About the research
This research analysed regional differences in productivity across Great Britain, with a particular emphasis on quantifying and explaining the productivity advantage of London.
Key messages
- Estimates of total factor productivity (TFP) derived from Office for National Statistics (ONS) business surveys showed that mean TFP was far greater in London than in all other regions and major cities
- Results from a decomposition analysis suggested that only a small part of London’s TFP advantage was attributable to plants in London having different characteristics to plants in other regions
- This implies that, rather than attempting to improve the characteristics of plants in low-productivity regions, levelling-up policy should target the underlying drivers of regional productivity differences
The challenge
The United Kingdom economy is one of the most regionally imbalanced in Europe. The aim of the work was therefore to provide estimates of total factor productivity (TFP) for different regions and cities of Great Britain and to use these to investigate the source of London’s productivity advantage. Such information will be useful for different tiers of government by helping them to identify the appropriate target of policy to improve productivity in low-productivity regions.
The approach
The research involved two stages, both of which were based on regression analysis. First, estimates of TFP were constructed using plant-level data covering 1997–2018 from the ONS’s Annual Business Survey.
Second, the difference in the mean of the natural logarithm of TFP between London and the rest of Great Britain was decomposed into an ‘explained’ and an ‘unexplained’ component. The ‘explained component’ shows the contribution to the productivity gap of differences in plant characteristics. The characteristics considered in the research were the following:
- multinational ownership
- trade involvement
- enterprise structure
- age
- R&D investment
- subsidization
- size
- industry
All variables were derived from the ONS datasets below.
Data used from the UK Data Service collection
Office for National Statistics. (2020). Annual Business Survey, 2008-2018: Secure Access. [data collection]. 13th Edition. UK Data Service. SN: 7451, DOI: http://doi.org/10.5255/UKDA-SN-7451-13
Office for National Statistics. (2021a). Annual Inquiry into Foreign Direct Investment, 1996-2019: Secure Access. [data collection]. 8th Edition. UK Data Service. SN: 6664, DOI: http://doi.org/10.5255/UKDA-SN-6664-9
Office for National Statistics. (2021b). Business Expenditure on Research and Development, 1995-2018: Secure Access. [data collection]. 9th Edition. UK Data Service. SN: 6690, DOI: http://doi.org/10.5255/UKDA-SN-6690-9
Research findings
London was found to be far more productive than all other regions in Great Britain: the difference in (log) TFP between London and the second most productive region (the South East of England) was greater than the range of (log) TFP across all regions outside of London. Productivity generally fell towards the north and periphery of Great Britain. Other major cities also had substantially lower productivity than London.
In the baseline set of results, less than a third of the difference in (log) TFP between London and the rest of Great Britain was predicted by differences in plant characteristics. The lower average age of plants and the greater presence of high-productivity industries in London were the largest contributors to this ‘explained’ component. Comparison of London with other major cities showed that differences in plant characteristics only predicted 27% of the productivity gap.
Recommendations for policy
The key implication is that policies that aim to reduce inter-regional differences in plant characteristics, such as increasing exporting in low-productivity regions to the levels observed in London, may have only a small effect on regional productivity differentials. Instead, policy should target the underlying factors which drive productivity differences across regions.
The impact
The authors were invited to give a presentation based on the research to officials at the Welsh Government and the findings were subsequently discussed in the Report of the Chief Economist of the Welsh Government on the 2022 Welsh Budget in a section on the reasons for Wales’ relatively low productivity. The paper has also, to date, been cited eight times in published academic papers. Results from early drafts of the paper received media coverage from outlets including the The Times and were used as part of a submission to the Treasury Select Committee on Regional Imbalances in the UK.
The research’s conclusions have important implications for the government’s ‘levelling-up’ agenda. For example, they suggest that the direct effect on regional productivity differences of measures to increase rates of inward investment, exporting or R&D in less productive regions will be small. The results instead support policy that addresses the underlying causes of lower productivity outside London such as investment in transport infrastructure or improvements to the quality of local government, potentially through greater devolution of spending and decision-making powers.
Read the research
Regional Studies article, 2022: The Geographic Dimension of Productivity in Great Britain, 2011-2018: the Sources of the London Productivity Advantage
This case study was commissioned by the Office for National Statistics and developed in collaboration with the UK Data Service Impact team. The data used in this case study was supplied to the UKDS SecureLab by the ONS Secure Research Service, an accredited trusted research environment, that uses the Five Safes Framework to provide secure access to de-identified, unpublished data. If you use ONS’ Secure data and would like to discuss writing a future case study with us, please get in touch at IDS.Impact@ons.gov.uk.