One of the real mysteries regarding the current state of UK’s economy is the so-called productivity puzzle. which refers to the fact that labour productivity has stagnated since the economic downturn of 2008.
This is very different to what has happened after previous recessions where productivity initially fell but then recovered and returned to previous levels.
Whilst there has been considerable economic debate surrounding the causes of lower productivity and some attempts by politicians to address this issue, there has been little progress to date to explain what has been going on.
That is why a recent paper which examines the link between management practices and productivity within UK manufacturing businesses makes fascinating reading.
Those of us who have been working for many years within the academic discipline of business and management appreciate the growing evidence between the adoption of management practices and increased performance in terms of growth, profitability and, most important of all, productivity.
Yet most of this research has tended to be ignored by policymakers and therefore this latest study, which attempts to examine this phenomenon in the context of differences in productivity performance, is to welcomed.
By using existing international work on these areas, structured management practices are carefully defined as a number of important processes including continuous improvement, number and monitoring of key performance indicators (KPIs), timetables for targets and how these targets are stretched, employee promotion and underperformance and finally, hiring decision-making.
So what does this research from the Office for National Statistics tell us about productivity amongst UK enterprises?
The first critical finding is that the study estimates that an increase in the management score of 0.1 is (on a scale of 0-1) is associated with an increase in labour productivity of 8.6 per cent. Simply put, an increased focus on management practices makes the business more efficient and effective in terms of productivity.
Of course, as management becomes more formalized as the company grows, it is not surprising that scores for management practices increase with the size of the firm i.e. the more people a company employs, the higher the management practice scores.
Given the link with productivity, the data shows that the average annual output per worker increases from around £40,000 for small businesses (10 to 49 employment) to £53,000 for medium-sized businesses (50 to 99 employment) and £62,000 for large businesses (employment of 250 and over).
The study also looks at the type of businesses that are productive and shows that
multinationals, large businesses (employment of 250 and over) and non-family-owned businesses have higher management scores and are more productive than domestic, smaller and family-owned businesses.
Of course, this study has focused on only one influence on productivity and there needs to be more research that into other sectors and, more importantly, on the influence of other factors on business performance such as innovation, skills and capital.
Nevertheless, given the lack of focus by policymakers on supporting the development of management skills within small firms, there is a clear message here that there needs to be a greater priority given to this vital area if the issue of falling productivity is to be addressed.
This is a particular issue for Wales as the latest regional productivity data shows that it has the worst performance of part of the UK at 80.1 of the average productivity for the economy. In terms of city regions, only Sheffield does worse than Cardiff across the UK.
Despite this, the issue of productivity and how to improve it doesn’t seem to be on the current economic agenda of the Welsh Government, although it does have the opportunity to address this urgently when a new industrial strategy is drawn up later this year.
However, this is not only an issue for politicians alone and as this column has reiterated on several occasions, there is a real need for universities and business schools to not only focus on supporting traditional students but also to ensure that the latest management practices are adopted by a small firm community which currently seems reluctant to do so.
If that could be done (and done properly) then the impact on the Welsh economy and its future prosperity could be more significant, in terms of productivity, than anything else over the next decade.