How are the UK’s devolved nations faring ahead of the general election?

Over the current parliamentary term, Wales, Scotland and Northern Ireland have each faced unique challenges as well as common ones, such as rising economic inactivity. Measures of output, productivity and the labour market indicate where the devolved nations could improve their economic prospects.

The UK is approaching a general election – due at the latest in January 2025 but expected in the second half of this year. Many of the big policy issues will be of broad concern across the country, but some will be of particular importance for the UK’s devolved nations.

Each of the three devolved nations has had a new leader in the past year, with the appointments of Vaughn Gething in Wales and of Michelle O'Neill in Northern Ireland, where the parties reached a power-sharing agreement following a long period without a government. Scotland will soon have another new first minister following the recent resignation of Humza Yousaf after just over a year in the role.

The devolved nations all face significant economic challenges, which are likely to inform voters’ choices at the time of the election. This article looks at these challenges and how the Welsh, Scottish and Northern Irish economies have fared in recent years.

Economic output

The main way we measure economic output is to use gross value added (GVA). This calculates the total value of goods and services in a geographical area, minus the costs of intermediate inputs used in the production process. GVA has been adjusted for inflation, often referred to as real GVA.

Looking at GVA figures for the devolved nations provides a good indication of their levels of economic output. But it is important to note that regional GVA data do not take account of commuting between regions and for the different labour market structures in different regions.

For example, labour markets are much more concentrated outside London and the South East of England, according to research by the Competition and Markets Authority. This means that fewer companies account for a larger share of jobs – and this is more apparent in rural areas.

This is especially important to consider when comparing the three devolved nations. The proportion of the population living in rural areas is higher in Northern Ireland (36%) and Wales (35%) than in Scotland, where it is 17%. Economic output is limited by several factors such as land, capital, energy and labour, so the location of populations and work matters.

Figure 1 depicts the GVA of the three devolved nations compared with the UK average, relative to their levels before the Covid-19 pandemic. It shows that all three devolved nations are above their pre-pandemic levels, but Scotland’s growth has remained below that for the UK as a whole.

Figure 1: GVA relative to the fourth quarter of 2019 in the devolved nations

Source: National Institute regional economic modelling system (NiReMS)

The most significant driver of this difference is the performance of the production industries (encompassing manufacturing, energy and water supply, mining and waste management), which has fallen by 0.1% relative to the last quarter in 2022.

Scotland’s reluctance to expand into nuclear energy means that the output generated by renewable energy is simply making up retired nuclear capacity.

Northern Ireland has had a robust recovery in terms of economic output. This is partially due to the importance of its trading/logistics sector. Between January and May 2022, exports from Northern Ireland to the Republic of Ireland increased by 23%, while trade in the other direction grew by 42%.

This could be explained by Northern Ireland benefiting from being in the European Union’s (EU) single market and customs unions (via the Northern Ireland Protocol). Although the trading industry is a relativity low value-added industry, the return of the Northern Ireland Assembly earlier this year – following the post-Brexit trade agreement between the Democratic Unionist Party and Westminster – could potentially provide long-term benefits for Northern Ireland as political stability may make it a more attractive destination for foreign direct investment (FDI).

Productivity

The UK has a productivity problem, with a significantly slower productivity growth rate than comparable economies since the global financial crisis of 2007-09. To compare how the devolved nations have fared in relation to productivity growth, we can use GVA per hour worked as a measure of productivity.

Productivity in economics is a measure of output per unit of input. We are more productive if we can get more output from one unit of input – both physical assets, such as equipment, and hours worked. In this case, GVA per hour worked is the preferred measurement of productivity as it accounts for different work patterns, such as full- or part-time work, whereas measures such as GVA per job/per head do not.

As Figure 2 shows, Wales and Northern Ireland are significantly above their pre-pandemic productivity levels in terms of GVA per hour worked. This has been the case since the end of 2020 for Northern Ireland and since the middle of 2021 for Wales.

Both nations are significantly below the UK average in terms of GVA per hour worked (see Figure 3), but it is a positive sign that productivity in the two nations is growing. Further, both are expected to maintain pre-pandemic levels in the next two years (see Figure 2).

Figure 2: Devolved nations’ GVA per hour worked relative to the fourth quarter of 2019

Source: NiReMS

Figure 3: Productivity in the devolved nations

Source: NiReMS

The uplift in productivity in Wales can be partially explained by Cardiff’s leap in productivity – the city was ranked third in terms of productivity improvements. One explanation for this growth is the Cardiff Capital Region City Deal in 2016 – an initiative that focused on investing £1.2 billion in a range of projects over a span of 20 years. It works by giving local partners greater powers and resources to strengthen growth across the Cardiff capital region.

Scotland, like Wales and Northern Ireland, experienced productivity growth from mid-2020 to mid-2021, reaching its pre-pandemic levels in mid-2021. But since then, this has gradually decreased. This decline is expected to continue into 2025 when productivity growth will hover around pre-pandemic levels.

Employment

Rates of employment have also differed across the devolved nations, and compared with the UK average (see Figure 4).

Figure 4: Employment in the devolved nations relative to the fourth quarter of 2019

Source: NiReMS
Note: This uses the Labour Force Survey definition of employment – that is, the number of people aged 16 or over who have completed one hour of work in the reference week or are temporarily away from their job, such as being on holiday.

Only Scotland’s employment level remains above what it was before the pandemic. Employment in Scotland is also strong relative to the UK average.

Employment in Wales, on the other hand, reached its pre-pandemic levels in mid-2020 and mid-2021, but trended downwards until the start of the 2023. Nevertheless, there has been some growth in employment over 2023.

For its part, Northern Ireland has followed a less regular path. There was a large dip in employment in Northern Ireland in mid-2021, dropping to 7% below pre-pandemic levels. Since then, there has been some recovery, but employment remains just over 1% below what it was before the pandemic.

Projections from the National Institute of Economic and Social Research (NIESR) for each of the devolved nations suggest limited employment growth into next year and that employment rates in all three will remain at their current levels.

This comes after revised employment data, released by the Office of National Statistics (ONS) in early 2024, showing that UK employment growth was lower than expected. The employment rate for those aged 16-64 was revised down across most periods by around 0.5% to account for the increase in the rate of economic inactivity. As a result, NIESR’s forecast in February 2024 for the devolved nations was significantly lower than the previous iteration.

The effect of the downward revisions by the ONS is uniform across the three devolved nations. These projections should also be considered in the light of the uncertainty surrounding the Labour Force Survey (LFS) employment data. The LFS has suffered from a much lower turnout, which has resulted in lower sample sizes than in previous surveys.

A deeper dive into the relationship between productivity and employment shows the importance of having highly skilled jobs for the productivity levels of a nation. For example, Wales and Northern Ireland are ranked tenth and 11^th (out of the 12 ITL1 regions) respectively when it comes to the proportion of employed people in skilled occupations (SOC 1-3,5).

In Wales and Northern Ireland in 2022-23, this proportion was 58% and 55% respectively, compared with London, where 71% of those employed were in skilled occupations. Scotland sat in the middle of the ranking at 62%.

Inactivity

Economically inactive individuals are those who are not in employment, who have not been seeking work in the last four weeks and/or who are unable to start work within the next two weeks. For example, someone is economically inactive if they are a retired person, a student, a carer and/or long-term sick.

Figure 5 shows inactivity rates in the devolved nations relative to the UK average. All have higher inactivity rates relative to the UK, and these are forecast to stay above the UK average over the next two years.

Figure 5: Devolved nations’ inactivity rates relative to the UK average

Source: NiReMS
Note: Economic inactivity is usually measured as the percentage of people aged 16-64 who are not economically active. NIESR’s forecasts show inactivity as a proportion of people aged 16 and above, on account of people older than 64 also seeking work.

Figure 6 shows that Wales has the highest inactivity rates among the devolved nations, closely followed by Northern Ireland and Scotland. The main driver of inactivity in Wales is the number of people who are long-term sick. In addition, Wales has the third highest rate of people seeking work among UK regions.

Figure 6: Inactivity rates in the devolved nations (proportion of the population aged 16 or over)

Source: NiReMs

Over the next two years, inactivity rates are expected to rise by a small amount, with this trend being uniform across the three devolved nations. This is driven by the increase in the number of people who are long-term sick, which is a UK-wide problem.

A key caveat here is that people are asked the ‘main’ reason why they are economically inactive, and as a result it is hard to decipher if, in reality, a multitude of reasons are at play. This is important to understand in order to inform policy decisions.

Conclusion

Looking across output, productivity, employment and economic inactivity, a picture of how the devolved nations have fared in the past five years emerges.

Scotland has experienced high employment levels, but suffered from low productivity relative to pre-pandemic levels. This suggests that there has been an increase in the number of people in low-productivity jobs in Scotland.

Low productivity jobs are those in industries with lower productivity levels, such as hospitality and health and social care, or where individuals are in jobs that do not use their skills to their full potential. The latter can be remedied by improving managerial skills.

Although Scotland would have high productivity gains if it invested more in innovation and research and development (R&D), this requires higher demand for graduates. But in turn, this would diminish the importance of qualifications and experience gained outside the traditional education system, which could also have a negative effect on productivity. Finding this balance should be a priority for the Scottish government.

Both Wales and Northern Ireland have seen significant gains in productivity – measured as GVA per hour worked – relative to pre-pandemic levels. Nevertheless, they both have a way to go to catch up with other parts of the UK.

It is promising to see the productivity growth of Cardiff and the positive effect of harnessing local partners. This approach should be extended throughout Wales and not just concentrated in urban areas.

The higher education sector in Cardiff has seen an increase in investment, but it is still ranked third (out of 12 ITL1 regions) when it comes to the number of people looking for jobs in other UK regions, and ranked the tenth lowest region when it comes to the percentage of employed people in skilled occupations. This hints that the in order for Wales to retain the graduates of its universities, it needs to improve the attractiveness of its jobs.

In the case of Northern Ireland, the post-Brexit trade arrangements agreed in January this year mark a crucial turning point. They could potentially act as a signal of political stability attracting higher levels of investment (including FDI) and increase the benefits of its border with the Republic of Ireland, where productivity is on the rise.

Inactivity has increased – and is higher than the UK average – in each of the devolved nations. With the current uncertainty surrounding the LFS, a top priority is to gain a better understanding of the reasons for inactivity.

Policy responses will differ depending on whether, for example, more people are studying or whether there has been an increase in the number of people caring for relatives or are long-term sick. It is also important to understand how these trends differ across various characteristics, such as age and sector, to understand further how policy can be targeted to reduce inactivity rates.

Where can I find out more?

NIESR’s most recent quarterly outlook NIESR UK Economic Outlook (Winter 2024).
For detailed statistics on labour market statistics for each devolved nation, such as inactivity rates and the number of people in skilled occupations, access the Labour Force Survey here.
For a more in-depth view of NIESR’s work on the factors driving Scotland’s productivity gap with international countries, see here.
For an in-depth understanding of investment across the three devolved nations – see the Productivity Institute’s ‘Investment in Places Research Project’, here.