South West Regional Skills Enterprise and Employment Analysis 2007/2008

Final Report

4.8 The Productivity Challenge

As the Regional Economic Strategy notes, “in terms of productivity – a measure of how well we use resources to produce the things we want – the region could perform better”(41). One measure of productivity, Gross Value Added (GVA) per hour worked, shows the South West operating at 95% of the national average, fifth of the English regions behind London, South East, East and East Midlands. This is down from 97% for 2003. Within that, performance varies widely across the region – from well below average in Cornwall and the Isles of Scilly to above average in the Gloucestershire, Wiltshire and North Somerset area.

Skills and human capital are a key driver of productivity. Whilst by no means the only significant factor, variations in the UK regions’ skills composition are the major factor in explaining regional variations in productivity (HM Treasury, 2001). Many studies have demonstrated a link between skills and different measures of human capital to productivity and economic growth. Skill levels have also been widely built in to indices of productivity, competitiveness or innovative capacity. Yet to that extent the South West bucks the trends. As Figure 7 below shows, whilst the South West has relatively high skill levels when compared with other regions, its productivity performance does not match, pointing to problems with the utilisation of these skills within the region. The region is operating at a low-skills equilibrium.

Figure 7: Productivity and Level 2+ skills, by region (Click image to open in new window)

Sources: Productivity First Release, ONS, 2005 & Annual Population Survey Jan-Dec 2005, ONS

Clearly a range of complex factors are at play in explaining comparative productivity performance, and it is important to remember that whilst higher skills levels are a necessary condition for high productivity levels, they are not a sufficient one. Other factors are explored in Meeting the Productivity Challenge(42), and include:

• Time-distance from key economic hubs (large and flexible consumer markets, knowledge transfer networks and flexible local labour networks);
• weaknesses in both basic and high skills development and use; and,
• relatively low capital/labour ratios.

This study, commissioned by the RDA, examined productivity drivers in the South West. It concluded that ‘the effects of workforce size, industrial composition and regional price differentials in explaining the productivity differences are limited. And that productivity differentials both between and within regions in the UK would appear to be largely determined by real differences in output per worker’.

In the sections that follow, the report focuses on those skills which may be essential in terms of improving the region’s productivity. It is important to support both high level qualifications and skills and basic qualifications, reducing the proportion of the population who lack any qualifications, if we are to improve productivity. Yet the impact of high level qualifications is, if anything, more important and might suggest the need for greater emphasis, in terms of raising productivity.

Over the past twenty years, the proportion of jobs requiring higher level skills has increased substantially as technology and the global economy have changed. Higher level skills development is critical to the region's economic development not least because of the significant positive impact it has on productivity. The demand for higher level skills will continue to increase as the industrial and occupation profile of the economy changes and it will be important to ensure that higher skills development is informed by regional skills priorities.

Conclusions

Evidence suggests that there is a strong link between higher level skills and productivity and that it is also important to examine the way in which skills are actually utilised, or applied in the workplace. Workplace organisation and leadership and management are critical to this. In the sections that follow, we look in more detail at these issues and the consequences for the South West.

(41) Regional Economic Strategy for South West England, 2006-2015, SWRDA, 2006, p 7
(42) Meeting the Productivity Challenge – Report on a study for the South West of England Regional Development Agency, April 2005. University of the West of England, Bristol and the University of Bath.