We document significant regional and sectoral productivity disparities in the United Kingdom, particularly between London and other regions, with important implications for aggregate productivity and living standards. These differences are driven by sectoral trade imbalances, notably in intermediate services, where London serves as the primary supplier. We explore how productivity shocks propagate through regional and sectoral linkages, using a quantitative spatial model of the U.K. economy to assess their local and aggregate impact. Using data for the 12 ITL1 regions and 9 broad goods and services sectors, we incorporate regional migration, input-output linkages, capital dynamics, and other local factors. We find that productivity shocks have heterogeneous aggregate impacts depending on the originating regions and sectors. London and the Southern regions exhibit the largest influence on aggregate GDP, while the services sectors yield the highest aggregate total factor productivity (TFP) and GDP elasticities. We identify regions where increases in their capital stock would contribute most to aggregate outcomes, while also emphasising the need for targeted regional and sectoral policies that promote tradability across regions to mitigate disparities and improve national productivity.
Authors Antonio Haro-Bañón, Fergus Jimenez-England, Monica George Michail, Stephen Millard