WIP0012

Written evidence submitted by Professor Melanie Jones, Professor of Economics at Cardiff University

I am writing in my capacity as academic lead for the Wales Productivity Forum, which is one of eight regional forums of the Economic and Social Research Council (ESRC) funded Productivity Institute (TPI).[1] The Wales Forum is led by Cardiff University, but members bring expertise from academic, policy, business and public sector backgrounds. Our aim is to support the implementation of research insights, including those developed by the TPI, into the design of practical interventions for policy and business practice to raise productivity in Wales. More information is available at: Wales Productivity Forum - The Productivity Institute.

The forum has recently released an insights paper Wales’ Productivity Challenge: A Focus on the Future which sets out the scale and nature of Wales’ productivity challenge, its importance for future wellbeing of the population and the practical steps that need to be taken to address it. This evidence draws on the findings of the paper which are most pertinent to the Call for Evidence, particularly relating to the role of deindustrialisation on the productivity challenge and future economic growth in Wales.[2]

What is Wales’ productivity challenge?

Economic growth is driven either by increasing the quantity of inputs, for example, in terms of employment rates or hours worked, or raising productivity of given inputs. The latter can be thought of as increasing the value of goods and services produced with existing inputs. At a national level, productivity is typically measured in terms of Gross Value Added (GVA) per worker or per hour worked, where GVA is the additional value of goods and services produced relative to the value of materials. Over the last decade the employment rate in Wales has converged towards the UK average.[3] Despite this, Wales’ relatively low economic output has been a persistent challenge. An important part of the explanation lies in Wales’ weak productivity growth.

Wales’ productivity challenge can be separated into three elements. First, Wales shares the UK’s ‘productivity puzzle’, the slowdown in productivity growth since the 2008 financial crisis. Second, Wales’ productivity is significantly below the UK average (about 17%) and has shown no signs of convergence over time.[4] Third, there is variation in productivity within Wales, with productivity in areas such as Powys, Gwynedd and Conwy and Denbighshire among the lowest in the UK.

What drives Wales’ productivity gap?

While it is not possible to identify all the mechanisms through which Wales’ past industrial structure might influence contemporary economic growth, Wales’ productivity challenge is not simply a consequence of its current industrial structure given there is evidence of productivity gaps between Wales and the UK average within most broad industry sectors (see Figure 1 below). Albeit these broad groupings might conceal important differences in composition within industries, Wales’ productivity gap is not driven by its greater reliance on the manufacturing sector, since manufacturing productivity is higher in Wales than the UK average. Wales’ intra-industry productivity gaps are most pronounced in non-manufacturing production, information and communication industries and professional, scientific, and technical activities, where productivity is more than 30% below the UK average. In summary, aligning Wales’ industrial structure to the rest of the UK would not address much of Wales’ productivity challenge.

Figure 1. Wales-UK Productivity Gaps by Industry in 2019

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Source: Replicated from Jones (2024) (Figure 4). ONS (2021): Region by industry labour productivity - Office for National Statistics.

Notes: Experimental statistics. Output per hour by industry section. Gap measured as a comparison between Wales and the UK industry average.

Instead, as we set out in the paper, Wales’ productivity gap with the rest of the UK is likely to be explained by gaps in a range of known drivers of productivity relating to individuals, businesses, and the external environment, which includes government policy and physical infrastructure. Our analysis of contemporary data shows that, relative to the UK average:

Business spending on Research and Development (R&D) per job is lower in Wales.
Small and Medium Sized Enterprises (SMEs) in Wales report greater barriers to accessing finance.
A relatively high proportion of the working-age population in Wales possess low levels of education attainment (NVQ1 or lower).
There is a higher prevalence of long-term limiting health problems among workers in Wales.
Wales has lower levels of capital formation (which capture both public and private sector investment into tangible and intangible assets).
The digital infrastructure (as measured by gigabit-capable internet services) is less well-developed in Wales.
The peripheral location, relatively sparsely distributed nature of population and lack of large cities means that Wales does not benefit from agglomeration economies.

While not independent from Wales’ past and current industrial structure, these factors are broader determinants of productivity and economic growth in Wales. In this respect, future productivity growth in Wales need not be determined by its industrial past. While the data at local level are subject to greater measurement error, analysis of the intra-regional variation in productivity in Wales shows that the South Wales Valleys, perhaps most associated with the decline in heavy industry in Wales, are not among the worst performing areas in terms of productivity. Instead, there is an East-West or urban-rural differential (see Jones, 2024, Figure 3). Productivity is less than 95% of the Welsh average in Powys, Gwynedd, Conwy and Denbighshire and, South West Wales (Ceredigion, Carmarthenshire, Pembrokeshire). The least productive areas in Wales are also among the least productive in the UK. Productivity in Powys (at only 63% of the UK average) is the lowest in the UK and, Powys, Gwynedd and Conwy and Denbighshire are among the five least productive local areas in the UK.

Why is Wales’ productivity challenge important?

The importance of productivity to living standards and economic wellbeing is often neglected in the public and policy debate. Yet, productivity growth is the main determinant of long-run growth in real wages, directly affecting household incomes and living standards. Productivity growth is also important for business, public service delivery and the government budget. Within the public sector productivity growth offers a way of increasing capacity and therefore can reduce overcrowding and waiting lists. Higher real wages also increase taxation revenue and reduce the demands on government spending, meaning the government has more opportunities to invest in long-term and social objectives. In this respect productivity growth is key to achieving many of the aims of the Well-being of Future Generations (Wales) Act 2015 and, carefully managed, can support both broader environmental and social agendas.

How can Wales address its productivity challenge?

Our paper makes clear that addressing Wales’ productivity challenge requires a long-term commitment, coordinated action and investment in people and infrastructure. Policy should focus on the gaps identified in Section 2 would include improving levels of basic educational attainment and, transport and digital infrastructure. We argue the Welsh Government has an important leadership role, but that success will depend on broader support from the UK government as well as other stakeholders including businesses, public service delivery providers and citizens more broadly. For productivity growth in Wales to exceed the UK average requires that UK growth policies do not disadvantage Wales. To engage necessary stakeholders, we recommend a national conversation on productivity, including improving understanding of what it is, why it is important, and the proactive steps stakeholders can play. In relation to this, we argue there is a need to promote productivity growth both among businesses and within the public sector.

This policy agenda would be supported by establishing a Welsh Productivity Commission comprised of independent experts who could provide external scrutiny and guidance in relation to informing, and evaluating, policy and progress. This would also serve as a long-term public commitment to improving productivity in Wales.

1 February 2025

[2] The paper, and therefore this evidence, develops ideas discussed at the Wales Productivity Forum and I am grateful to all members for sharing their expertise. I am also grateful to Max Munday and Julia Diniz for comments on an earlier version of this submission.

[3] However, employment rates in several of the traditional industrial areas remain persistently below the Welsh average, for example, Blaenau Gwent and Rhondda Cynon Taf.