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Spatial disparities in productivity are central to the future of levelling up

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WWG policy debate (1)

In the run-up to the election, our colleagues at the Centre for Economic Performance (CEP) are running a series of election analysis articles, where world-leading economists give their take on the state of different areas of economic policy, and the big choices facing the next government.

In the first of these articles, Anna Valero and John Van Reenen look at growth and productivity – two central issues facing the country. They point out that UK labour productivity today is 26% lower than it would be had productivity growth continued its pre-2008 financial crisis trend. This gap is a big part of explaining stagnating UK growth, weak gains in pay, and falling living standards.

The range of productivity levels across the country also tell an important story about where and why we see big divergences in economic opportunities and living standards.

CEP will shortly publish election analysis by our Director, Henry Overman, that discusses how the next government should think about tackling spatial productivity disparities in the economy.

Ahead of that, we discuss in this blog what these disparities mean for local economies.

Spatial disparities are old

Differences in levels of economic performance and productivity around the country are longstanding. As the Levelling Up White Paper from 2021 points out, these kinds of differences are to some extent normal and inevitable as economies change over time. But the pattern of stark disparities in productivity that we see in the UK first began to consolidate in the 1970s, as deindustrialisation and a general transition towards a service economy meant that areas with a higher share of high-skilled workers and tradeable services firms became the most productive. Today, services are the key sector, and understanding them at the local level is important to understanding the dynamics of the local economy.

Spatial disparities are big – but not unique

With the focus on Levelling Up policy in political debate in recent years, the inequality between places and regions has taken centre stage. It is certainly true that significant differences exist – research for the Economy 2030 inquiry shows that in 2019, London produced £76,000 of gross value added per job, more than twice that produced in the lowest productivity areas (Gwynedd, Powys, Torbay, and Herefordshire) of less than £40,000 per job. But the UK is not unique in this – the same research notes that for labour productivity, the UK has spatial inequalities similar to those of Germany and Italy, and when looking at labour productivity in urban areas, the UK is less unequal.

Spatial disparities matter

While not an extreme outlier internationally, these disparities in productivity still matter, and help determine some of the inequalities we see between places in the country. As our blog on understanding productivity notes, generally local productivity is closely associated with local incomes, which in turn will be important for living standards. Additionally, areas with higher-paying, more productive jobs may see wider employment multipliers, because of increased demand from higher personal income. So, they’ve been here a while, they’re big, and they are important. What should be done about them? You can read this CEP election analysis which tackles that very question.