Misconceptions around what productivity actually means are holding back the Welsh economy, business leaders and economists are warning.
Guests on the Unlocking Wales' Productivity Potential podcast, produced by Business News Wales in partnership with the Wales Productivity Forum, said that productivity is often discussed as an abstract or technical concept, when in reality it shapes wages, business competitiveness, public services and investment decisions.
The problem, they argue, is not a lack of debate, but a lack of clarity about what productivity actually is and why it matters.
Professor Melanie Jones, lead for the Wales Productivity Forum at Cardiff Business School, said productivity is fundamentally about generating more value from existing resources, including labour, capital and infrastructure. That value is not limited to financial output alone. In the public sector, it can mean improving social outcomes or service capacity, rather than simply cutting costs or increasing workloads.
Speaking on the podcast’s launch episode, Melanie argued that productivity is often confused with efficiency, particularly in areas where value is harder to measure. That confusion, she said, has contributed to productivity being seen as a dry economic idea rather than something that directly affects people’s lives. In practice, she said, productivity is the main driver of wages and living standards, underpins business competitiveness and determines how effectively public services can operate within constrained budgets.
She also warned that productivity improvements are long-term in nature and do not deliver immediate results, making them harder to prioritise against more visible or urgent pressures. However, she said failing to invest in productivity ultimately limits Wales’ ability to address those very pressures, from economic wellbeing to the capacity of health and education systems.
Professor Philip McCann, Sir Terry Leahy Chair of Urban and Regional Economics at Alliance Manchester Business School, said that misunderstanding productivity has also shaped how it is perceived culturally. He said people often associate the term with a “Dickensian” image of factory work, where employees are pushed to produce more at lower cost, rather than with innovation, skills and smarter ways of working.
“That’s not what productivity is about at all,” Philip said.
“Productivity is about doing things better in smarter ways and cleverer ways.”
Philip argued that productivity and wellbeing are frequently treated as competing priorities, when international evidence shows they are closely linked. Higher-productivity economies tend to have better health outcomes, longer life expectancy and stronger public services because they generate the resources needed to fund them. Work, he said, plays a central role in wellbeing through fulfilment, achievement and self-respect, as well as income.
He also pointed to Wales’ position within the UK’s regional productivity landscape. Wales sits among the lowest-productivity regions in the UK, alongside the North East of England and Northern Ireland. While that position has been stable for some time, the gap between these regions and the UK’s most productive areas widened sharply from the late 1980s and has not meaningfully closed since the global financial crisis.
Philip said the consequences of lower productivity are not academic. One of the most significant impacts is on access to investment. He explained that businesses and entrepreneurs in Wales face a higher cost of capital than comparable firms in London or the South East, not because of weaker ideas or ambition, but because places are priced differently by financial markets.
The difference in risk premiums between Wales and the South East, he said, is typically around 200 to 300 basis points. That level of risk pricing is comparable to the gap between the UK and countries such as Romania or Chile, meaning businesses in Wales are effectively being priced as if they are operating in far riskier international environments.
“Businesses in Wales are literally being priced in financial terms as if it’s Romania or Chile,” Philip said.
Rhys Thomas, Director, Place & Investment Driver at PwC, told the podcast that confidence and coordination matter as much as skills. He argued that productivity improvements rely on a combination of human capital, digital infrastructure and the conditions that encourage businesses to invest for the long term.
Rhys added that public investment can play an important role, but only if it is used to unlock private capital rather than replace it. He argued that government funding should be treated as seed capital, creating the confidence for businesses to co-invest in skills, innovation and infrastructure.
Without a better understanding of what productivity actually means, the guests warn, Wales risks continuing to talk about productivity without addressing the barriers that keep it low.
Hear more in the Unlocking Wales' Productivity Potential podcast episode Understanding Productivity in Wales. Listen to the podcast here.
