The productivity challenge 

The data tells us that the North East has a productivity challenge. It has this in common with the UK as a whole, and with many of our regional neighbours, but the North East picture also has its own distinctive features.

• Output per hour worked is lower in the North East than the national average. The gap between the North East LEP area and England excluding London is larger than at any other point in the two decades that data is available for. This is partly because some of the most productive sectors in the North East such as the automotive sector were more heavily impacted by Covid-19 
• Output is lower in the North East both because of the sectoral composition of the region and because sectors are less productive in the North East. Workers in the North East work fewer hours in highly productive sectors such as information technology and business services, and nearly all sectors are less productive in the North East. The challenge is to both increase the proportion of employment in high-productivity sectors and to raise productivity across all sectors
• Output in the region has been becoming more geographically concentrated over time. Some built up areas in the North East with low output per worker have caught up with the regional average since 2009, including areas such as Ashington, Blyth and South Shields. Despite this, the overall economic output in the region has been becoming more concentrated geographically with over half of output from just 5% of neighbourhoods
   

The inclusivity challenge 

As well as productivity in the region holding back overall growth, the North East also faces a range of inclusivity challenges. Employment is unevenly spread, with rates lower among workers in many groups with protected characteristics less likely to be in employment than the average. Although this also true in other regions, the gap compared to the national rate for many of these groups is especially large. Low pay, poverty and income inequality are all issues, as is an uneven distribution of wealth in the region.

• Low and unevenly distributed employment rate. The North East has a low employment rate compared to the national average. As with other regions, older workers, disabled workers, people from ethnic minorities and female workers are all less likely to be in employment in the North East. Within these groups, people with a disability and those in older age groups have especially large employment gaps compared to the national average and the same is also true for male workers
• Low pay and poverty. Employment alone also does not always ensure a decent standard of living with the region having a higher portion of jobs that pay below the living wage than the national average. Among the nine English regions, the North East region has the highest percentage of total household income from state support and the lowest percentage from employment. One consequence is that 1 in 5 children are growing up in low-income families, which can have a seriously negative impact on their future life chances
• Income inequality but at a lower rate than other regions. There are large differences in terms of individual and household income in the North East, and these differences tend to be larger than differences between regions. However, these inequalities are small by national standards even after accounting for housing costs. The main inclusivity challenge in the region in relation to income is there is a higher percentage of households in the low income groups than nationally.
• Unequal distribution of savings and property wealth. In contrast to income the North East has the second highest level of wealth inequality in England after London. This is because savings are very unevenly distributed, with most households having no or only a very small amount of savings. The uneven distribution of property wealth also contributes, with home ownership rates in the region being low despite the relative affordability of housing. Both of these are linked to low pay in the region

Interaction between productivity and inclusivity

The evidence shows us that productivity is linked to higher wages in the North East and beyond, but productive sectors are not always the most inclusive.

• Productivity and higher wages are positively correlated across UK regions and North East sectors. The relative low productivity of the region is one of the reasons that wages are low in the North East, improving productivity is one way of trying to improve the standard of living in the region, combatting low pay and poverty
• Older workers, disabled workers and ethnic minority workers are less likely to work in more productive sectors. This suggests that these groups face barriers to participation in highly productive sectors. We need to consider how to improve the prospect of employment as well as distributing the benefits of productivity improvements to those who do not directly work in high productivity sectors
• Women are slightly less likely to work in productive sectors but more productive sectors in the region display smaller gender pay gaps. This demonstrates that increasing productivity does not have to come at the expense of progress on inclusivity, although the region will need to be careful that any strategy to improve productivity does not change this trend 
   

Enablers of productivity and inclusivity

The evidence suggests there are some enablers which can improve both productivity and inclusivity in the North East. These primarily involve supporting individuals through things like qualifications to gain appropriate skills or improving health outcomes to increase participation in the workforce. Support for businesses is important too, embedding innovation and increasing R&D.

• Qualifications and productivity are positively correlated in the North East. This is because qualifications in general help workers increase their productivity, but also because qualifications are often necessary to access employment in high productivity sectors. The North East has lower rates of highly qualified workers and improving this is one way which the North East can work on both productivity and inclusivity
• The North East has higher rates of ill health than the national average. One of the major reasons that people do not find employment in the North East is ill health, but even if they do find a job health conditions are likely to limit the output of workers. Addressing health inequalities in the North of England could increase productivity by an estimated £20.2 billion in GVA^[1]. Improving health and improving the ability to those with long term health conditions is likely to both improve inclusion and productivity in the region
• Improving the connectivity between workers and employment hubs can help residents find jobs and employers find productive workers. In general, connections to major employment centres are strong in the North East due the primarily urban nature of the region. However, there are pockets of poorer connectivity, particularly in more rural areas, which limits the ability of residents in these areas to benefit from jobs growth. The increasing concentration of economic output in the North East makes connectivity even more important from an inclusivity perspective
• Improving the digital capabilities of firms and workers. Digital capabilities have the potential to considerably improve the productivity of firms and workers across the North East. The digital infrastructure in the region, except for more rural areas, is generally strong. However, there are clear digital skills gaps in the workforce which are a barrier to both inclusion and higher productivity^[2], suggesting that a focus on digital skill in particular is one way of growing an inclusive regional economy

Additional data

These are only some of the major drivers of productivity and barriers to inclusivity in the North East. We don’t have scope to cover all factors in detail in this section of the Evidence Hub, but you can explore some of many other drivers in the region on the data reports below.

Other Our Economy pages

This spotlight page is just one aspect of our analysis for Our Economy this year. You can also explore our international case studies which examine how comparator regions across the world have approached their own challenges with inclusive growth, as well as our other inclusive productivity page looking at the conceptual links between the two concepts.