Between 2015 and 2020 national labour productivity (output per hour worked) grew by 2.1%, and despite the Covid-19 pandemic it increased by another 0.4% between 2019 and 2020. These aggregate figures, however, mask a great deal of divergence in performance across the sectors of the economy. And this divergence in productivity across sectors will most likely make the government’s aim of levelling up much harder to achieve.
One of the major reasons why national labour productivity growth was positive between 2019 and 2020 was because it was boosted by an increase in the public sector labour share, which has a higher value added per hour. But there are particular measurement complexities in the public sector.
Private sector labour productivity increased by 1.4% between 2015-2019, but then fell by 3.4% between 2019 and 2020, largely due to the effects of the pandemic. From 2015-19, value added per hour within individual sectors rose by 2.5% (labelled ‘within effect’ in Table 1). But because labour shifted into lower value added activities (labelled ‘between effect’), the productivity growth outcome was lower.
Chart 1: Comparison of sectoral labour productivity growth 2015-2019 and 2019-2020
The manufacturing sector has been key to the disappointing figures. Manufacturing is a high value added activity, generating an average of £48 per hour versus the median value of £32 per hour across the whole economy. As overall value added per hour remained static in manufacturing, the decline in productivity growth has been driven by a fall in its share, with labour shifting to other, lower value sectors.
Given that the manufacturing sector is a much higher proportion of the economy in the Midlands and North of the country, this can only exacerbate regional inequality and make the levelling up agenda that much harder to achieve.
A brief analysis of two manufacturing sectors, pharmaceuticals and transportation, highlights some of the challenges facing policymakers. The pharmaceuticals sector, with value added of £148 per hour saw limited productivity growth between 2015-19, although its labour share did increase. The sector boosted national productivity growth by 0.1% between 2019-2020 reflecting the role of the sector in responding to the pandemic. Indeed, the life sciences sector has been identified by the government as a key sector, with the Queen’s Speech proposing an increase in public expenditure on related research and development to £22 billion.
The manufacture of transportation, which includes automotive and aerospace, is twice the size of the pharmaceutical sector in terms of GVA, although it has a lower value added per hour of £47. This is one of the few manufacturing sectors that has seen both a decline in value added per hour as well as a fall in its labour share. Furthermore, as argued here, the manufacturing of transportation equipment is likely to be negatively affected by the negotiated settlement with the EU which has increased trade frictions.
How does this sectoral pattern relate to levelling up? The challenge for the government is that the transportation sector’s activities are concentrated in the West Midlands and the North West, followed by the South West (largely aerospace) and the East Midlands. Hence the fall in its value added per hour is likely to weigh on future wage growth in these areas, while its declining labour share is causing labour to shift into lower value added service roles. Hence regions that ought to be a priority for levelling up, are battling greater relative productivity decline because of the industries that are concentrated there. Furthermore, the pharmaceutical sector, which saw the greatest increase in productivity growth between 2019-2020 for manufacturing, is well represented in the south east as the regional distribution of activity shows in chart 2.Chart 2: Transport and Pharmaceutical manufacturing GVA by regionSource: ONS
The sector with the highest productivity growth between 2015-2019 was Information & Communication, at 0.8%. This sector also showed resilience to the pandemic, growing an additional 0.1% between 2019-20. However, it is geographically concentrated in the South East of the country, accounting for 67% of the sector’s GVA as shown in chart 3. This analysis of the overlap between sectoral performance and geographic concentration shows that the levelling up challenge in terms of productivity may get worse.
Chart 3: Information & Communication GVA by region
What can policymakers can do in response? Starting in the late 1990s regional strategies started to be developed through regional development agencies and in a more piecemeal fashion through their successor bodies, local enterprise partnerships and city region combined authorities. However, for these strategies to be successful requires central government buy-in, as well as financial support. For example, while the North West has considerable capabilities in pharmaceuticals in a high potential sector, central government supported the decision to locate the Francis Crick Institute in London, with a capital grant of £220m.
The government’s current approach to industrial strategy appears to be based on investment in science combined with a broader focus on net zero. In principle this could mean that some low growth regions might benefit from investment in targeted tradeable sectors that have strong growth potential and existing capabilities. For example, the Humber Estuary has benefitted from investment in offshore wind which was supported by government subsidies. It was also noted here that the electrical vehicle market requires the UK’s chemical sector to be able to provide the necessary components for batteries to maintain tariff free trade with the EU; 45% of the chemicals sector is based in the North West, Yorkshire and the North East – all regions that could benefit from incremental investment.
But the headwinds against levelling up are strong. While it is plausible that a handful of growth sectors might be supported by both regional and central government where some skills base already exists, the current trend in terms of sectoral performance in many areas continues to favour the South East of the country.
 2019 Constant figures used
 Latest regional GVA data available at the detailed industry classification is for 2017
About the author
Thomas Aubrey is the founder of Credit Capital Advisory. He has written widely on financial and economic issues including Profiting from Monetary Policy (2012) and co-authored Prediction Markets: The end of the regulatory state? (2007) with Professor Frank Vibert. He has also acted as a senior policy advisor for a number of British, European and Asian public bodies on areas including capital markets, corporate governance, housing and industrial strategy.