Challenging (mis)understandings of labour productivity for levelling-up: a broader research agenda for regional development

Abstract

Policy work typically conflates measures of real and nominal labour productivity, using them interchangeably, often leading to misdiagnoses of the causes of regional disparities, with potentially flawed policy as a response. The Levelling Up White Paper is no exception, reflecting a fundamental misunderstanding of what is being measured and why it matters. This article makes two contributions to the literature on this point. First, it shows theoretically and empirically that there is no necessary correlation between real and nominal labour productivity for either sectors or regions. Secondly, it builds and extends an industry-sector typology to argue that interregional nominal labour productivity differences are best understood within an augmented post-classical power-over-rents framework, where the ability to capture value is critical. We trace the consequences of this for understanding the industrial mix in high nominal productivity regions and the effect on local prices and real wages. While we suggest some potential measures for rebalancing economic activities across regions, we argue that levelling up of living standards is a problem of distribution as much as efficiency. It requires moving beyond the obsession with attempting to directly target misdiagnosed differences in regional labour productivity, and rather engaging with regional development holistically and sustainably.