Regional productivity gaps at near record high

Differences in typical household incomes across the UK’s regions and nations have halved since their 1990 peak, but differences in productivity remain close to record highs, according to new research published by the Resolution Foundation. The report, Mapping Gaps, examines the relative economic performance of UK regions and nations since the 1960s, and the extent to which this has driven differences in household living standards. The report notes that regional inequality is a hot topic ­– particularly since the EU referendum exposed huge voting divides between London, Scotland and Northern Ireland, and the rest of the UK – and that the UK is one of the most unequal countries in the OECD when it comes to the relative economic performance of its regions and nations.

On the key productivity measure of output per worker, the UK is the most geographically unequal G7 country, with even greater inequality than the US. Across the UK, output per hour worked varies by around 56 per cent between the most and least productive parts of the country  which are London and Wales respectively (Cardiff pictured). However, Mapping Gaps shows that a different picture emerges when looking at typical household incomes after housing costs across the UK regions and nations. This is partly due to the state reducing gaps through redistributive policies, and because geographic income inequality has fallen over the last 30 years.

[perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The country’s unequal economic geography does not mean that living standards divides are equally stark[/perfectpullquote]

The report found that geographic income inequality increased during the 1980s, and peaked in 1990. In that year, typical incomes in the South East (the richest region) were 40 per cent higher than in Scotland (the poorest region or nation at the time). However, geographic income inequality has fallen steadily since 1990. Today, typical incomes in the South East are now just 20 per cent higher than in the North East (now the poorest region of the UK). As a result, geographic income inequality in the UK is higher than Germany, Japan and most Nordic countries, but lower than the US, Canada, Italy and Spain.

The Foundation says that there are positive and negative reasons for falling geographic inequality. Rising employment in recent years has helped to reduce the variation in employment rates across the UK, while a higher minimum wage has helped to reduce geographic pay gaps. Less positively, rising housing costs have borne down most heavily on living standards in London and the South East.

However, the report cautions that while regional household income gaps have been falling across the UK, policy makers shouldn’t be complacent about geographic income inequality. It says that with UK employment already at a record high, the key to big, sustainable falls in geographic inequality in the future are more likely to rest on reducing the UK’s big productivity divides, as this is the ultimate driver of pay and living standards.

Stephen Clarke, Senior Economic Analyst at the Resolution Foundation, said: “The UK has long been a highly unequal country when it comes to the economic performance of its regions and nations. But the country’s unequal economic geography does not mean that living standards divides are equally stark. The state plays a key role in redistributing towards poorer parts of the UK. And over recent decades, rising employment and – less positively – richer areas bearing the brunt of rising housing costs, have helped to halve geographic income inequality. But this doesn’t mean we should stop worrying about the issue. Regional differences in economic performance remain stubbornly high. Closing these gaps, particularly through addressing problems in less productive parts of the UK, will hold the key to stronger, shared economic growth.”