A lot of this cannot be done at national level; it is really dependent on local and regional activities and activities in the devolved nations to create what we call these ecosystems where the business community as a whole, the education community and the Government can connect and drive innovation and skill generation,” he said.

Later, in a response to Dame Angela Eagle, MP for Wallasey, on regional disparities, Bart added:

“If there is one area where I find the UK very different from other places I have worked … it is the huge fragmentation that we have in the policy framework. We do not have sufficient connections between various policy levels, and therefore central Government policies do not really trickle down to the areas where they need to be implemented. It is that sort of disconnect between these various policy areas that is another cause of the persistence of these regional disparities.”

Public investment and infrastructure

Julie Marson, MP for Hertford and Stortford, asked if infrastructure spending was a priority for public investment. Bart responded that public investment requires a long-term view and that he was concerned short-termism thinking in UK policymaking, often within the term of a government.

“Plans and schemes change very quickly,” he said. “They get abolished even sometimes by the same Government. It is not necessarily because of a change of Government, which is what you see in the United States. Within a Government period here you can see rapid changes in policies.

“That is really hard from the perspective of innovation and productivity. It needs to have a long-term focus; programmes need to be sufficiently scaled up and they need to have some time to play out and get properly evaluated before you follow up with another programme.”

The role of social infrastructure – education, healthcare and housing – alongside physical and digital infrastructure was also important.

“Ultimately, once you have a road somewhere or you have broadband, you want to have skilled employees, healthy employees, people who have proper housing facilities and places where people can work productively and live a good life,” he said.

Watch clips from the Treasury Committee inquiry into jobs, growth and productivity post-Covid on our YouTube channel or view the written evidence from Professor Bart van Ark. The full transcript of the hearing can be also be read.