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As UK chancellor Philip Hammond grapples with how to boost Britain’s poor productivity, an unconventional experiment intended to do just that is already taking place in the underbelly of the labour market.

The experiment was the brainchild of Mr Hammond’s predecessor, George Osborne, who used his Budget speech in July 2015 to announce a new, higher minimum wage for people over the age of 25. The move was partly a political gambit to catch out the Labour opposition. But Mr Osborne also argued that the new “national living wage” would jolt the British economy out of its “low-pay, low-productivity” trap.

Britain’s low-paid sectors, such as retail and hospitality, are between 20 per cent and 57 per cent less productive on average than the same sectors in Belgium, France, Germany and the Netherlands, according to the IPPR think-tank.

Mr Osborne thought that by pushing up the cost of low-skilled labour, he would force employers to invest in training or technology to make their staff “worth” the higher wages.

Economists raised their eyebrows. One said shortly after the announcement that the idea was “not economics 101” but “not crazy either”.

Living wage charts

More than two years later, as Mr Hammond embarks on yet another Budget focused on productivity, it is worth asking how Mr Osborne’s flagship labour market policy is working out.

There is no doubt the NLW has already started to reshape Britain’s labour market. The country’s lowest-paid workers received their biggest pay rise in nearly 20 years after the NLW was introduced in April last year at £7.20 an hour. The minimum wage was previously £6.70 an hour for people over the age of 21.

The share of UK employees who are relatively low-paid — defined as those earning less than two-thirds of the median — has now dropped below 20 per cent for the first time since the 1980s.

However, the impact on workforce productivity has been less dramatic.

When the NLW increased hourly wage costs for Paul Stone, who owns eight convenience stores in the Spar franchise in Manchester, he reacted by “trimming the fat off the rota”. He cut hours at times when the stores were quieter, and staff now work harder while they are in the store.

Living wage charts

Conor D’Arcy, a senior research and policy analyst at the Resolution Foundation think-tank, said Mr Stone’s response was fairly common among business owners.

When the think-tank asked 215 employers last year how they had responded to the rising minimum wage, “asked workers to do more” was the third-most common response, after “increased prices” and “took lower profits”.

In a recent focus group with staff on the minimum wage, organised by the think-tank, several of the participants said their workload had increased.

“When I started we had five car parks, now we have seven,” said one car park attendant. “We used to have four on a shift, now we have two. They left and they never replaced them.”

While these strategies might boost productivity in the short term, there is a limit to how much effort can be squeezed out of staff, not to mention a risk that the quality of work will fall.

Living wage charts

Economists say the more sustainable route to higher productivity is to train staff better, or invest in technology that allows them to be more efficient.

Mr Stone has come to the same conclusion.

“Trimming the fat” was “obviously only an exercise you can run once”, he said.

When the NLW increased again this April by 30 pence, to £7.50 an hour, he installed a self-service checkout machine. Such machines have become commonplace in big UK supermarkets, but are still relatively rare in smaller convenience stores.

Mr Stone said he made sure to put the machine into a growing store, so there was no need to lay anyone off. But he still needed to give training and reassurance to employees.

“Customers were coming in [seeing the machine] and saying ‘ooh your job’s going to disappear’,” he said.

Living wage charts

There are signs of similar investments happening in other low-paid sectors. Hotel chains like Premier Inn have started to deploy self check-in desks. Others, like the Hilton, have started to roll out technology that allows customers to use their phones to enter their rooms so that they can bypass the reception desk altogether.

Mr D’Arcy of the Resolution Foundation said companies might have invested in these technologies anyway, but it seems as if the NLW “has acted as a little bit of a kick up the backside [for employers].

“The big question is whether that translates into anything meaningful, and how long all of those changes take to feed in [to overall economic productivity],” he added.

So far, the bigger picture shows little sign of improvement. The productivity of staff in the UK, measured by their output per hour, has remained weak since the introduction of the national living wage.

But the productivity of the low-paid sectors most directly affected by the NLW is more mixed. Productivity in hospitality and agriculture has been volatile but fairly weak overall, while productivity in the retail sector is rising — although that trend seems to predate the NLW’s introduction.

Living wage charts

James Lowman, chief executive of the Association of Convenience Stores, said the number of people employed in his sector has dropped from 408,000 to 370,000 since 2015 even as turnover has increased, he said.

While that implies an increase in productivity overall, he said that smaller companies are finding it harder to adapt than larger businesses.

“You’ve got a bit more of the haves and the have-nots,” he said.

Medium-sized employers like Mr Stone have been able to afford to invest in new technology like self-checkout machines, or in higher-margin products, such as hot or chilled food.

But smaller corner shop owners cannot necessarily afford to make those upfront investments — and in any case, there is a limit to the usefulness of technology like self-checkout in a small shop, which might only have two people working at any given time. Most shops would not drop staffing levels from two people to one for safety reasons.

When the national livign wage increased, Paul Stone installed self-service checkout machines so he needed fewer till operators © Jon Super/FT

The problem for the wider UK economy is that while larger employers might be best placed to make bold, productivity-enhancing changes, many of the country’s lowest-paid staff work for small companies. Smaller companies employ 35 per cent of the adult workforce but 52 per cent of Britain’s minimum wage workers.

Living wage charts

Even medium-sized employers like Mr Stone are scratching their heads about how much more efficiency they can achieve. He said he has looked into installing electronic price labels on shelves to save staff the time it takes to manually change them, but they are currently “not worth it for the price”.

He added that as the NLW continues to rise — the government has promised the minimum wage will reach 60 per cent of median earnings by 2020 — he might have to start raising prices to reflect the higher cost of labour.

“It’s difficult to know where the extra productivity’s going to come from,” he said. “We’re a labour intensive business. I can’t see us getting robots to stack the shelves.”

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