Investigating the Factors Driving Scotland’s Productivity Gap with International Countries

Main points

• Much as in the rest of the UK, productivity growth in Scotland has remained stagnant since the financial crisis (McLaren, 2018). The average labour productivity growth rate for Scotland during the period 2009-2017 was just over 1 per cent and appears to be stagnating in the international productivity rankings. While previous studies have investigated what might explain the productivity gap between Scotland relative to other areas of the UK, there is no comprehensive analysis of the productivity performance that illustrates Scotland’s position in the regional European landscape. We aim to get a better understanding of what are the potential factors that might explain the productivity gap between Scotland and other wellperforming European and UK regions. While this analysis is of high-policy relevance to the broad levelling-up agenda, which seeks to reduce economic and social disparities amongst the UK regions, does not consider in detail distributional issues.
• Our comparative analysis focuses on a group of regions that are of similar level of economic development to that of Scotland, but that have excelled in terms of labour productivity growth. We examine the role played by capital investment, labour quality and Total Factor Productivity (TFP) as well as innovation and foreign direct investments (FDI) in explaining productivity differences. We focus on the post financial-crisis period covering the years from 2009 to 2017.
• We find that Scotland has slightly outperformed many regions in the UK in terms of labour productivity, in particular thanks to a greater capital accumulation. However, and confirming empirically the ideas put forward by other studies, we find that the Scotland’s underperformance relative to EU benchmark regions is largely explained by worse TFP and innovation, while to a lesser extent capital. On the innovation side, however, we find that Scotland does relatively well for its ability to translate the R&D effort into significant and economically important TFP gains.
• Scotland has also been outstanding in attracting FDI, but this does not seem to be translating into higher TFP growth. We also present new evidence highlighting the diminished contribution from labour quality to labour productivity growth. This is the result of increased polarisation of workforce with greater role of graduates and a reduced importance of intermediate qualifications.

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