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Manufacturing Labour Productivity

February 2008

Photograph of a factory and computer monitoring equipment

Introduction

In the long run, productivity advance (defined here as gross value added per person employed) is at the heart of economic performance and is the main source of improvement in living standards and economic well-being. It is also a key indicator of an area's underlying industrial strength or competitive position. Short-term changes in productivity growth are related to the business cycle and reflect the fact that employment does not usually respond instantaneously to changes in output. Over the longer-term, however, structural factors are more important with productivity growth determined by such elements as improvements in technology and efficiency, in work practices and in skill and education levels and perhaps most especially, by improvements in the pace of innovation and in the size and quality of the capital stock.

Manufacturing Gross Value Added in Lancashire

Manufacturing industry in Lancashire remains an important and highly valued component of the local economy. According to the results of the latest (External) Annual Business Inquiry conducted by the (External) Office for National Statistics , manufacturing industry in the sub-region generated nearly £5.2bn in gross value added in 2005. This was equivalent to nearly a quarter of Lancashire's total wealth creation from all industries and services. Nationally, the manufacturing sector's share of economic output is much lower at about 15%. In terms of its productivity, gross value added per head in Lancashire manufacturing industry stood at an estimated £50,700, an all time high. This level was 11% above the UK manufacturing average of £45,700

At face value this level of labour productivity was a highly creditable out-turn, particularly given the pattern of relatively low net capital expenditure evident across many local activity sectors and a long history of productivity "under-performance" in the sub-region. However, because it is the result of a calculation between two large estimated elements – employment and output (as measured by gross value added) labour productivity measurements, particularly for relatively smaller geographical areas like Lancashire, can be highly volatile in the short-term and little confidence should be placed on one or two years' figures. However, even averaged over the five-year period 2001-2005 gross value added per head in Lancashire manufacturing industry consistently out-performed the nation and at an estimated £44,800 over the period averaged 8% higher than that in the UK at large (Table 1).

Volatility in the local statistics is also increasing as the weighting of manufacturing within the economy continues to decrease and as certain key manufacturing sectors assume an increasingly dominant role within this smaller base. In particular, trends in Lancashire's labour productivity have been critically affected by the out-turn of the aerospace industry, easily the largest single sector, which typically accounts for as much as a third of the sub-region's total manufacturing gross value added. In the late 1980s/early 1990s GVA per head in the local aerospace sector soared on the back of large maturing military aircraft programmes, civil aircraft orders, new forms of industrial production and increased out-sourcing of lower value added and non-core activities. The size of the gains allied to aerospace's unusually large weighting was such that the "whole economy" labour productivity average was raised well beyond its trend rate. Productivity in aerospace fell back sharply post 1991 when production faltered in an unprecedented industry downturn in both its civil and military sectors and remained subdued over a sustained period as the County paid the price of the so-called "Peace Dividend" in a spate of major restructuring episodes. The local productivity surge towards the end of the 1990s and subsequent expansion has again been attributable in large measure to a recovering aerospace and subsequent expanding sector.

Because of "data suppression" to retain statistical confidentiality it is no longer possible to strip the specific aerospace contribution from the productivity calculations. However, as a proxy, Figure 1 shows the effects on productivity levels and changes of removing the Transport Equipment sector (which includes both motor vehicle and aerospace production). The effect is clearly to demonstrate, in a sense, a two-speed economy in Lancashire. The underlying pace of productivity growth (i.e. Lancashire all-industry manufacturing less Transport Equipment) has been less erratic but also less encouraging. There has been a persistent "productivity gap" between the underlying Lancashire level and that nationally amounting to some fifteen percentage points. This gap, which would be even wider if it was statistically possible to remove motor vehicle production from the calculation, is of long-standing, having been evident since at least 1980 when these local statistics first became available.

Graph showing manufacturing labour productivity for Lancashire NUTS-2, the United Kingdom and Lancashire Source ONS - Annual Business Inquiry

Labour Productivity by Industry Sector

The aggregate level of manufacturing labour productivity in Lancashire disguises wide variations both between industrial groups and with their national equivalents. Thus, productivity in top-ranking Transport Equipment (which includes aerospace) was three times greater than that in Textiles and Textile Products or Wood and Wood Products industries, for example. Sectoral comparisons between Lancashire and the UK averaged over the 2001-2005 period are illustrated in Figure 2.

Chart showing annual average gross value added per head by industry group Source ONS - Annual Business Inquiry

Six of the thirteen identifiable industrial sectors in Lancashire had average GVA per head 2001-05 above their UK equivalents. Comparatively, the highest productivity level by far in Lancashire was in the Transport Equipment sector and was attributable wholly to aerospace activity. GVA per head in Transport Equipment in Lancashire was no less than 80% higher than the UK industry average and 90% higher than the Lancashire all-industry average. Whilst some way behind in absolute terms, Fabricated Metal Products also had a small productivity edge over its national equivalent, probably due in large measure to a significant presence of engineering service companies, many of which are also part of the aerospace supply chain. Other sectors with above-par productivity compared with the national average are Rubber and Plastic Products (10% higher), followed by Textiles and Textile Products (+6%), and the small Non-Metallic Mineral Products industry (+3%). It is of note that most of the Lancashire industries recording higher comparative levels of productivity also had comparatively high levels of net capital expenditure. Conversely, important local industries where productivity was significantly lower than that recorded in the UK were Chemicals (40% lower), Paper, Printing and Publishing (-19%), Electrical and Optical Equipment (-18%), and Food and Beverages (-16%). The local impact of these apparently lower performance levels was all the more marked since these industries tend to have relatively high levels of productivity nationally.

Relative levels of wealth generation as measured through GVA per head have a major influence on the ability of firms and sectors to pay wages and salaries to the workforce, to invest in future production capacity and generally to meet other out-goings such as taxes to government and rewards to owners and shareholders. Other things being equal, it is desirable to have an economic base that maximises gross value added. However, productivity per se in this sense is by no means always to be equated with more conventional measures like "efficiency" or "profitability" and the above statistical comparisons do not necessarily reflect the competitiveness of individual sectors and companies. The aggregated industry totals are made up of figures for firms that are far from homogeneous. Different activities will have different levels of labour productivity reflecting not only capital intensity and performance in plant utilisation, but also the specific product mix and these will vary irrespective of the "efficiency" of the individual units.

There is little doubt that structural factors have a major impact on the productivity differences between Lancashire and the UK. As illustrated in Figure 1 above, Transport Equipment (largely aerospace) and related sectors clearly holds the baton for productivity levels and growth. Aside from aerospace Lancashire has less than its share of the other nationally high performing/high tech/high productivity industries. Even in nationally high productivity industries where at the aggregate or broad industry level Lancashire appears to have a fair representation, local strengths tend towards the more upstream or commodity activities rather than towards the more buoyant higher value added sectors.

This characteristic can be observed for instance in the presence of basic chemicals production rather than pharmaceuticals or speciality chemicals; pulp and paper mills and paper converting rather than printing and publishing; basic electrical equipment rather than computers or electronics. Comparatively also, many of Lancashire's strengths continue to lie in more traditional but in absolute terms, lower wealth creating industries such as Textiles and Textile Products, Wood and Wood Products, Metal Products and the like. Even though the performance of some of these older sectors has been impressive and even above that achieved by their national equivalents, it has been insufficient to compensate for the under-representation of the higher productivity/higher growth industries and to improve the potential performance level of the County's manufacturing base to an even higher level.

Labour Productivity by Sub-Region

Similar considerations apply to the striking variations in productivity levels within the County and particularly between its western and eastern halves (Table 2). Whilst a note of caution is necessary about the volatility of data at these more local levels, GVA per head in the Lancashire West sub-region, which averaged £53,900 between 2001-2005, was 30% above the UK average whilst that in East Lancashire at £35,500 per head was 14% below the UK average. Both sub-regions have seen a sharp rise in productivity levels over the past few years, to a degree reflecting a cyclical up-turn in Transport Equipment (aerospace) GVA, though the impact of this was felt most strongly in Lancashire West where the statistical weighting of the sector was largely responsible for the high performance level.

Labour Productivity by District, 2000-2004

In a like manner, manufacturing labour productivity levels have a wide dispersion at district authority level. Gross value added per head, expressed in terms of an annual average rate 2001-2005, are illustrated in Figure 3. Within a range extending from about 60% above the UK average in Fylde to more than a third below in Blackpool, three Lancashire districts have gross value added per head higher than the UK average. Amongst the top-performing districts – Fylde, Pendle and Ribble Valley – have a large aerospace component within their industrial structures. This industry has benefited from a significant cyclical up-turn over the past few years. Additionally, Fylde has a major high value added nuclear fuels manufacturing facility. Wyre benefits in part from a small but high added value chemical sector.

Chart showing annual average manufacturing labour productivity by Lancashire district Source ONS - Annual Business Inquiry Manufacturing GVA

This page was compiled by Peter Kivell .

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