05Why building back better cannot focus on jobs alone
The jobs miracle happened during a period when the UK saw very poor productivity growth. This matters for both wages and living standards across the country and is particularly important for the Government’s attempts to level up the economy. It suggests that policy cannot just focus on jobs when building back better.
While local services growth will create jobs, a vital part of a post-Covid-19 recovery, it will not address the UK’s productivity problem
Between 2013 and 2019, the UK and Italy saw by far the poorest productivity growth of the G7.17 This reflects the types of jobs created. While local services account for the lion’s share of roles in Britain, they tend to have lower levels of productivity and less scope for productivity increases.
Instead, it is activities in exporting industries that are mostly responsible for the UK’s productivity performance (rather than a ‘long tail’ of low productivity businesses that mainly consist of local services activities).18 While they made up 30.7 per cent of private sector jobs in Britain in 2019, they accounted for 46.7 per cent of the private sector economy’s output in the 12 months prior (the last year with GVA data available at a sub-national level). And their greater ability to take on board new innovations had spurred productivity improvements.
For example, between 1990 and 2019, productivity more than doubled in the manufacture of computer and electrical equipment, and information and communications. It almost tripled in chemicals and pharmaceuticals (all exporting industries). In contrast, it rose by less than 1 per cent in arts, entertainment and recreational services, and declined in accommodation and food services.19
While exporting activities do not play a large direct role in job creation, accounting for only 28 per cent of private sector jobs between 2013 and 2019, they do so indirectly by increasing the amount of money in an economy and driving up demand for local services. For example, for every 10 net new exporting jobs created between 1995 and 2015 in urban Britain, 11 were generated in local services. And when looking at high-skilled exporter jobs, this rose to 17.20
In the immediate aftermath of the Covid-19 pandemic, there will be an imperative to create jobs. But there must be a sustained focus on improving productivity by supporting the performance of exporting industries.
Addressing the underperforming exporting sector will be key to tackling the UK’s productivity problems
Having an explicit focus on the performance of exporting activities will be important for two policy goals – levelling up and the so-called ‘productivity puzzle’. Each has very different geographies.
The key distinction between successful city economies in the Greater South East and those elsewhere in the country is the variation in productivity of their exporting bases, as shown in Figure 11.21 In 2018, exporting industries in cities and large towns in the Greater South East were far more productive (in contrast to local services, which were both substantially lower and much more evenly spread). It is this longer-term variance in productivity that sits at the root of the difference in economic performance between the South East corner and the rest of Britain.
Figure 11: Differences in productivity are driven by the performance of exporting businesses
As well as these long-running differences in productivity, a second, more recent challenge has hit exporting activities in Britain. Not only has job creation been muted since 2013 (as shown above), productivity growth has been extremely disappointing. While these industries should be well ahead of local services, in reality they trailed them (see Figure 12).22 National data shows IT and communications, financial services and manufacturing – all exporting sectors – saw the greatest productivity growth in the decade before the financial crisis. Afterwards, IT grew at around a quarter of its previous rate. Manufacturing barely changed and financial services productivity fell.
Figure 12: The productivity of exporting sectors declined during the jobs miracle
This meant that many places in Great Britain experienced the miracle in jobs growth but saw productivity fall (see Figure 13). In fact, it declined in 33 cities and large towns over the period. And of the 25 cities and large towns that led the way, with jobs growth above the national rate, 12 saw productivity drop. Clearly, job creation in these cities and large towns was a good thing, but the fall in productivity is a concern for the longer-term growth of their economies.
Figure 13: Many cities saw productivity fall despite strong job creation
Most notable is the poor productivity growth of places that enjoyed high levels at the start of the period, such as London, Slough and Aberdeen. Research by the Bank of England has shown that the underperformance of high productivity firms caused the slowdown – those that were at the productivity frontier, that traditionally drove improvements, saw disappointing growth. From a geography perspective, this suggests it was Britain’s high productivity cities, likely to be home to such businesses, that were to blame for the national economy’s productivity puzzle.
Foreign exporters struggled in particular
Foreign businesses play a particularly important role in exporting industries. In 2013, a total of 27.7 per cent of exporting jobs were in foreign-owned companies, compared to 13.9 per cent in local services. They are likely to play a disproportionate role in exporter productivity too – between 2006 and 2017, foreign-owned businesses in Great Britain were around 18 per cent more productive than domestic ones.23 Research by the Bank of England suggests this is down to stronger R&D investments, better management and collaboration with other institutions.24 And a large share of Foreign Direct Investment flows into the UK are made by exporting sectors such as financial services, information and communications and professional, scientific and technical services.25
Data on productivity of foreign firms at the local level is not available, but data on jobs suggests that this group in particular has struggled in recent years, even lagging behind domestic exporting companies. While foreign exporting businesses accounted for 27.7 per cent of exporting roles in 2013, they contributed only 7 per cent of the growth in private sector exporting jobs (meaning that domestic exporters accounted for 93 per cent).
Figure 14: Jobs in foreign exporting businesses fell in almost half of cities
The trend is of concern in its own right but is heightened by the UK’s withdrawal from the EU. Forecasts by University College London and the London School of Economics predict that foreign investment into the UK will fall by 37 per cent post-Brexit.26 If this is the case, it will compound the struggling performance (in jobs terms at the very least) of foreign exporters, with implications for both levelling up and the productivity puzzle.
This is especially important given that, as was the case for all jobs, roles created in foreign firms were overwhelmingly down to new businesses investing in the UK. This makes efforts by the Government to encourage investment from abroad post-Brexit even more important, both in terms of productivity and job creation. The recently established Office for Investment within the Department for International Trade intends to establish ‘one front door’ for international investors.27 Cities will need to understand how to best work with this new office if they are to benefit from its activities.