Today
Fri 17 September 2021

Jonathan Portes examines the real forces at play, which will require addressing, as part of the Prime Minister’s flagship policy for his new ‘Red Wall’ constituencies 

The UK is one of the most regionally unequal countries in the developed world. 

Productivity in its capital, London, is 75% above the national average – comparable to the difference between Germany and Slovakia. The western half of inner London is the richest and most productive region in Europe, while much of the rest of the UK, especially the north of England and Wales, is as poor as Portugal or parts of eastern Europe.   

London has the highest levels of child poverty in the UK, with half of the children in some boroughs living under the poverty line. Indeed, there are more poor children in the capital than in Scotland and Wales combined. Most Londoners are far from rich; after taking housing costs into account, the average household in London has an income slightly lower than the national average. Unemployment, too, is higher in London than elsewhere in the UK, and was so even before the Coronavirus pandemic.

In arithmetic terms, the explanation is relatively simple.  

London, and the greater south-east, are indeed much more productive than the rest of the UK – the amount produced by the average worker is much higher. But this does not necessarily translate into higher household incomes. This is for several reasons.

First, the rewards of this higher productivity are very unevenly distributed. The very highest earners in the country are overwhelmingly concentrated in London, pushing up average wages – but there are hundreds of thousands of low paid workers, and relatively high levels of unemployment.

Second, housing (and other) costs are much higher in London, so London workers need to earn quite a bit more to have the same disposable incomes as counterparts elsewhere.

And third, while the UK tax and benefit system is quite redistributive, with high-earners paying a lot of tax on their incomes – and much of that money recycled by the state by public services, pensions and other benefits – this happens at a national not local level. Therefore, overall, much of London’s extra output is redistributed to the rest of the country, meaning that incomes, especially after housing costs, are much more equal than productivity.  

Moreover, over the past decade, both dimensions of inequality have been exacerbated by government policy. Cuts to benefits for low-income families and children, and housing benefits, have worsened child poverty nationally, but especially in London – at the same time as pensions have been relatively protected. Meanwhile, cuts to local authority spending have been concentrated on poor areas which relied most heavily on central government funding, hurting both deprived areas of London and disadvantaged areas of the north. And, while London has subsidised the rest of the country when it comes to benefits and public services, it hasn’t done so in terms of transport and infrastructure spending, which have been concentrated in the south-east.

This explains the apparent paradox described above: productivity and prosperity in the UK is about place – and some places are much more productive than others. But poverty is very much about people. Your education and background matters a lot more than where you live as to whether you have a job, how much you earn, and your standard of living. And it explains why when politicians talk about ‘levelling-up’ the north or about ‘left-behind’ areas – or worse still complain about the ‘metropolitan elite’ – the response from those of us who work on poverty and inequality is to say that this misses the point and ignores many of those in greatest need of help. 

But in fact, the two phenomena are intimately connected. 


The Rise of the Service Sector

The roots of these divisions lie in the deindustrialisation of the 1970s and 1980s. The story of the industrial heartlands of the north and Midlands, and coal mining areas, is well known. But it is often forgotten that London had a large light manufacturing sector well into that period. Its decline, and the closure of the docks, meant that London too lost hundreds of thousands of skilled manual jobs. Indeed, the population of inner London fell by more than one-fifth in the 1970s. 

Equally, it is well known that London’s recovery and current prosperity was built on globalisation, immigration and the dominance of the service sector. But less obvious is the dual nature of the resulting economic structure.

On the one hand, there was high productivity in globally competitive sectors in the ‘knowledge economy’ such as financial services, the legal service, advertising, journalism, design and higher education. Often these services are tradeable, and benefit from the economics of agglomeration – bigger means better – where their concentration in London increases the size of the talent pool and makes them more productive. On the other hand, there were lower productivity, labour-intensive non-tradeable services that also benefit from agglomeration, but in a different way: they thrive because there are lots of people living and working in a densely populated area: restaurants, transport, delivery services, and so on. 

Since the distinct parts of the service sector feed on each other, and benefit from agglomeration, growth leads – at least up until the Coronavirus – to more growth. The result is an economy that is overall very productive, but also very unequal – and very dependent on inward immigration, both domestically and internationally, of younger workers. It has also led to an increasingly two-tier labour market, characterised by insecurity and ‘precarious work’, especially for the young, not just in services such as delivery and taxis, but also in some professional occupations like journalism and the arts.

Meanwhile, the aftermath of deindustrialisation elsewhere is somewhat different. 

While manufacturing is essentially non-existent in London, the UK still manufactures as much as it ever did. But that is not the case for jobs – the growth in manufacturing productivity means that far fewer skilled workers are required to produce the same amount of goods. What’s replaced manufacturing jobs? Again, service sector jobs. Even in the areas of the country which remain most dependent on manufacturing, far more people work in services; in no region does manufacturing account for much more than one job in 10. But, benefiting less from agglomeration, those jobs are – especially outside of some successful large cities – on average considerably less productive than in London and its periphery. And, while the centre of government and hence senior civil servants are concentrated in London, overall only one in seven Londoners works in the public sector, compared to more than one in five in the north-east (and more than one in four in Northern Ireland). Public sector pay is considerably more generous relative to the private sector outside London. 

So there are jobs – even in the most deprived areas of the country, employment rates are at historically very high levels – but different jobs to those of the 1980s and before. They are much more likely to be in the service sector, much more likely to be done by women, and again, outside of the public sector, often less secure. 

Of course, just as there is huge variation within London, there is even more variation outside it. The least dynamic local economies are in places which don’t have high value manufacturing or service industries, but aren’t well enough connected to large cities to become suburbs or commuting areas.  

So what does this mean for ‘levelling-up’, both between people and places? 

Ultimately what links the two is the labour market. The analysis above suggests that the key driver of developments has been the shift from manufacturing to services and, in particular, the growth of the high productivity service sector, which in turn is both driven by, and requires, the expansion of the graduate labour force and its increasing concentration in London, other large cities, and commuting areas around them, which in turn generates many low productivity service sector jobs and precarious and insecure employment for many. This applies to the whole country and is driven by technological changes that are likely to intensify, not reverse, over coming decades. Focusing on a few areas and seeking to create ‘good manufacturing jobs’  – even if it is in the industries of the future, such as renewables – is only going to be at most a small part of the answer for a small number of places.

That doesn’t mean that growing inequality, both between people and places, is inevitable. But reversing it requires both national and local policies addressed at both people and places, and that don’t pit poor people in London and the cities against deprived areas in the north and Midlands. 

It means investment in connectivity – physical and digital – that allows skilled workers to have productive, well-paid jobs wherever they live; investment in people, that narrows the divide in skills and productivity between those who go to university and those who don’t; and a new model of the labour market and welfare system that instead of forcing people to take any job – no matter how insecure or precarious – shares risks between employers, workers and the state so as to expand choice and opportunity.  

In other words, we need to change, not just where jobs are, but what they are and who does them. None of this is cheap or easy – but levelling-up will only work if it is about all of the UK, and about both people and places.

Jonathan Portes is Professor of Economics and Public Policy at the School of Politics and Economics at King’s College London

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