Productivity

Productivity is a measure of how much an economy gets out for the inputs that are put into it, and improvements in it are what determines increases in standards of living. This is why the UK’s poor productivity performance, both in terms of levels and growth, is so concerning – this underperformance hits people in the pocket.

Productivity is a good example of a topic that by looking at its variation across the country, instead of just national performance, dramatically changes our understanding of it. Explore the questions below to understand why.

Explore the questions below for Centre for Cities’ thinking and analysis:

What is the geography of UK productivity?

The split in output per hour across the country is one of the starkest demonstrations of the North-South divide. The map shows how the UK’s most productive cities are clustered in the Greater South East, making it one of the most productive parts of Europe. And on average in 2021, the average worker produced in 3.75 days what a worker elsewhere in the UK produced in five.

Figure 1: GVA per hour, 2021 (£)

 

Why are the differences in productivity a problem? / Should the aim of policy to make everywhere equally as productive?

The aim of policy should not be to make everywhere equally as productive, but to make them the best versions of themselves.

This is because different places play different roles in the national economy. Big cities offer access: access to a large pool of skilled workers and a network of other skilled businesses. But they offer this at a cost, through higher office and congestion costs for example. The location of firms shows that higher-productivity businesses tend to be willing to pay the urban premium to access these benefits. More rural settings offer access to cheap land and beautiful countryside, two benefits that high-productivity businesses are less likely to prioritise. It is for this reason that higher-productivity businesses, especially larger ones, are much less common in deep rural areas.

The policy challenge in the UK is that with the exception of Bristol, all large cities outside of London are a considerable distance from their productivity potential. This pulls down both regional and national productivity.

Should all businesses make an equal contribution?

In the same way that different places play different roles in the national economy, different types of businesses also play different roles. It is tradable or ‘exporting’ businesses that are both more productive and have contributed disproportionately to productivity growth in the UK in recent decades. Local services businesses – think cafés, hairdressers etc – are both low productivity and have seen little productivity growth in recent decades. The time taken to wait a table or cut a head of hair is similar to what it was 40 years ago.

For a place to increase its productivity it needs to attract in or grow more high-productivity businesses rather than increase the productivity of its ‘long tail’ of less productive companies, which are dominated by local services activities. It is these high-productivity exporter companies in particular that tend to benefit from an urban location.

That’s levels of productivity. But what about growth?

The UK has developed a further productivity headache since the global financial crisis. Not only have the weaker places continued to struggle, but the country’s innovation superstars, such as Cambridge and London, have also faltered.

London’s flatlining is particularly concerning because of its size. It was the main reason why wider UK productivity growth outstripped many other developed economies before 2008. And its flatlining is the main reason why UK productivity growth has been so disappointing since then. It is true that productivity growth has stuttered across the developed world since the late 2000s. But in places like France and the USA, productivity growth has still outstripped the UK, and their biggest cities have led the national performance. In the UK London has lagged the national performance.

This means that policy now needs to find answers for both the long-term strugglers and the places that have more recently flatlined if it is to improve the UK’s productivity performance.

What does this mean for policy?

To deal with the long-running underperformance of productivity, policy should principally focus on reducing the gap between the current performance of big cities and their potential to bring them into line with their European counterparts. This means improving the benefits that they are supposed to offer high-productivity businesses – namely access to a large pool of high skilled workers and access to other knowledge-based businesses. Actions should focus on improving skills of the pool of workers, expanding the size of the pool of workers through improvements to public and private transport and making sure that there is sufficient commercial space and associated public realm in their city centres. It should also give these cities fiscal powers so that they can benefit from the increase in taxes that an expanding economy creates.

In smaller places policy should also attempt to close gaps in performance, but note two things: that in absolute terms this gap is much smaller than for big cities, and; the levers policy has to pull are more limited. For towns and villages within commutable distance of large cities, strengthening connections into those large cities to allow people to access the prosperity generated will also have a role to play.

For those previous innovation superstars that have seen a sharp slowdown since the late 2000s, policy should focus on removing barriers to building to help curb further deteriorations in housing affordability, extend graduate visas to five years to encourage the retention of skilled foreign workers and incentivise investment in activities that will increase productivity, such as in ‘intangible’ activities like IP development.

 

Our work on productivity

Showing 1–10 of 204 results.

Universities innovation
Do universities anchor innovation or just organise it?

London School of Economics

Universities are often invoked as vital drivers of local economic growth, innovative technologies and businesses. However, as James Evans discusses their influence on local innovation may be overestimated in comparison to the role they play in organising and helping these businesses develop.

External Article 19 Jun 2024
Next government should put big cities at the centre of a national mission to make the UK richer than Germany

The UK is an outlier among leading G7 nations as its largest cities outside the capital act as a drag on the economy rather than leading it. Equivalent cities in leading G7 economies France, Germany and the US are more productive than the rest of their respective countries and this is key to explaining why their national economies outstrip the UK.

Press Release 12 Jun 2024