Is the answer to the UK’s productivity puzzle a focus on area type?

As policymakers scratch their heads over how to tackle the UK’s productivity challenge, is a focus on regional disparities too blunt an approach? As this blog argues, an understanding of the distinct characteristics of area type within regions could shed new insights on appropriate policy responses.

The UK is in the midst of a productivity crisis. Output per worker was 27 per cent lower in the UK compared with the US in 2016, and it’s not just US workers who are outperforming us – so are the Canadians, Germans, French and Italians. Indeed, the UK’s output per worker was 16.6 per cent lower than the rest of the G7 in 2016. As productivity is intrinsically linked to living standards we can be left in no doubt that faltering productivity levels have important implications for all of us. There have been claims that living standards are to flat-line for a decade as productivity drags, and the Government itself has stated that unless productivity is improved it cannot raise living standards and quality of life. It is an issue the Government say they are “determined, unflinchingly, to correct”, and one element of this involves a much-needed focus on place.

A place-based approach to productivity certainly makes sense. Since the Brexit vote there has been an emerging consensus that some places have been left behind and increasingly alienated by globalisation. Whilst in some areas globalisation has stimulated inward investment and the emergence of new industries, this has not happened everywhere, resulting in a place-based divide that has both economic and political implications. The Industrial Strategy acknowledges this growing sense of place-based inequality in a welcome step forward by Government, but it is clear their conceptualisation of place is limited. The place-based solution to the productivity malaise, is, according to the Government, to fix regional disparities in productivity.

Whilst this place-based approach is refreshing, there is reason to believe that area disparities in productivity are the real problem, rather than between regions per se, and addressing them should be the priority. Research using the ONS area classification of local authorities into eight different area types reveals that disparities in productivity between types of area offers a potentially more complete and nuanced picture of the problem. ONS productivity figures reveal the bottom 20 local authorities for GVA per head in 2016 are from nine different regions, but just three area types: Services and Industrial Legacy, Countryside Living, and Town & Country, suggesting low levels of productivity are concentrated in these types of area.

A more detailed look at the figures shows Service and Industrial Legacy areas had an average GVA per head of £18,681 in 2016 which is even lower than Wales (£19,140), the UK region with the lowest GVA per head. At the other end of the spectrum, London Cosmopolitan areas had an average GVA per head nearly 17 times higher than Affluent England in 2016, the area type with the next highest GVA. This is due in part to commuter flows and the inclusion of the City of London which skews the figures, yet the vast size of the disparity also conveys the extent of the imbalances within our economy.

Whether you take the definition of place to be region or area type – London’s productivity dominates the rest of the country. But a focus on the experience of the remaining seven area types reveals some interesting differences which could indicate where the focus of policy responses to boost productivity could lie.

Excluding London Cosmopolitan areas, the average GVA per head across all areas in 2016 was £24,079. Aside from Services and Industrial Legacy areas, Countryside Living, Town & Country, and Urban Settlements also have a lower GVA per head than average. Based on current figures, projections show that if these area types had a GVA per head equal to the average, total GVA for these areas would increase by 15 per cent, adding over £117 billion to the UK economy.

Looking at the overall trends, the figures reveal an increased polarisation between area types from 1998 to 2016. Again leaving London Cosmopolitan areas to one side, the gap in average GVA per head between Affluent England and Service and Industrial Legacy areas has almost doubled between 1998 and 2016. The gap between Ethnically Diverse Metropolitan Living areas and the next highest – Business, Education and Heritage Centres – has grown fourfold. The figures quite clearly demonstrate that the gap between productive and less productive areas has been widening over the last 20 years. If an effort was made to bridge that gap, it could yield significant and meaningful improvements for the UK economy.

This raises the question of how to bridge the gap? One of the Government’s proposed solutions is to increase the number of good or outstanding secondary schools to create a more skilled workforce; the fact that 90 per cent of secondary schools are good or outstanding in London compared with just 67 per cent in the North East is the reason identified for the regional disparities in productivity. When considering this statistic according to area type, even wider differences emerge. Just 65 per cent of secondary schools are good or outstanding in Services and Industrial Legacy Areas, compared with 92 per cent of schools in London Cosmopolitan areas. That is a huge 27 per cent difference. As nine of the 12 local authorities which make up the North East region are classified as Services and Industrial Legacy areas this may explain the regional disparity in educational outcomes – it is conceivably area type that matters, not location. With over a quarter more good or outstanding schools in London Cosmopolitan areas than Services and Industrial Legacy areas, this presents a significant issue, not just for productivity, but for the fairness of our education system, and society more generally.

When considering the productivity and education figures together, different types of area appear to face different productivity challenges. Areas classified as Countryside Living are second from bottom in terms of GVA per head, and yet they are only slightly below the national average for secondary school performance. The problem in these types of areas might therefore be ‘brain drain’, rather than the education system. In contrast, Services and Industrial Legacy areas and Urban Settlements which have low GVA per head also have correspondingly poor secondary schools. The need for Government policy to improve and invest in schools could therefore be expected to boost productivity in these types of areas, whilst other strategies will need different emphases to boost productivity in different area types.

Whilst any place based-approach is better than none, a focus on region as the prime place category doesn’t hold all the solutions. Each region contains different types of area, and it is quite possible that the solution for one area type will differ from another; a purely regional approach therefore risks forcing unsuitable policies on our villages, towns and cities. A more appropriate solution would be to consider what types of challenges an area type faces and find policy solutions to tackle them – so we need to develop much more detailed understanding of the interplay of area type, and the opportunities that exist within them if we are to drive up productivity everywhere. This would be genuine place-based policy-making. This isn’t to say that the Government’s strategy is all wrong; the need to have policy flexibility below the regional or Local Enterprise Partnership level is directly acknowledged in the Industrial Strategy, as is the fact that some towns face particular challenges that require specific policy solutions. As the first Local Industrial Strategies at the LEP level are set to be agreed by March 2019, the Government is currently faced with an invaluable opportunity to devise a real place-based approach to productivity that addresses the challenges and strengths of different area types.

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