Addressing the underperformance of big cities and city centres should be at the top of Andrea Leadsom’s priorities to deal with the UK’s lagging productivity.
While there has been little space for domestic policy in the last three years, one area that has received some attention is the Industrial Strategy, one of the flagship policies of Theresa May’s domestic agenda. It is not clear whether the new administration will continue with this approach but either way, here are three things that the new business secretary Andrea Leadsom should reflect on as she takes up her brief.
1. The UK’s poor productivity results from the underperformance of its big cities
In principle, the bigger a city becomes, the more productive it is because of the amplified benefits of agglomeration. This holds in many developed countries, such as the USA, (West) Germany and France.
But it doesn’t hold in the UK. Most of our largest cities punch well below their weight, lagging the national average on productivity. This is sometimes mistakenly interpreted to claim that cities aren’t that important for the national economy.
But it shows quite the opposite. The reason why the UK lags behind other developed countries in terms of productivity is because the biggest cities in the north of England in particular are not making the contribution they should be. This is bad for the people who live in and around them. And it is bad for the national economy. For this reason, improving the performance of our biggest cities should be top of the list for the incoming Secretary of State if she wants to address the UK’s productivity problem.
2. Don’t expect all businesses to be productive as one another
The idea that there is a ‘long tail’ of unproductive firms that are dragging the UK’s productivity down has captured the imagination. You’ll be hard pushed to find any piece written about productivity in the last two years that doesn’t make reference to it.
But the long tail is a red herring. That there is a rump of low productivity businesses is certainly true. Looking at the make up of these businesses reveals them to be dominated by local services businesses, such as hairdressers, cafés and cobblers. And the scope for these businesses to improve their productivity is very limited.
To see this, think of a barman or waitress. Their jobs have not fundamentally changed in recent decades, and their ability to make large productivity gains in the future is limited by the nature of their job.
Instead the Secretary of State should focus on ‘exporting’ businesses – those that sell to regional, national or international markets. These businesses have both higher levels or productivity and have seen much greater productivity growth in recent decades.
In particular, she should look at why they are less likely to locate in certain parts of the country. The problem for many cities in the north is that they have struggled to attract and retain sufficient numbers of higher-skilled exporting activities. So if the productivity of these cities is to improve, then policy needs to make them more attractive to these types of businesses.
3. Many northern city centres are not attractive to high-skilled exporting businesses
City centres play a particular role in the national economy. They cover less than 0.1 per cent of land, but are home to 14 per cent of all jobs and a third of Britain’s high-skilled exporting jobs. This is because of the benefits that these centres offer in terms of providing access to a network of other high-skilled businesses from a range of industries.
But there is a great deal of variation across them, and the underperformance of many cities results from the struggles of their city centres to attract higher skilled exporting activities.
For this reason making struggling city centres more attractive places to do business (rather than attempting to save their high streets, which is what policy makers have focused on in recent years) should take priority. To do this city centres should be viewed as a key piece of infrastructure, and the National Productivity Infrastructure Fund should be used to create a £5 billion City Centres Fund. Those cities awarded money from this fund should be the ones who can demonstrate a clear strategy for how they aim to make their city centre more attractive to business.
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The main issue that is so frequently overlooked in the conventional wisdom regarding UK productivity is the sectoral breakdown that you reference in your second point. The reality is that over the past 30 years the UK economy has undergone a structural employment shift, with the vast majority of the almost 500m increase in total hours worked concentrated in sectors with below 90% of average productivity (including the public sector, where measurement remains notoriously difficult), while high productivity sectors such as oil production have seen a marked reduction in their role. In addition, historically (and probably unsustainably) high productivity growth in financial services has completely stalled since the financial crisis as profitability has been stripped out of this sector through tougher regulation and tighter margins. None of this means much for what we conventionally think of as productivity, and once it is excluded the trends are much less worrying than they initially appear. It is lazy thinking to follow the conventional ‘low productivity -> more investment required’ argument without more attention to detail, especially when some of the forms of investment advocated have a very unclear relationship to future productivity gains.
Good article but a area to look at are the councils who are employing ooo’s how productive are they?
There is no focus on productivity increases especially in councils
What about the distribution of our national research effort which is hugely concentrated in the golden triangle? If that’s where the research is, that’s where the researchers will be, and that’s where ideas will emerge. And if they are 200-300 miles way from the big cities you won’t get much transmission from research to business: hence low product and process innovation and low productivity. This is more regional than urban problem, I suggest.
Makes sense. Productivity gains mostly come down to buying bigger machinery and more automation. Barwork and hairdressers cannot be automated. Robots have to improve a lot before I let one loose on my barnet with scissors!