It’s time to power productivity and boost wages

A few weeks ago, CBI chief executive Rain Newton-Smith gave a speech at the Resolution Foundation to celebrate 25 years of the minimum wage, first introduced in 1998. Together, the Minimum and National Living Wage have directly and indirectly helped millions of people since then.

The economic picture back in 1998 was vastly different compared to the context firms are operating in today. Growth was 3.4% for 1998 and inflation was at only 1.6%. Fast forward to 2024: in January, GDP fell by 0.3% year on year, with inflation still above target at 3.4%. The last few years have left their mark on living standards – with half of UK families saying their cost of living is still rising. That’s not only affecting those on National Minimum or Living Wage. It’s also hitting people in the middle of earnings distribution.

While it might be tempting to assume minimum wage policies can ease that, the truth is, that those measures alone won’t do.

Businesses too have been struggling to cope with inflation and pipeline cost pressures. When the National Living Wage increased last April, almost half of firms affected told us that they had to pass it on in price rises. The overall squeeze on business means that firms have lost the headroom to invest – money that could be well-spent on tech and innovation or more training to raise productivity. And remember, productivity growth is the only effective and sustainable way to raise living standards.

The CBI is therefore calling on the UK government to produce a Living Standards Strategy – fit for 2024, not 1998. We need a holistic approach that powers productivity, in turn driving up wages. That comes in two parts.

First, firms are looking for Government action to boost the supply side of our economy and help reduce price pressures, including in areas like energy and housing. Here, unclogging our planning system could help build more low carbon houses – bringing down rents and mortgages whilst improving energy efficiency.

This month’s rise in the National Living Wage means that the Low Pay Commission (LPC) has hit its targets and ended relative low pay. But for many, the reality feels different. More people than ever are feeling low paid. In part, that’s because while we’ve been focused on minimum wages, we have been neglecting economic growth. To fix that, the LPC needs a new remit to make sure the lowest paid can benefit from growth going forward – by continuing to track two-thirds of median pay.

Business and both the UK and devolved governments need to come together to focus on economic momentum to actually raise median pay – that is how to sustainably raise the minimum wage.

That is the second part of our Living Standards Strategy. Businesses require the right economic conditions to be able to play their part – to invest more in the skills, tech and innovation needed to drive productivity growth. That will require steps to incentive investment – through a long-term industrial strategy – and measures to boost investor confidence – through a 10-year trade and investment strategy.

For Northern Ireland, the steps to raise productivity must be even bolder. The region has for decades now been a productivity laggard due to the high percentage of jobs in low productivity sectors such as agriculture and retail.

The Productivity Institute at Queen’s University Belfast (QUB) has also highlighted that Northern Ireland’s peripheral location is an added burden when it comes to the region’s productivity levels. These issues combined with a myriad of other factors such as the dominance of small firms, connectivity issues, access to skills and the brain-drain, all make ‘productivity growth’ a hard nut to crack at the local economy level.

Angela McGowan

Economy Minister Conor Murphy, has, however, committed to tackling this problem as part of his economic vision. With QUB’s Productivity Institute acting as a ‘critical friend’ for policy development, it is good to see that the Institute has in recent years identified opportunities for addressing our local productivity problems.

They argue these include:

• The scope for policy to correct previous failures in areas of investment, human capital and infrastructure.
• Capitalising on Northern Ireland’s brand image and Irish heritage.
• A relatively young population which gives us the opportunity to address the skills gap.
• Retaining Northern Ireland graduates and stopping the ‘brain drain”.

To translate these opportunities into reality, we need bold action, public and private expenditure as well as strong leadership. Only time will tell if the next UK Government is prepared to raise taxes to pay for the investment needed and get the country out of its productivity snare.

In the meantime, the CBI will continue to campaign for a partnership for productivity growth – to boost real pay – with a National Living Wage so everyone gets their fair share.

• Angela McGowan is director of CBI Northern Ireland