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While the UK lags behind other European countries in terms of productivity — the often quoted stat is that a German worker produces in four days what a UK worker produces in five — this masks some pretty extreme variation across these islands. What is less well known is that a worker in the Greater South East of England is more productive than the average German worker. And so the UK’s productivity challenge is a result of the underperformance of other parts of the country.
Our work shows that this is mainly caused by the lagging contribution of cities outside of the Greater South East (GSE). While the non-urban parts of the GSE are more productive than non-urban areas of the rest of the country (17 per cent in 2017), this is dwarfed by the differential between cities. Cities in the GSE were almost 50 per cent more productive than their urban counterparts elsewhere in the UK.
What’s more, many cities elsewhere in the country even lag their rural neighbours in terms of productivity — cities such as Newcastle, Nottingham and Hull trail their surrounding non-urban counterparts. This isn’t normal. In many other developed countries cities lead the national average mainly because concentrating economic activity in one place — known as agglomeration — makes businesses more productive.
So to tackle both the national economy’s lagging productivity and address uneven access to prosperity across it, policy needs to crack the poor performance of many of our cities.
To answer that, we have to ask the question: why do businesses locate where they do? And we have to narrow this down further. While businesses like cafés and restaurants employ many people, their location is governed by where their market is — they need people to sell to. Added to this, they aren’t the cause of the UK’s productivity woes — beware any explanation that it is result of a long tail of unproductive firms.
The relevant businesses in this case are the businesses that could locate anywhere because they serve more than their immediate market, exporting to regional, national or international markets. And the location of the high skilled cohort of these businesses, that are the most productive and innovative companies in the national economy, is skewed towards cities in the Greater South East.
This occurs because of the benefits that these places offer: access to not only lots of workers, but high skilled ones to boot, and for many high-skilled service exporters, access to other similar businesses in dense city centre locations. And businesses pay a premium for this access, paying rents way in excess of costs elsewhere.
Cities elsewhere in Britain are not offering these benefits to the same extent. And it is this that policy should focus on tackling. For skills, a number of interventions are required, from improving school performance in struggling areas to auditing the amount of money spent on skills. For adult education specifically it should introduce a Singapore-style system, assigning a number of credits to every individual over 25 to improve their skills.
And to turn around struggling city centre economies, it should create a £5 billion city centre productivity fund for councils to bid into to make their city centres more attractive places to do business. On its own this sounds like a lot of money. But it is just a fraction of the £37 billion National Productivity Infrastructure Fund that is burning a hole in pockets over at the Treasury.
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