Introduction
The mainstream narrative about the UK economy seems to have settled on the view that investment has been low, leading to poor productivity. The narrative is then turned into a call to action, framing productivity as the only means of raising living standards.
At a local level, however, the economic development focus has been somewhat split between individual combined authorities and local authorities. There is an increased focus on developing inclusive economic strategies to ensure that the economy benefits all residents.
Of course, there are always ‘cakeists’ who want both, but how do you invest in a high-growth, high-skills economy if only a small proportion of residents have the skills to take up the job opportunities available?
The case for productivity
The case for productivity is that the UK economy has finite resources and a reasonably fixed labour pool. If the country wants to have more to share (through wages and government expenditure), the only way to grow the overall pot is to ensure that output per hour of effort rises.
There seems to have been little challenge to this idea, and it is now rolled out in every media commentary on the UK economy. Like so much media coverage of economics, the argument is overly simplistic and flawed.
At a national level, 500,000 more people are now economically inactive because of poor health since the start of the COVID-19 pandemic. In total, 2.5 million people in the UK are inactive due to a long-term health condition. The economically inactive are not included in any productivity calculation. The size of the UK economy would grow if some of those currently ill could be supported back into work, no matter how unproductive those roles were. This approach could also reduce government expenditure on benefits, thereby providing a double benefit.
At a local level, the productivity argument is even more problematic. The ONS calculates local productivity by apportioning values to sectors. The claim that Region X has a productivity gap of Y% compared with Region Z is really a statement that Region X has industries that generate lower profits. The Industrial Strategy makes the case for foundational industries. In some cases, despite their low value-add, these industries are needed to enable other parts of the economy to perform. Where would the high-flying pharmaceutical producer be, for example, if there were no transport and logistics industry to get the products to market?
A focus on productivity is not a panacea.
Inclusivity
The case for inclusivity can be made compellingly. Perhaps the most famous quote of recent years was from a speech by Jacinda Ardern, then PM of New Zealand, who said, ‘Economic growth accompanied by worsening social outcomes is not success, it is failure’.
A strategy focused on inclusivity emphasises equality of opportunity and redoubles efforts to ensure that those in society who face barriers to education and employment have different routes and opportunities to improve their life outcomes.
As the focus of all economic activity, however, a narrow focus on improving inclusive outcomes risks limiting endeavour and innovation in the most productive parts of the economy.
Is a choice required?
In an ideal world, both productivity and inclusivity might be achievable, but in a world of scarce resources, the choice is likely real. A focus on building an innovation-led high-value economy looks different to working with the foundation economy to enable greater opportunities for those not in employment, education or training.
The focus
The appropriate focus is likely to differ depending on the type of area involved. This is hardly an ingenious idea, although the current narrative on productivity-led growth might have us believe that it is heretical.
We examined all Local Authorities across England to identify an appropriate area of focus. The graph below shows skill levels and inactivity due to ill health and as a first step considers four quadrants of authority.
Whilst other nuances could be built into the approach, the graph suggests four different areas of focus.
Low skills / poor health outcomes – a focus on creating pathways to fulfilling employment, working on pre-employment support, and with those employers willing to support part-time work or a phased return to employment.
High skills / poor health outcomes – in these areas, there is a need to focus on providing a wider range of potential work roles across different sectors, which can offer more opportunities for those struggling with various health conditions.
Low-skills / high-participation rate – these areas will benefit from initiatives to boost workforce skills.
High skills / high-participation rate – These areas can benefit most from initiatives to drive greater investment in high-value businesses and productivity.
Conclusion
The answer for the UK economy is not a choice between productivity and inclusivity; at the local level, a prioritised approach is needed. Selecting the correct strategy will obviously depend on the particular circumstances of the area, but where inactivity rates are high, shifting the dial on this issue can achieve perhaps more for the national economy, as seeking productivity gains whilst also improving life outcomes for residents.
Mickledore is an economic advisory business focused on strategy, sector investment, business planning and evaluation. If you are interested in examining the economic priorities your own area contact nwilcock@regionaldevelopment.co.uk