Defining productivity and inclusivity 

The term productivity is used to measure the rate at which inputs, such as capital and labour time, are transformed into outputs, such as goods and services^[1]. There are a range of different ways of measuring inputs and outputs which can lead to different calculations. 

For our analysis of labour productivity, GVA per hour worked is our preferred measure as it is both true to individual’s experiences in terms of the cost on their time and widely available from the ONS at a range of geographies.

For some parts of our evidence base however, we do use different measures such as GVA per worker, where GVA per hour is not available. We also acknowledge that GVA has its limitations as an output measure and have tried to be mindful of this throughout our analysis.

Inclusive growth also has a range of measures that could be used to operationalise the concept. For instance, the OECD defines inclusive growth as “economic growth that is distributed fairly across society and creates opportunities for all”^[2].

In our evidence base we have focussed on three dimensions in particular: labour market participation; poverty and low income; and wealth inequality. All of these have a further cross cutting perspective, looking at the extent these issues manifest across protected characteristics.

Again, this is not to say that these are exhaustive of measures of inclusivity, but they provide a robust set of indicators through which we can begin to explore how inclusivity manifests in the North East and its relationship to productivity.

Why do we care about productivity?

Put simply, productivity gets right to the heart of the efficiency and potential of our regional economy. The North East has a relatively small population, and it is growing more slowly than other parts of the country. That means that if we want our economy to not only grow, but grow more quickly than the national average, we need to improve how much economic output each person is able to produce.

• Productivity improvements are an essential component of economic growth^[1]. Without these improvements we can only improve the size of our economy through bringing more people into employment. There are limits to this approach in the long run as the number of workers is not infinite. In the UK growth since 2010 has mostly come from expanding employment while productivity has flatlined, which may suggest this approach will be less sustainable in the future
• Productivity allows us to do more with less. It therefore expands our options in terms of the kind of economy we can create. If we can do more with less for instance, we could choose to work fewer hours for the same level of economic output. France has a similar population to the UK and a similar economic output, but because their output per hour is much higher, they can work fewer hours 
• The North East labour force is likely to shrink in the near future. The baby boom generation is approaching retirement which means the working age population of the North East is going to fall. The population of the North East grew by just 2% between 2011 and 2021, the lowest growth of any English region, limiting our ability to grow the economy by adding extra worker hours. This will impact on economic growth unless we either improve productivity or increase participation

Why do we care about inclusivity? 

There is an increasing recognition that economic growth, even when driven by productivity improvements – isn’t enough for its own sake^[1]. Its value comes from lifting the living standards of everyone in society. There’s a body of evidence which points to the impact of improving employment prospects, raising income levels and reducing inequality can have on the overall health, wellbeing and living standards of a population.

• Employment is associated with better health and wellbeing. Many studies have shown that being in employment improves health and wellbeing compared to being unemployed^[2][3]. Higher unemployment is a driver of poor health outcomes in the North East
• Poverty and low income determine standards of living. Inclusion cannot just mean employment, as employment has grown significantly in the UK over recent years but this has been mirrored by increased in-work poverty^[4]. The effects can also be long lasting, children who experience poverty are at greater risk of unemployment during adulthood which creates costs to society and an estimated loss of earnings of £12.3 billion^[5] 
• Economic inequality limits the ability of all to benefit from economic growth. Inequalities in income, savings and wealth can mean not everyone can access the opportunities that come with productivity growth. Across rich nations income inequality is also associated with worse outcomes across health, wellbeing and a range of other social indicators^[6].
  1. ^{^} House of Lords Library (2023) Economic growth, inflation and productivity. Available here 
  2. ^{^} The Health Foundation (2022) Relationship between employment and health. Available here. 
  3. ^{^} The Kings Fund (2012) Economic context. Available here.
  4. ^{^} Joseph Rowntree Foundation (2023) UK Poverty 2023. Available here.
  5. ^{^} Child Poverty Action Group (2023) The cost of child poverty in 2023. Available here.
  6. ^{^} Pickett and Wilkinson (2009), The Spirit Level. Available here.

How are productivity and inclusivity mutually supportive?

Not only can productivity and inclusivity be viewed together, but they in fact also often support one another other. Productivity increases can allow for the creation of new jobs and improve wages. But it also allows greater flexibility in the economy, with the potential to dedicate more time and resources towards sectors such as health and education where human connection and the hours spent are the most valuable commodity.

In the other direction, inclusivity plays an important role in unlocking innovation, with a more accessible labour market reaching all the talents of the region’s population, bringing greater diversity of voice and experience, while creating more efficient, robust and effective businesses.

• Productivity growth improves wages and living standards. By increasing the output of workers, productivity improvements can allow employers to pay their employees more. An increase in productivity also reduces the cost per unit which can help bring down prices, and so with wage improvements and lower costs, living standards should rise. In England there is a clear relationship between productivity and average wages across regions and local authorities
• Productivity improves jobs growth. Stronger economies that are seeing productivity improvements also tend to create more jobs overall, meaning there are greater opportunities for employment. This can be true even if there are fewer jobs needed in the sectors with high productivity as wage increases lead to greater demand elsewhere^[1]. Employment rates and productivity are correlated across English local authorities, although the relationship is not as strong as that for pay
• Productivity improvements can allow more time to be devoted to health and education. Improving productivity can allow us to meet our needs in certain sectors more easily with fewer workers, allowing workers to transition into other areas of need. It means that more workers can work in sectors such as health and education with large skills gaps and work to improve overall participation in the labour market. A healthier economy, with higher living standards and higher overall wages can better support all sectors, although skills provision will be needed to support workers transitioning.
• Improving the participation of underrepresented groups can also improve economic performance. Other factors being equal, teams and firms with a diverse range of backgrounds tend to be more likely to outperform finically^[2], while lack of economic mobility can limit productivity growth through decreased competition and dynamism^[3][4]. Therefore improving participation and ensuring all can participate in the economy is itself is one way in which the region can improve its productivity.  
  1. ^{^} Centre for Cities (2018) Does increasing productivity destroy jobs? Available here.
  2. ^{^} McKinsey (2022). Diversity wins: how inclusion matters. Available here..
  3. ^{^} Richard Florida (2017) For a Strong Economy, Focus on Inclusive Growth Available here.
  4. ^{^} Joseph Parilla (2017) Opportunity for growth: How reducing barriers to economic inclusion can benefit workers, firms, and local economies. Available here.

Balancing productivity and inclusivity

The evidence suggests neither a drive purely for increased productivity, or purely for better inclusivity will have the same impact as a balanced approach which prioritises both. It’s important to measure productivity well – simply looking at GVA per hour only tells part of the story – and to look at how related factors like the concentration of economic activity, housing and shifting employment patterns are influenced by increasing productivity.

• Trajectory of productivity in the pandemic. During Covid-19 GVA per hour went up while employment decreased, largely because unproductive sectors were affected more by Covid-19 restrictions. This is an extreme case but highlights participation and improved GVA per hour do not always move in the same direction. Improving headline productivity through such strategies would not be compatible with inclusivity, and highlights the need to view a range of metrics when making judgments on progress
• Productivity improvements tend to be concentrated in a small number of firms. If the improvements in wages from productivity are mostly driven by improvements in particular firms^[1], access to these firms may become ever more important and increase the risk of wage inequality. If these firms cluster geographicaly there is an added dimension of ensuring workers can commute to these areas
• Shifts in employment. Improving productivity increases wages and decreases the costs of goods and services. However, it can also mean that fewer jobs are required in sectors that see productivity growth, manufacturing employment has significantly fallen for example as productivity improvements have improved output. In the long run this tends to create more jobs in other sectors, but these are not necessarily sectors in which the same workers have the skills or inclination to work in. This highlights the importance of tying skills provision to local industrial strategy
• Housing costs increase at a greater rate than wages. Economic output has become increasingly concentrated in recent years in a relatively small number of areas, a trend which may increase with further productivity improvements. This puts a premium on housing and associated costs near these areas, which is why housing affordability is negatively correlated with productivity in England. Housing and transport connectivity should form part of any drive towards greater productivity, and it should be noted the North East shows affordability alone does not necessarily translate into increased ownership 
  1. ^{^} D. Andrews, C. Criscuolo and P.N. Gal (2019) The Best versus the Rest: Divergence across Firms duringthe Global Productivity Slowdown: Available here.

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 what the evidence tells us about inclusive productivity in the North East.