03Urban economies in the Midlands Engine are below their ‘productivity potential’
While cities in the Midlands Engine are centres of production and home to the majority of the area’s exporting base, it is important to look at their performance relative to places outside the Midlands Engine as well as within it. This section looks at how they measure up to their potential.
The Midlands Engine’s cities and large towns do not offer the benefits of agglomeration as they should
Economic theory predicts that larger cities should be more productive, as agglomeration effects increase with size. This is because as economic activity concentrates in one place, the benefits of a city location – matching, learning, and sharing – multiply.
Figure 11 demonstrates that while this broadly holds true across the UK as a whole, the biggest cities outside of London do not experience this effect, with almost all of them sitting below the trendline. This makes the UK an outlier relative to other developed nations and means that the relationship in Figure 11 is weaker than for other developed countries.11 As at least some of these big cities should be leading rather than lagging the national average. Their poor performance is a large problem for both their local and the national economy.
 Enenkel K and Swinney P (2020), Why big cities are crucial for levelling up, London: Centre for Cities
Figure 11: The UK’s largest cities underperform – including some in the Midlands Engine
Birmingham and Nottingham urban areas are mainly responsible for the Midlands Engine’s underperformance
The gap between a place’s performance and the trend line (the difference between their actual and potential level of productivity) gives an estimate of the amount of output that each city in the Midlands Engine would be adding to the national economy were it performing at its potential. Doing this for all parts of the Midlands Engine demonstrates how far the Midlands Engine is from its potential and illustrates the contribution that different parts of it make to this underperformance.
The Midlands Engine falls around £18 billion a year short of its productivity potential, making it eight per cent smaller than it should be (see Figure 12). The Birmingham conurbation underperforms by £10.5 billion every year, about 58 per cent of the total underperformance of the Midlands Engine. It is followed by Nottingham and Leicester, which each account for a further £1.9 billion (10 per cent) and £1.5 billion (eight per cent) share of the total gap. Mansfield’s gap is £1.2 billion (six per cent) compared to Derby and Telford with £800 million (four per cent). In total, urban areas underperform by £16.3 billion per year, which accounts for 89 per cent of the annual output gap.
Figure 12: The biggest cities drive the Midlands Engine's output gap
It is for this reason that the Levelling Up White Paper identified the underperformance of the UK’s biggest cities outside of London as the key reason why areas outside of the Greater South East lag behind the Greater South East. Addressing Birmingham’s underperformance in particular will be central – not only to boosting the Midlands Engine but helping to level up the UK economy too.
Birmingham city centre performs closer to expectations, but is too small
While agglomeration doesn’t appear to be playing out as clearly at the city scale as in other developed countries, at the city centre scale the relationship is much clearer. Figure 13 shows that as a city centre gets bigger, the share of jobs that are in high-skilled occupations increases. The good news is that Birmingham city centre does sit on the trend line, reflecting the mix of high-skilled jobs that the previous section showed are located within it.
Figure 13: Larger city centres have higher shares of high skilled jobs
But the chart also shows that, despite Birmingham urban area being almost three times the size of Leeds in terms of population, the city centre economies of both cities are very similar in size. This shows that though Birmingham city centre is successful, it is much smaller than it should be, limiting the prosperity it generates and the contribution it makes to the wider Midlands Engine economy.
The Midlands Engine’s service exports underperform
The Midlands Engine underperformance is driven by the underperformance of service exporting activities in these cities. Figure 14 plots the productivity of local services, manufacturing exports and services exports, revealing three insights:
- Local services (businesses such as hairdressers and restaurants) are both low in productivity and see very little variation across Great Britain. Even between the Midlands Engine urban and non-urban areas, the average GVA per local services worker is around £40,000. They are not the cause of differences in productivity between places.
- The productivity of manufacturing in the Midlands Engine at £70,800 per worker is close to the British average of £78,900. Some urban economies also have more productive manufacturing sectors than Britain as a whole, such as Coventry with £95,800 and Telford with £93,700. It is considerably lower in Stoke and Mansfield at £40,000 per worker, suggesting there may be some specific issues to address around manufacturing in these places.
- The productivity of service exports in the Midlands Engine, although comparable to manufacturing at £70,700 per worker, is considerably lower than the British average of £92,700. Unlike manufacturing, no city or large town has an service export sector more productive than the country as a whole.
Figure 14: The Midlands Engine is underperforming in the productivity of its service export sector
Although Midlands Engine cities and large towns are high-skilled economies compared to surrounding areas, the implication is that they are not attracting enough higher-productivity service exporters. Given the preference for an urban location, and city centre location in particular, this is important in understanding why the Midlands Engine’s cities are underperforming. The performance of the ‘new economy’ in the Midlands Engine echoes the broader performance of the export base (see Box 6).
Box 6: The new economy in the Midlands Engine
The ‘new economy’ encompasses emerging knowledge-intensive sectors like FinTech and advanced manufacturing. Despite its small size, accounting for only three per cent of all UK firms, its position at the forefront of using new technologies and innovations makes it important for improving the UK’s productivity and prosperity and a central pillar for the future success of the whole economy.
Previous work by the Centre for Cities found that the new economy is disproportionately based in cities, and city centres in particular. In fact, 59 per cent of firms cluster in the nine per cent of land covered by 63 largest cities and towns, while 13 per cent of firms cluster in city centres accounting for 0.1 per cent of land.12
Figure 15 shows that all the Midlands Engine cities sit below the average for Great Britain for the number of new economy firms per 10,000 working age people. In contrast, the non-urban areas of the Midlands Engine both outperform urban areas (contrary to the national picture) and have almost the same number of new economy firms per 10,000 working age people as the non-urban average for Great Britain and overall average for Great Britain, suggesting that they perform as expected.
Figure 15: The Midlands Engine Cities are underperforming in their number of new economy firms
Source: The Data City, ONS (2021)
This is reflected in Figure 16, which shows that the Midlands Engine city centres are home to only 5.4 per cent of all new economy firms in the region while the hinterlands see 42.9 per cent of all new economy firms, compared to 32.3 per cent found in the UK overall.
Figure 16: The new economy firms of the Midlands Engine are disproportionately outside of cities
Source: The Data City, ONS (2021)
It ultimately shows that while the non-urban areas of the Midlands Engine are performing well, the cities, and in particular, the city centres of the Midlands Engine are not attracting and generating the cutting-edge new economy firms that drive growth and innovation for the region.
Manufacturing employment is falling, but service exports employment is growing
The underperformance of service exporters is important, not only because they have the potential to be very productive, but also because the UK is continuing to specialise in them. As shown in Table 2, the Midlands Engine is too. While manufacturing employment has declined since 2015 across the non-urban and most urban places in the Midlands Engine (except Telford), employment in service exports is growing across the Midlands Engine and outpacing overall jobs growth in five out of the eight urban economies of the region.
Table 2: Growth of manufacturing and service export employment between 2015-2021
|Manufacturing Exports||Service Exports||Total|
These changes do not mean that manufacturing’s importance to the Midlands Engine is declining. As manufacturing becomes more capital intensive and efficient, employment shrinks as the sector remains globally competitive. However, it does mean that, for the Midland Engine to become more prosperous in the future, it needs the services part of its exporting base to be performing in the way its manufacturing part currently does.
City underperformance impacts the rest of the Midlands Engine
The underperformance of the Midlands Engine’s cities and large towns doesn’t just affect the aggregate size of the Midlands Engine economy, their underperformance has knock-on effects for people in live in towns near them. Figure 17 shows the implications of this for the living standards of the six towns that are within 45 minutes of Birmingham’s urban area.
Of this group, Bromsgrove and Lichfield have strong employment outcomes. Part of the reason for this is that their residents disproportionately access the high-skilled opportunities available in the Birmingham urban area, and this makes these two towns more prosperous as a result. They account for 34 per cent of Birmingham’s high-skilled commuters from surrounding towns, but only 21 per cent of the surrounding towns’ populations.
Figure 17: Towns near Birmingham underperform because the city economy underperforms
The problem is that, unlike London for example, Birmingham’s underperformance means that there is not enough prosperity available to improve the outcomes of most of the nearby towns. London provides 385,000 skilled jobs to its hinterlands, equivalent to every single working age person in Leicester having a high skilled job. For Birmingham, it is 81,000. This puts the surrounding towns in competition for a relatively small pool of commuters. Those that decide to live in a town (many choose to live in smaller places) tend to choose Lichfield or Bromsgrove because of the quality of life that they offer over other towns.