UK – one of the most unequal countries when it comes to regional productivity

The first in a series of blogs looking at uses of the European Regional Database, Ben Gardiner looks at spatial disparities in productivity and how they compare across countries in the EU and within the UK.

The Industrial Strategy Council recently released a report on UK regional productivity differences, which showed (Fig 3) how the UK has become one of the most unequal countries (based on regional productivity disparity at NUTS2 level) across the EU, ahead of only Poland and Romania in 2017.

Using Cambridge Econometrics’ European Regional Database, we can replicate this using output per persons employed rather than per hour – there are some minor differences, but the broad story remains the same with the UK ranking as the country with the third-highest productivity disparity.

How regional productivity changes over time

The above figure is simply a snapshot, however, and it is interesting to see how this picture has evolved over time. Again, using the European Regional Database we can explore this (see figure below). A few stories emerge from the time series of regional disparities:

• Germany shifts upwards suddenly in the early 1990s due to reunification, when east German regions are added to the mix, but since that initial rise the trend has been generally one of convergence.
• Italy, a country which conjures up stereotypical north-south divides with the Mezzogiorno, has generally seen a decline in the spread of its regional productivity, although this is partly due to slow growth in general.
• France, a country which is also has a largely monocentric governance structure, has a much lower productivity spread, and aside from a divergence around the time of the financial crisis and subsequent great recession, has been fairly stable.

• The UK presents an interesting case. The sharp rise in the mid-1980s is caused by a mix of rising productivity in inner London (due to the combined effects of continuing de-industrialisation and financial liberalisation but also the declining productivity of Southern Scotland (the lowest ranking region around that time). The reversal of this divergence occurs as low-performing regions start to catch up in the boom period of the mid-1990s, but this is a short-lived phenomenon. From the late-1990s onwards the trend has mostly been one of further separation of London’s productivity from the rest of the country.

To what extent has London really pulled away from the rest of the country?

The answer to this is provided in the next chart, which shows each individual (NUTS2) region’s productivity as part of the overall distribution. Here, the pulling away of Inner London (West and East), and more latterly parts of Outer London, is clearly seen.

Fewer and fewer regions are above the average as these parts of London have also gained employment, increasing their share or weight in the overall economy. This finding accords with a recent bulletin from the ONS reporting that only two NUTS1 regions (London and the South East) had above-average levels of labour productivity.

Indeed, if we ignore these top three regions and re-calculate the ratio, it falls between 1981 and 2017, from 1.8 to 1.6, showing the relative range has actually decreased.

Why this matters

The above analysis unpacks the information contained in the Industrial Strategy Council chart and reveals the cyclical nature of divergence in the UK, but also the recent trend of divergence which seems to be proceeding unabated while most other Member States are either stable or declining in the spread of their regional prosperity.

The detail also shows how the high and widening degree of divergence has been mostly caused by Inner London pulling away from the rest of the country over the last two decades, so in some ways the divergence is not that great if we look at the rest of the country.

However, London is such a large share of the economy that we cannot ignore it, which also begs the question what exactly is meant by the levelling up rhetoric – is it a levelling up of performance, powers, opportunities, or what?

Having taken ownership of this phrase and used it as a mantra for improving regional performance (and reducing disparities) the government now has to define precisely what it means and then lay out the policies to pursue it.