Centre for Cities' Chief Executive Andrew Carter outlines what the Government needs to know before it can boost productivity.
In his Spending Review this afternoon, the Chancellor of the Exchequer Sajid Javid
Tackling the UK’s productivity problem is a core part of Centre for Cities’ work. Here are our three key things that the Chancellor should know to tackle it.
1. Productivity varies hugely across UK – with political consequences
As the Chancellor said in the Spending Review, the productivity problem looks very different across the UK, with far starker regional divides than in most other developed countries.
The Greater South East of England, particularly its cities, is not only the most productive part of the UK economy but also one of the most productive parts of Europe as a whole.
This is down to the region having a much greater share of high-productivity exporting firms and a far lower share of low-productivity exporting firms than other places.
By contrast, the distribution of productivity in local service businesses varies very little across the UK. A hairdresser in Plymouth is as productive as a hairdresser in Blackburn, for example. Instead, the significant variations in productivity variation seen across the country can be attributed to the performance of the export base in different cities.
2. High productivity doesn’t automatically create inclusive economic growth
An increasing problem that the Government needs to grapple with is the reality that the benefits of high productivity are not often felt by the public – hence the Spending Review’s investments in schools, hospitals and police announced today.
Despite London’s high-performing export sector and higher wages, the capital has some of the highest poverty levels in the country.
This paradox can be explained by the fact that higher wages coupled with a housing shortage have increased house prices in the city. As a result, the real wage a London worker is left with once they’ve paid their rent is relatively lower than it might be if they were based elsewhere.
The next election is likely to be fought on issues such as this, in addition to Brexit of course.
3. Not all businesses can be equally productive
The idea that the UK has an unusually “long tail” of productivity laggards that pull down the national average has preoccupied policymakers in recent years. Their belief is that by making those businesses more productive, the problem can be solved.
However, what this fails to reflect is that the long tail is dominated by local services businesses, which have a limited scope for making productivity improvements due to the types of activities they involve (such as hairdressing).
The key to raising national productivity should instead be to focus on exporting businesses, which are better equipped to absorb innovations and find new markets.
Leave a comment
Be the first to add a comment.