Published on 16 November 2020
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COVID19  •  Economics

Focus on productivity to make everyone better off

It is essential to be aware of how the crisis is widening existing inequalities across the UK, writes Professor Diane Coyle. "To heal social fractures, we must focus on giving people across the whole of the country access to the opportunities they need to improve their lives."

Just before the second national lockdown, local leaders in Greater Manchester clashed with central government over the imposition of a top tier of COVID lockdown rules. They argued for increased financial support, noting that the new restrictions will see more business closures and unemployment in an area among those hit hardest by almost a decade of budget austerity and where many people are low earners. This is just one vivid example of the way the pandemic is widening existing inequalities and fractures in the economy and society.

Public health measures that limit interactions between people – social distancing, working from home, closure of pubs, clubs, gyms and large events – are essential for controlling the pandemic but also have an impact on jobs. There is no trade-off between the public health rules and the economy – limiting the spread of infection will limit the long term economic damage, but the immediate economic hit is unavoidable. However, it is falling unequally.

People in low paid or precarious work, freelancers, women, young people, have been most likely to lose their jobs or to have to give up work to care for others. Those with professional jobs and above-average incomes have generally been able to work from home and meanwhile have been spending less, saving more.

In the UK, the north of England, parts of Wales and central belt of Scotland have more economically vulnerable people. With a high and rising rate of infection, they have also experienced further local lockdowns and ‘circuit-breakers’, which will make their immediate economic outlook even worse. These traditional industrial areas have seen their fortunes lag ever further behind the south and east of the country for several decades, and have experienced the harshest effects of many years of shrinking public services. They now seem to have even less chance of catching up.

Does the unequal impact of the pandemic and lockdowns mean the present government’s “levelling up” agenda has no hope? It will certainly be more challenging, not least as the outlook for both public health and the economy is extremely uncertain. But the agenda will also be even more important, including politically. Anger, anxiety and loss of hope are driving political divisions everywhere.

It is not only the UK experiencing immense social fractures. Many other rich countries have seen the same trend, towards an emerging knowledge economy concentrating the well-paid jobs and most productive businesses in big cities, with large numbers of people elsewhere who are “left behind”.

How do we build ‘forward’ better?

Our research at the Bennett Institute for Public Policy in Cambridge focuses on the intersecting questions of place and policy, motivated by the challenge of addressing inequality in today’s turbulent world. Our researchers are exploring the drivers of geographic inequalities, from the footprint of austerity-driven reductions in services to the political questions raised by diverging fortunes in different places.

Our latest report finds that investing public funds – in people’s health and skills, and in social, natural, and physical capital – is the best way to bring about a more resilient and prosperous future, and to deliver the ‘levelling up’ agenda. Investments in this inclusive wealth will have a high return as countries look to ‘Build Forward’.

Meanwhile, our newest programme of work is concerned with productivity, the term economists give to the country’s capacity to sustain growth and rising living standards and well-being. Cambridge is one of the leading hubs of the new national Productivity Institute, based in Manchester. Along with policy and business engagement, one of the key strands of our research as part of the new Institute will focus on how people use knowledge – ideas, know-how, information.

For example, there is a large gap between the productivity (and so also profitability and wages paid) of the best and worst firms in every sector of business. Yet technologies and ideas are generally publicly available, so why aren’t they always widely or effectively used? And what about the social context? When is there enough trust within a firm that everybody will try something new, or enough social connections within a community that ideas flow?

We already know that ‘social capital’ or trust, in its different forms, has a big impact on economic success. We discovered this earlier in the pandemic when we were looking at the formation of COVID-19 mutual aid groups as an indicator of social capital. Places where there were more groups relative to the population were those where formal education levels and incomes were highest.

Sometimes dismissed for being too ‘fuzzy’ a concept, the role of social capital and non-monetary aspects of work and business are clearly important in order to understand diverging economic fortunes. As the great economic historian Joel Mokyr once put it, “Economic change in all periods depends, more than economists think, on what people believe.”

Essentially, understanding the knowledge economy including its social dimension will help us understand what has driven inequality – and how future policies and practices might reverse that.

Where should we go from here?

Our long-term research programme is just starting up, but there are some recommendations we offer now.

It is essential to be aware of why the pandemic is having such unequal impacts, and to ensure these lessons inform future policy choices, including health policies. Income improves health, and good health in turn affects people’s potential to earn. An economic downturn leading to sustained loss of income means people’s mental and physical health will deteriorate along with their earning capacity. People can easily be tipped into a lasting downward spiral. Chronically hungry children now mean the nation’s productivity and living standards will be permanently lower when they grow to adulthood.

The government must act specifically to remedy the heavy costs the pandemic has imposed on young people, whether the disruption to their school or university career, or as they lose jobs or fail to get jobs through the autumn and winter. The loss of learning, the mental health impacts, and the experience of unemployment early-on all impose lifetime costs on the individuals affected. And here too, those who are already most deprived will suffer the most.

When it comes to responding to the stark geographic inequalities being amplified by the pandemic, the government response needs to be unequal too. Austerity policies had an uneven spatial footprint; financial support to respond to the current crisis needs to be targeted to the worst-off people and places. These have the weakest public service provision and often also the least social capital, poor health and housing, and the worst access to green spaces and clean air. Populations in England’s poorest towns have on average 12 fewer years of good health than those in the country’s richest towns.

Central government must include other tiers of government, whether the devolved governments or English city mayors and local authorities, in decisions and actions. Local decision-makers have detailed local knowledge the centre cannot possibly access. Perhaps even more important, if not trusted by the centre they will doubt every government claim about “levelling up”, making it even harder to respond to the profound challenges of inequality and social fracture. We are already seeing the consequences of failure to take local knowledge into account in the recent clashes between Greater Manchester and Westminster. Social capital matters for a productive and prosperous future – including social capital within government.

What’s next?

There is no menu of easy short-term options; but there are choices about what kind of future to build.

The UK, like other countries, is in for a significant economic downturn in addition to the losses and anxieties the pandemic is imposing on so many of us.

There will be a temptation for the government to focus both on short-term GDP growth, not least to reduce unemployment, and on restoring order to the public finances. These will be important but they are not the priorities.

This crisis has laid bare many weaknesses of the UK economy and society, and the nation as a whole will not thrive or be productive unless everybody, no matter where, has access to the high-quality education and jobs, clean air, good housing and health services they need to make the most of their lives.

Original source: University of Cambridge Beyond the Pandemic.

Read more: The new Wealth Economy report finds that investing public funds – in people’s health and skills, and in social, natural, and physical capital is the best way to build forward to a more resilient and prosperous future, and to deliver the ‘levelling up’ agenda.

Hear more: Professor Diane Coyle, Dr Matthew Agarwala and Dimitri Zenghelis, from the Wealth Economy project team, discuss the key findings from the report in a podcast:

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The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.


Diane Coyle 2018

Professor Diane Coyle

Bennett Professor of Public Policy and Co-Director of the Bennett Institute for Public Policy

Professor Coyle co-directs the Institute with Professor Kenny. She is heading research under the progress and productivity themes. Biography Professor Dame Diane Coyle is the Bennett Professor of Public Policy...

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