GUEST COLUMN:
Professor Philip McCann
Sir Terry Leahy Chair of Urban and Regional Economics
Alliance Manchester Business School
When people hear the word productivity, many immediately picture something bleak and outdated. The image that often comes to mind is a Dickensian factory floor, where workers are treated as little more than machines, pushed to produce ever more output under relentless cost pressures. It is an image rooted in squeezing more widgets out of people, with little regard for their skills, creativity or wellbeing. That picture, however, bears little resemblance to what productivity actually means in a modern economy.
Productivity is not about driving costs down at any human price. It is about doing things better, in smarter and more imaginative ways. At its heart, productivity is about how effectively we transform the inputs we have into outputs that are higher quality and higher value. Those inputs include materials, energy and capital, but they also include people: their skills, knowledge, ideas, creativity, willingness to take risks and entrepreneurial instincts. When productivity improves, it is because organisations and economies are finding better ways to harness those attributes, not because people are simply being pushed harder.
This misunderstanding matters, because it shapes how productivity is discussed and, too often, dismissed. I frequently hear people say that they are less concerned with productivity because their focus is on wellbeing. That framing suggests a trade-off between the two, when in reality they are closely linked. Internationally, productivity and wellbeing are highly correlated. Countries with higher productivity levels tend to have better life expectancy, healthier lives and stronger public services. The reason is straightforward. A more productive economy generates the resources needed to fund healthcare, social care, education and the wider infrastructure that underpins quality of life.
Work itself is a central part of this relationship. Work is not only about income. It is about aspiration, achievement, fulfilment and self-respect. When people are able to do their jobs well, using their skills effectively, work is more engaging and more rewarding. At the same time, the cumulative effect of millions of people working productively is that society is better able to provide the leisure facilities, cultural assets and public services that people value. Productivity and wellbeing are not competing priorities; they are part of the same story.
Against that backdrop, it is important to be clear about where Wales stands. On standard productivity measures, Wales sits towards the bottom of the UK distribution. Alongside the North East of England and Northern Ireland, it falls into the lowest group of regions when measured at the broadest regional level. This does not mean that Wales is uniquely weak, but it does mean that it remains some distance below the UK average, and that position has been remarkably persistent over time.
The UK’s regional productivity pattern is also unusual by international standards. Rather than a landscape of peaks and troughs spread across the country, productivity in the UK is heavily concentrated in and around London, with levels falling away as distance from the capital increases. Wales sits within this core-periphery structure, and while there are nuances and exceptions, the overall pattern has changed little over the past 15 to 20 years. Any signs of convergence that emerged in the early 2000s were swept away by the global financial crisis, and there has been no meaningful catch-up since.
These patterns are not abstract. They have direct consequences for businesses and entrepreneurs operating in Wales. One of the most significant, and least discussed, effects of lower productivity is the impact it has on access to finance. Quite simply, an entrepreneur in Wales is less likely to secure funding, and will face a higher cost of capital, than an otherwise comparable entrepreneur in London or the South East. This is not about individual talent or ambition. It reflects how places are priced by financial markets.
The difference in risk premiums between Wales and the South East is of the order of 200 to 300 basis points. In financial terms, that is comparable to the gap between the UK and countries such as Romania or Chile. In other words, businesses in Wales, and in many other parts of the UK outside the South East, are being priced as if they are operating in much riskier international environments. That reality shapes investment decisions, the likelihood of new ventures being funded, and the pace at which innovation can be translated into commercial activity.
This is why institutions that place productivity at the centre of economic decision-making matter. In countries such as Australia and the Netherlands, independent productivity bodies are embedded within the policy system. They examine economic, social and environmental challenges through a productivity lens, and their findings are formally debated rather than quietly ignored. These institutions do not offer simple solutions or silver bullets. Their role is to help build consensus around workable strategies and to signal that productivity is a long-term national priority.
That signal is crucial for investors. It builds confidence, reduces perceived risk and, over time, helps to narrow the cost-of-capital gap faced by businesses in peripheral regions. By strengthening trust and credibility, such approaches make it more likely that investors will look again at places like Wales, not just as locations of lower cost, but as places with long-term potential.
Productivity, then, is not a technocratic obsession or a distraction from wellbeing. It shapes how economies are financed, how work is experienced and how societies provide for their citizens. Misunderstanding it comes at a real cost.
Professor Philip McCann talks about this and more in the Unlocking Wales' Productivity Potential podcast episode Understanding Productivity in Wales. Listen to the podcast here.
