The UK's growth plan is simple. It wants more investment to deliver higher productivity that lifts wages and boosts living standards. There is an unfortunate consequence, however: unemployment.
The ruling Labour Party does not put it in such stark terms, but the Prime Minister effectively has. In November 2022, Keir Starmer told the CBI employers group that the days when "cheap labor are part of the British way on growth must end." At the time, Starmer was leader of the opposition and the incumbent Conservatives were reeling from the Liz Truss crisis, which had left their economic credibility in tatters.
"We're more comfortable hiring people to work in low paid, insecure, sometimes exploitative contracts, than we are investing in the new technology that delivers for workers, productivity and our country," Starmer told the CBI, referring to the UK economy as a whole. "And we can't compete like that. Britain's low pay model has to go."
Four years and one general election later, the low pay model has gone. What exists in its place is something that's starting to look more than a little bit French, with rising labor costs and businesses spending on capital.
The last Conservative government did much of the work but Labour pressed ahead after winning the election in July 2024, with higher taxes on jobs, increased minimum wages, expanded worker protections and tighter migration rules. As employment costs have risen, so has joblessness.
Unemployment is 5.2%, up from 4.3% under Labour despite six interest rate cuts and an acceleration in annual GDP growth to 1.3% last year from 1.1% in 2024. "The marginal cost of labor has gone up substantially," said Sanjay Raja, Deutsche Bank UK chief economist. "As a result, we are seeing a shift towards investment."
Whether by design or accident, Starmer has stumbled on a strategy that appears to be working.
Business investment grew 3.5% in 2025, the fastest pace since 2022, and annual productivity measured by output per worker using tax data rose 2% at the end of last year, over three times the 2010-2024 average. Former Conservative prime minister Rishi Sunak boosted tax relief on capital expenditure, a policy continued by Labour Chancellor of the Exchequer Rachel Reeves.
The shift is textbook economics. As the relative cost of labor rises, employers deploy more resources to capital. Agriculture in developing countries is labor intensive because wages are low. In the US, farms are mechanized because workers can get better-paying jobs.
Raja does not think this is deliberate but rather a happy side-effect of traditional Labour values of rewarding low-paid work. "It's a helpful unintended consequence," he said. "I don't think they had a plan to drive up employment costs to get firms to substitute from jobs to capital. That's not Labour."
'More Like France'
The process began under the Tories in 2016 with the commitment to a national living wage paying those aged 25 and over 60% of average pay. They slowly ratcheted it up to two-thirds of the average and lowered the eligibility to 21.
Since the 2024 election, Labour has raised it 11% and increased the 18-20 wage by 26.2% in a bid to harmonize the two bands. On top of that, the government has whacked employers with £26 billion ($35 billion) in payroll taxes, beefed up job protections, empowered the unions and cracked down on migration with new rules that drove work-related visas down by a fifth in 2025. All of which have made employment costs more onerous.
Jim O'Neill, a former Goldman Sachs chief economist and cross-bench peer who has advised both Conservative and Labour governments, welcomes the shift. It makes employers "think about more AI and more general investment," he told the BBC this month. "When you look at the past 25 years of this economy, that is what we have been desperately missing."
RSM UK economist Tom Pugh is more pithy. Britain's position as the mid-Atlantic fulcrum between US free market capitalism and European social democracy is moving. "We are looking less like the US and more like France," he said.
The analogy is apt. France accepts unemployment as the price of investment. Joblessness is currently 7.5%, low by French standards, and total investment 22% of GDP - 3 percentage points more than the UK. The result is 13% greater productivity, the engine that drives living standards and the holy grail of UK policymaking after years stuck in the slow lane.
Britain's public finances increasingly resemble France's as well. Before the 2008 financial crisis, UK gross debt was around 43.2% of GDP - 23 percentage points lower than France. The gap has halved, with debt at 101.2% of GDP in 2024 and France at 113.1%, according to the International Monetary Fund. The UK tax burden is due to reach 38% of GDP by the end of the decade following Labour's £66 billion of tax rises, up from 33% before the pandemic and closing in on France's 43.5% rate.
Torsten Bell, the pensions minister, sees advantages in the French model. "Britain needs to have a higher investment future," he said at a London Stock Exchange event on Sept. 15 last year. "All of our productivity gap with France is explained by a lower capital stock." In Bell's telling, the French squander their windfall "by retiring ridiculously early," at 62. The British, where the pension age is 66, know better. "There's enough Protestants left for a bit of work ethic," he joked.
But the UK is not ready for French levels of unemployment. The current 5.2% headline rate may be tolerable, but 16.1% joblessness among those aged 16 to 24 -- higher than Europe for the first time on record -- is not. Labour is under pressure to slow the pace at which the 18-20 wage is rising, to protect young workers whose entry level jobs are simultaneously being swallowed by AI.
Labour has made a down-payment on its growth plan by investing an extra £120 billion in public infrastructure this parliament but, as Bell said, private investment is "obviously where the bulk comes from." Four fifths of last year's £547 billion of investment was private.
The UK has a lot of catching up to do. Total investment accounts for 19% of GDP, lower than every other Group of Seven nation, with the private sector largely responsible. A recent National Bureau of Economic Research paper estimated business investment is 12%-18% lower than comparable countries.
The data appears to be turning for the better but Boston Consulting Group's Centre for Growth director Raoul Ruparel needs more convincing. "The UK has rapidly rising costs for low wage and younger workers, particularly in sectors such as hospitality and retail. But these aren't really the sectors we need to see significant additional investment or in which significant investment is particularly likely."