UK productivity disparity higher than Europe – and rising

Posted on 10 Feb 2020 by The Manufacturer

Sustained economic policies, fostering local growth strategies, and intervening in areas “at risk of falling further behind”, are among a raft of measures the Industrial Strategy Council has published in response to regional disparities in UK productivity.

Image by Greg Plominski from Pixabay
London and the home counties are among those areas of the UK “steaming ahead”, while coastal regions such as Cornwall and rural areas like Lincolnshire show “widening” rates of low productivity

London and the home counties are among those areas of the UK “steaming ahead”, while coastal regions such as Cornwall and rural areas like Lincolnshire show “widening” rates of low productivity, according to the UK Regional Productivity Differences: An Evidence Review, which the ISC has used to propose a series of recommendations for levelling up.

The review draws on academic studies that examine the “extent and causes of spatial disparities in UK productivity”, which is a key indicator of economic performance because it assesses the conceivable economic rewards from work in a region.

The most productive, or above average UK regions are outer and inner London, east Surrey, west Sussex, Berkshire, Buckinghamshire, Oxfordshire, and east and north east Scotland.

Whereas Cornwall, west and south Wales, Lincolnshire, Yorkshire, Northumberland and Cumbria were shown to be below the UK average.

Regional and spatial disparities in the UK are also larger than in most other western European countries, rising to the highest levels in more than a century, according to the review.

Productivity across NUTS2 regions in the UK in 2017

Productivity across regions in the UK in 2017

Although there is no simple explanation for widening spatial disparity, skill levels, workforce health, and quality of local institutions and infrastructures are contributing factors.

Three key regional differences:

  • Place-based fundamentalsA combination of geography, local culture, governance and infrastructure were shown to be important factors in determining the economic activities of a region.
  • Agglomeration – Academic analysis shows that certain regions are more disposed to cultivate “clusters of economic activity” which become self-sustaining. Specialised businesses stand to benefit from trade with other firms in their industry and area, and also profit from sharing common resources from large cities.
  • SortingWorkers, especially highly skilled workers, also cluster – meaning small differences between places can generate large disparities in the nature and skills of the workforce, in turn shaping a regions’ industries, attractiveness and productivity.

A region’s productivity is determined by its total income (typically over a year), divided by the number of hours worked over the same period, which corresponds to the income generated by the average hour of work.

This income takes into account workers’ wages, as well as rental income from machinery, equipment and property, income and profits.

While productivity is not a faultless indicator of a region’s economic performance, if one region is more productive than another it can help to show that people “may be able to enjoy the benefits of higher incomes while working the same number of hours, or to enjoy the same level of income while working less”.

The Industrial Strategy Council has made some policy recommendations to assuage the “extent and causes of spatial disparities in UK productivity”:

  • End the tendency to abolish and recreate regional policy – continuity in UK regional policy ensures a strategic approach to achieving long-term economic goals, ISC said. Adding that once an initiative is started and shown to be self-sustaining over time, it should be favoured.
  • Foster local growth strategies that employ a broad approach – these interventions should range from social and health, to business policies.
  • Keep the spotlight on places whose productivity levels and growth rates are well below the national average – ensuring interventions are directed towards regions at risk of falling further behind.

“Unless we improve productivity…we cannot raise living standards and quality of life for all our citizens” – the government’s 2017 Industrial Strategy white paper.

The white paper also sets out a goal of improving the “foundations of productivity in all parts of the country”, in light of the UK’s regional disparities when compared to other western European countries.

Make UK

Make UK’s annual Regional Manufacturing Outlook, in conjunction with accounting company BDO, would seem to corroborate ISC in pointing to parts of Wales, the North East, Yorkshire, and parts of the Midlands as regions it deems the “most economically disadvantaged areas of the UK”.

It adds that manufacturers in these areas also tend to have high trading relationships with the European Union, and that the “risks” of a no deal Brexit are likely to be disproportionately felt.

Manufacturing accounts for nearly a fifth of the East Midlands’ economy and the EU accounts for just over half its exports, it said.

“Investment is critical to UK manufacturing. The sector is facing increased global competition and major change in respect of industry 4.0 and sustainability,” said Tom Lawton, head of manufacturing at BDO.

“An increase in first year capital allowances – something that a quarter of companies see as a priority for the government – would be a good incentive to boost capital investment in 2020 and beyond. This should be considered as part of a long-term sustainable industrial strategy.”

You may also enjoy reading The Budget 2020 wish list – what UK manufacturers want and need

Ahead of the UK government’s Budget set to be announced on 11 March 2020, The Manufacturer has been speaking with a range of firms from various sectors about what they hope the Spring statement will mean for their industry.

*Headline mage by Greg Plominski from Pixabay