In this week’s blog, Dr David Jordan, Research Fellow, Queen's Management School, Queen's University Belfast discusses the reasons for low productivity in Northern Ireland, based on his Green Paper co-written with Professor John Turner for the Productivity Institute.
Over the past decade, the UK’s productivity growth has stagnated relative to its peers. Productivity measures the total value of output produced for a given amount of work, and is key to higher wages and living standards. Understanding the reasons behind the UK’s underperformance has increasingly moved to the forefront of public policy, and improving productivity is a key part of the UK government’s recent City Deals and ‘Levelling Up’ agenda.
Addressing poor productivity is particularly important for Northern Ireland. It has the worst performance of any region in the UK, and it also lags behind the Republic of Ireland. The most recent data show that Northern Ireland has a 15% gap to the UK level when measured by GVA (‘gross value added’) per job, widening to 18% when measured per hour worked. This low productivity has been identified as the central reason for the local economy’s slow growth over the past two decades.
This is not a new problem. As the figure below shows, Northern Ireland’s productivity gap to the rest of the UK has been a persistent feature of the past 100 years. It predates the UK’s recent slowdown following the 2008 financial crisis; it existed before the Troubles; and it was evident prior to partition for the counties which would become Northern Ireland.
Source: See Jordan and Turner, 2021.
Research has taken a variety of approaches to identifying the causes of Northern Ireland’s productivity gap. In our Green Paper, we group the explanations into seven common themes, and examine the evidence for each.
1. Economic structure
The structure of Northern Ireland’s economy is one of the earliest explanations for its low productivity. The structural view suggests that if Northern Ireland had the same economic structure as the UK, the productivity gap would disappear. This view reflects Northern Ireland’s past concentration in the declining staple industries of textiles and shipbuilding, and policymakers today still emphasise economic structure as a main cause of low productivity. Yet the evidence shows that economic structure is responsible for just under half of the productivity gap. Within-sector productivity failings are just as important, and include a long-tail of firms that underperform relative to their peers.
2. Geographic peripherality
Northern Ireland’s geographic peripherality is another early explanation for low productivity. By being further away from other economic centres, it faces higher costs for importing raw materials and exporting finished goods. While there is evidence transport costs were higher during the early twentieth century, these were on average the same or only marginally higher by the 1980s, and could not explain the sizeable productivity gap. Today the Republic of Ireland faces a similar issue of geographic peripherality, yet has much higher productivity. Instead ‘soft peripherality’, which includes distance from networks relating to knowledge and innovation, is more harmful for Northern Ireland’s competitiveness.
3. Capital and investment
During the twentieth century, raising the level of capital per worker in manufacturing was the main focus of policymakers, as Northern Ireland lagged behind Great Britain. By the 1980s this gap had been eliminated, yet the productivity gap failed to close. Attention has turned to innovation, and Northern Ireland’s poor track record for R&D intensity. Measured by R&D expenditure per job, Northern Ireland appears not to perform poorly relative to other low productivity regions. However, evidence suggests this reflects R&D expenditure being concentrated in a small number of large firms, with a lack of innovation elsewhere.
4. Human capital
Low levels of human capital has the most extensive evidence to support its role in explaining Northern Ireland’s low productivity. It is the result of a ‘brain drain’, where there are too few in the workforce with tertiary qualifications; and an ‘attainment gap’, where too many individuals leave school without the skills they need. A skilled workforce is key to attracting inward investment, but other factors related to human capital may also matter. There is evidence of a managerial skills gap, where firms lag behind in the adoption of best practice, while a shortage of entrepreneurship has also been identified.
5. Infrastructure
There is limited evidence examining the contribution of infrastructure to the productivity gap. However, Northern Ireland has been highlighted as needing greater expenditure on infrastructure to avoid being left behind relative to its peers. This is most obvious for the 116 towns and cities in Northern Ireland where a lack of investment in water and sewerage is placing a constraint on economic development. While the picture is better for internet connectivity, a lack of key infrastructure creates a barrier to the attraction and growth of high productivity sectors.
6. Public policy
The devolved government at Stormont has responsibility for a number of key policy areas relating to productivity, including economic strategy, enterprise policy, and employment and skills. While tackling low productivity has often been an aspiration of policymakers, past policy interventions have proven ineffective. Part of the explanation has been the prioritisation of the number of jobs created by any single investment, rather than levels of productivity. Northern Ireland’s large public sector is often cited as contributing to the productivity gap, by absorbing skilled labour and ‘crowding out’ private investment. An alternative view is that a large public sector and a successful private sector are not mutually exclusive: instead it is the effectiveness of public policy in building a successful private sector which matters.
7. Institutions and governance
Northern Ireland has a unique history of devolution within the UK. How this interacts with other local institutions and governance structures has been identified as central to explaining the local economy’s long-run underperformance. The evidence suggests that economic efficiency has often been subordinate to other institutional priorities, such as political stability. The legacy of the Troubles, and the interaction between institutions and political stability, may therefore pose a constraint on closing the productivity gap. The issue of labour relations, and the rise of flexible employment following labour market deregulation, may also be linked to low productivity growth.
Overall, the evidence demonstrates that Northern Ireland’s low productivity is the result of a combination of interlinked factors. This poses a challenge for policy, as it means there is no single solution. Where should policymakers start?
In the short-to-medium term, improving human capital has the greatest potential. A more highly skilled workforce can attract inward investment, provide a pool of talent to benefit local firms, and promote innovation. In the long-term, the other areas where Northern Ireland underperforms will need to be addressed. The ability to do so will depend on whether local institutions can overcome their past failings. Policies will need to be coordinated across different departments within the Northern Ireland Executive, and the quality and effectiveness of policy interventions will need to be improved. An important element of this will be the collection and analysis of more detailed data for the local economy, to ensure problems are correctly diagnosed, and policy outcomes are measured and evaluated. Northern Ireland’s productivity gap is not inevitable, but it will require a concerted effort to address it.
This research was undertaken for the Productivity Institute, a UK-wide organisation that works across academia, business and policy to better understand, measure and enable productivity across the UK. It is funded by the Economic and Social Research Council (grant number ES/V002740/1).