The New Economics Foundation, a thinktank dedicated to creating a sustainable economy, has produced a report arguing that increased holidays and wages for the lowest paid can increase demand and productivity.

The report, entitled “Time for demand. Boosting productivity with public investment, minimum wages and paid holiday”, argues that to increase the spending power of lower paid workers, the Low Pay Commission - the body that makes formal recommendations to government on annual increases to the minimum wage rates - needs to introduce faster increases.

In addition, it wants the Commission to be given a new mandate to recommend increasing the national living wage so that it reaches the level of an average between the actual living wage for London and the rest of the country by 2025. Alternatively it wants to see an increase in all minimum wages as fast as possible as long as these do not result in increasing levels of unemployment; whichever proves to be higher.

With regard to statutory holiday pay, the Foundation points out that, after taking into account statutory minimum leave and paid public holidays, UK employees have among the fewest paid days off from work in Europe.

It therefore proposes that an external body be created to make annual recommendations to government on regular increases to annual statutory leave entitlement. This body would need to collaborate closely with the Low Pay Commission, or it could sit within the Commission itself.

To reflect the fact that reducing working hours can create a virtuous circle between increasing productivity (on the one hand) and helping to ensure that productivity gains themselves lead to social, economic and health benefits for workers (on the other hand), the Foundation proposes that the new body should have two phases to its mandate.

For the first phase, the Commission would be asked to recommend annual increases in paid statutory leave that are as large as possible, subject to not increasing unemployment. Once this phase was complete, the new Commission could be given a new ‘normal times’ mandate to recommend a more steady increase in statutory leave to remunerating workers in the form of paid time off consistent with sustainable, long-term increases in productivity.

During both phases, government could use the opportunity afforded by higher paid leave to announce new bank holidays spread evenly throughout the year, helping to bring the UK more closely in line with the rest of Europe.

Matthew Pull, of Thompsons Solicitors, comments: “The UK has a productivity problem, with the annual rate of increase having dropped by around two thirds since the 2009 recession. The New Economics Foundation’s report makes a convincing case for tackling this issue by boosting demand through increased public investment, focused around a much needed ‘green transformation’ of the UK economy, as well as upping paid holidays and wages, in particular for the lowest paid within our society.”

To read the report in full, go to the thinktank's website.