The Government has said it will set out plans to “level up” economic conditions and opportunities across the UK in the Budget.
What are current economic inequalities and how big are they? This Insight explores how productivity and incomes differ across the regions and nations of the UK.
There are large differences in productivity across regions
A key economic indicator is productivity. This measures how much is produced (GDP) for every hour worked.
Productivity and living standards are closely linked. If we can produce more in the same amount of time, this frees up resources, such as labour, in the economy to do other things.
Comparing regions and nations of the UK reveals London has the highest productivity level in the UK by some distance. It was 32% above the UK’s average productivity in 2018.
The South East is the only other region above the UK average. The Yorkshire and the Humber region and Wales had the lowest productivity levels in 2018, 17% below the UK average.
Regional figures such as these, while valuable, can also mask differences within regions, from local area to local area.
The map below shows the same productivity data but this time for 371 local authorities in Great Britain (plus the overall figure for Northern Ireland). Economic output is measured by the value of goods and services produced in an area, called gross value added (GVA).
The map shows that differences within regions can sometimes be as large, or larger, than across regions.
It highlights that many of the most productive local areas in the UK are in the South. These are mostly in London and the surrounding area to its west in the ‘M4 corridor’. There are also pockets of high productivity areas in other regions, such as the North West.
Why are there regional differences in productivity?
The Industrial Strategy Council is tasked with evaluating the Government’s progress in delivering its Industrial Strategy. It has pointed to three “key explanations” for productivity differences in a recent report. These are:
- 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.
Andy Haldane, chair of the Council and chief economist at the Bank of England, noted in the report’s foreword that regional differences have deep long-lasting roots. For example, estimates of regional GDP per head over a century ago show London well above the UK average.
He identifies a “self-reinforcing” cycle of factors – such as skills, jobs, transport, housing – that can be a “virtuous circle” for well-performing areas, or a “vicious” one for “left-behind places.”
Reversing these vicious cycles is difficult, requiring policy measures to be “large-scale, well-directed and long-lived.” Haldane says this has historically not happened in the UK.
There is less variation in incomes after considering taxes and housing costs
As well as productivity, statistics on household incomes provide an insight into regional economic differences. At face value, these also show a similar picture: median earnings are highest in London, well above the UK average.
Digging a little deeper, however, leads to a more nuanced picture. A more complete evaluation should include other income in addition to wages (investment income, welfare payments, pensions etc.) and take account of taxes paid.
The Department of Work and Pensions conducts a detailed survey of household disposable income, adjusted for the number of people living in each household. This provides arguably the most rigorous data on incomes. These figures, detailed in the chart below, show disposable income before and after housing costs, in the regions and countries of the UK.
Before housing costs are factored in, London has the highest median disposable income, although the difference is not as large as for productivity. This is partly due to redistribution through the tax and welfare system.
After housing costs, however, London drops to equal fifth highest, reflecting the sharply higher housing costs in the capital.
Spring Budget 2020: Background briefing, House of Commons Library.
About the author: Daniel Harari is a researcher specialising in the economy at the House of Commons Library.