UK Regional Productivity Differences: An Evidence Review

The Industrial Strategy Council has conducted a review of the academic evidence on the extent and causes of spatial disparities in UK productivity, and the implications for policies aimed at promoting local productivity growth.

The review finds that  differences in productivity across UK regions are large, in absolute terms and by international standards, and are longstanding. A number of British cities are “steaming ahead” with high levels and growth rates of productivity and income, but not all cities are doing well. Furthermore, in a number of towns, coastal regions and rural areas, the levels and growth rates of productivity are low.

There is no simple or single reason for these wide and widening differences in spatial performance. In practice, highly productive regions tend to out-perform low-productivity regions along a number of dimensions – from the skills and health of the workforce to quality of local institutions and infrastructures. Nonetheless, the report highlights three key explanations for these regional differences:

• Place-based fundamentals: Geography, local culture, governance and infrastructure are important factors determining the economic activities of a region
• Agglomeration: Places attract clusters of economic activity which become self-sustaining. These agglomeration effects arise because specialised firms benefit from the ability to trade with other firms in their industry and because these firms benefit from sharing the common resources offered by large cities.
• Sorting: Workers, especially highly-skilled workers, also choose to cluster. This means small initial differences between places can generate large disparities in the nature and skills of the workforce, which then shape regions’ industries, attractiveness and productivity.

Overall, the Council’s review of evidence suggests that it would be beneficial for policy to:

• End the tendency to abolish and recreate regional policy. Local areas benefit from continuity in UK regional policy as this ensures a strategic approach to achieving long-term economic goals. Initiatives which, once started, become self-sustaining over time should be favoured.
• Foster local growth strategies that employ a broad approach across a range of policy interventions - from social and health interventions to business policies.
• Keep the spotlight on places whose productivity levels and growth rates are well below the national average, to ensure that interventions are directed towards places at risk of falling further behind.

The review also highlights three evidence gaps: regional price differences; regional capital stocks; and indicators of well-being at a local level.