Higher wages key to solving productivity puzzle

21 March 2018 Consultancy.uk

The global economic recovery has been blighted by sluggish productivity over its nine-year duration. The corporate response to this is often to slash wages in the hope that reducing expenditure can enhance profits – and high wages are often blamed for heightened inflation and slow growth. However, as wages remain stagnant, and inflation continues to hamper consumer spending regardless, a new study has suggested that enabling ‘demand’, or increasing wages, may be the key to stronger growth.

A new report from McKinsey & Company has found that stagnating wages are negatively impacting the growth prospects of the global and UK economies. The study, which took in a year-long analysis of seven developed nations and six sectors, finds that nine years into recovery from the Great Recession, labor-productivity-growth rates remain near historic lows across many advanced economies. As a result, the researchers determined that “demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.”

In other words, limiting wages among the majority of workers has clipped the wings of the global financial recovery, as spending power has remained limited for almost a decade. This has been particularly harshly felt in the UK over the past two years, as fluctuations in the value of the Pound resulting from tumultuous Brexit negotiations have further hampered the spending power of most consumers – who had already endured years of austerity and wage stagnation – forcing many to tighten their belts with regards to what is often termed ‘luxury spending’.

Britain’s poor productivity performance over the past decade deepened throughout 2017. While the sustained decline was shown by a recent BDO poll-of-polls to have stabilised after April 2017, the overall output of each working hour declined 0.2%. This woeful performance stood in stark contrast with a forecast for productivity growth from the Office for Budget Responsibility (OBR) for 1.5%.

Subsequently, the OBR declared that it had greatly overstated Britain’s economic performance over the past seven years, alongside an announcement by the International Monetary Fund in July that it anticipated the UK economy to grow by 1.7%, compared to a previously anticipated 2%, due to "weaker-than-expected activity" in the first three months of the year. The twin blows all but wiped out a £26 billion budgetary buffer, put aside to soften the UK’s exit from the EU, by Chancellor of the Exchequer Philip Hammond, who since announced a series of new austerity measures in response.

In many countries, exceptionally low productivity-growth post-recession reflects slowing value-added growth with robust growth in hours worked

While the problem may have been troubling Britain’s public and private coffers for some time, for the large part, the response has been limited to doubling down on the same tactics as before; primarily the reduction of expenditure by way of real-terms wage cuts, and via the ‘digitalisation’ of jobs which could be done more efficiently by machines in the long-term. This is something which the UK manufacturing sector has been keen to push the Government for support in, citing it as a key battle ground to fighting Britain’s productivity gap.

Meanwhile, on top of support in a range of digital transformation exercises, the consulting industry has similarly offered clients solutions that tend to skirt around the topic of wages. Workplace stress has become a major talking point with regards to productivity, having been cited as the cause of some $250 billion in lost revenues for US businesses, and a large contributing factor for £77 billion relating to UK sick days. However, the most common cause of workplace stress – inadequate pay – is rarely addressed by firms looking to help clients boost output.

UK stagnation

In a closer examination of six major Western economies, which are experiencing slower than expected productivity growth, it seems that on average, workers are now engaged in more hours of labour – and yet the value added to the economy by their work has declined. The UK is exemplary of this, according to McKinsey’s study, as workers in 2010-16 worked longer hours than their counterparts between 1985-2005 – while adding significantly less value and labour productivity for their efforts. This is not to be confused with the idea workers are simply not producing enough consumables, or to a high enough standard, rather it is that the consumer economy they produce for relies upon them to buy back their labour, and the labour of those like them. As wages have declined in real terms from 2010-16, those workers have comparably poorer spending power when contrasted with those between 1985-2005.

Long-term demand leakages could act as a drag on productivity growth and may be further amplified by digital

McKinsey’s paper therefore suggests that employers across the economy are looking to scale back on wages to improve their profit margins, this may in fact have the opposite effect on companies’ bottom lines, and on the growth of the economy as a whole. According to the study, weak productivity can result from a weakened share of profits that the labour force receives from what it produces, while house and land prices rise, along with the cost of living. Rising inequality impacts this further, meaning a yawning gap appears between a wealthy minority with spending power, and a working majority, who must focus what little resources they have on the bare necessities.

While the UK retail sector was supposedly bullish last year, seeing the fewest high street store closures in seven years, consumer spending was largely bolstered by growing debt rather than healthy wages – echoing the circumstances which resulted in 2007’s credit crunch. Entering into 2018, the UK’s high street has subsequently been stricken with falling demand, as consumers rein in their spending to avoid becoming over-incumbered with debt, while focusing stagnating incomes on essentials. A turbulent start to the year, therefore, saw Toys R Us and Maplin both file for administration within a matter of hours of one another, inevitably drawing comparisons with the retail crash of 2008/9. This was followed by a string of so-called ‘casual dining’ chains opting to enter Company Voluntary Arrangements in order to avoid liquidation, including Prezzo, Carluccio’s, and Jamie’s Italian.

This trend is likely to continue unless something is done to alter the financial situation of the bulk of consumers, but this alone may not be enough. This is because digitalisation could amplify labour share declines and inequality, displacing workers who were once considered skilled labourers into low-wage jobs.

Without a productivity boost, younger generations will experience slower increases in their standard of living

The stagnation of productivity looks likely to have a disproportionate effect on younger generations. While, according to previous McKinsey research, just 5% of jobs could be completely replaced by technology, these tended to be work where Millennials were most commonly involved. As this is likely to compound the continued stagnation of the generation’s wages, meaning that generations born after 1990 will witness markedly lower GDP growth throughout their lifetime – and with it, a lower improvement in the quality of life they experience, proportional to the improvements witnessed by those born in 1960, for example.

The authors conclude that while they expect productivity growth to recover and see the potential for at least 2% growth a year over the next decade – 60% of which could come from digital opportunities – these should not be treated as a magic bullet to long-term drags on demand for goods and services. Indeed, these may persist alongside, and be exacerbated by digitalisation in some aspects. Changing demographics, declining labor shares, rising income inequality, polarization of labor markets, and declining investment rates could well be amplified, on top of the creation of other potential barriers to productivity growth.

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”