thenextwave

Four things I learnt from that “business leaders’ letter”

Posted in economics, politics by thenextwavefutures on 10 April, 2015

telegraph-business-leadersOf course the election has moved on, but I just wanted to come back to last week’s “business leaders’ letter” to the Telegraph. That letter, which focussed on corporation tax, and the business response to Labour’s zero-hours proposals, tell us more about business than it does about politics. Here’s a quick guide to four things they tell us.

1. Whatever skills business people have, they’re not about economics.

The general view of the way the Coalition has managed the economy is that austerity has cost us about 15% of GDP, which is why most of the economists who were asked were unimpressed by the government’s economic performance. 15% of GDP is a big number: about £240 billion, or around £10,000 for every household in the country. It buys a lot of products and services, some of which would have been bought from the business leaders’ companies.

2. Business people focus on costs rather than revenues.

There are cultural reasons for this: from an early age business people learn that “cash is king”, and so on, but it doesn’t help build a growth business. Indeed, in their book The Three Rules, Michael Raynor and Mumtaz Ahmed argue – based on a pretty forensic analysis of business data – that businesses that outperform their sectors over a sustained have only two characteristics in commons: they focus on better rather than cheaper, and revenues rather than costs. (The third rule? “There is no other rule.” Cheesy.) The language in the letter is about costs, specifically cutting corporation tax, not revenues. John Cridland of the CBI has also fallen into a similar trap recently, on zero-hours contracts. The Telegraph has form here: a letter from business leaders in 2013 extolling the virtues of flexible labour markets, of course a description of labour markets in which employees do all the bending.

3. They’ve missed all of the recent literature on the connections between investing in staff, service, and profitability.

It’s not just about jobs any more. There’s a whole lot of recent literature, exemplified by Zeynep Ton’s book The Good Jobs Strategy, that argues that successful businesses, even in categories such as retail, prosper by paying better wages, investing in training, and pushing responsibility to their staff, who are (not incidentally) more engaged as a result of this treatment. The evidence is seen in companies such as Costco, which has outperformed strongly the retail sector in the US, which pays an average $22 an hour, compared to Walmart (average $13), which has been flatlining. There’s a reason that Walmart has recently decided to increase wages. But then, business leaders queued up to tell us that the minimum wage would increase unemployment. In practice, labour markets don’t behave like other markets because people are involved.

4. The idea of flexible labour markets is more attractive to business leaders than it should be to anyone else.

I’ve been doing some work at The Futures Company with the Finnish business organisation, the Association for Finnish Work, on high value work. Increasingly, it looks as if the only successful strategy for richer nations is to pursue high value, because the alternative creates a visious cycle in which low pay leads to low productivity leads to low investment leads to low social returns.

The low value work cycle001Economists argue about this, and Duncan O’Leary had a good review of the arguments in a recent PwC/Demos report (opens pdf), but the UK’s recent experiment with flexible labour markets, and its associated “productivity puzzle“, seems to have been quite a strong demonstration that low value work drives both low productivity and low investment; and that this output gap then creates a tax gap.

Deborah Orr summarised this issue neatly in The Guardian last week when she wrote,

What is it that makes people able to believe that what’s good for them is good for everyone, even though they refuse to countenance the opposite – that what’s good for everyone is good for them?

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