After one of the worst decades for productivity growth in the UK’s modern history, few people now doubt the scale of the country’s productivity problem. What has been less clear is its cause and how to tackle it.
Recently, the idea that the root cause of the problem is a ‘long tail’ of underperforming firms across the country has been gaining popularity with policymakers. In this theory, the key to raising national productivity – and giving people across the country a pay rise – is to support these businesses to improve their performance.
This thinking underpins the government’s business productivity review. It aims to explore how businesses can increase their productivity through new technology and better management techniques. The government estimates this could help unlock an extra £100bn for the national economy.
Unfortunately, however, new Centre for Cities analysis suggests these efforts could be doomed to fail. It shows policymakers are right to identify the ‘long tail’ of underperforming firms, but wrong to pin their hopes of boosting national productivity on them.
That’s because the UK’s least productive firms are almost without exception those which only serve local markets, such as hairdressers, cafés and small construction companies. These kinds of businesses have seen little or no growth in productivity for decades – and are unlikely to in future – primarily because of their limited capacity to benefit from technological advances.
Instead, the analysis shows the key to addressing the UK’s problem is to help already high-performing businesses do even better. That means focusing on firms which export across the country and globe, particularly in sectors such as ICT, manufacturing and pharmaceuticals.
These firms are more productive – and will continue to be – because of their ability to capitalise on changes such as automation and improvements in software.
Looking at where highly productive firms are based in the UK reveals another crucial and overlooked element in the productivity puzzle: how it plays out differently across the country. The report shows that high performing firms are disproportionately based in cities in the Greater South East.
What does all this mean for local leaders? Firstly, it seems that the best way to improve local productivity levels is to focus on helping high-performing firms to do even better rather than supporting struggling firms to up their game.
In cities in the Greater South East, that will primarily mean addressing the expenses that come with economic growth – such as high housing costs, or greater demand for transport infrastructure.
For cities elsewhere in the country, the focus should be on tackling the obstacles which have deterred highly productive businesses from locating there – upskilling the local workforce, for example, or making their city centres better environments for these kinds of firms to locate in.
In these ways, local leaders can play an important part in addressing the productivity puzzle.
Andrew Carter, chief executive, Centre for Cities