Can investment in skills improve Northern Ireland's productivity performance?

Northern Ireland has the lowest productivity of any region in the UK. While there are several reasons for this poor performance, investment in skills is a key area where local policy-makers can help to boost productivity and improve the nation’s growth prospects.

Elections will soon take place for the Northern Ireland Assembly, the nation’s devolved legislature. Any new government that it appoints – known as the Northern Ireland Executive – will face several immediate economic challenges. These include inflation, a health service under pressure, climate change and the continued effects of Brexit and the Northern Ireland Protocol.

Yet the most deep-seated economic challenge facing local policy-makers is low productivity. While politicians in Northern Ireland have recognised for many years that raising productivity is an important economic objective, the nation’s productivity gap relative to the rest of the UK and its constituent nations and regions has persisted. Could investment in skills provide a solution to this perennial problem?

What is productivity and how does Northern Ireland perform?

Productivity measures the total value of output produced in the economy for a given amount of work, either per job or per hour worked. Raising productivity is key to economic growth and higher wages, and it drives long-run improvements in living standards.

The UK’s comparatively poor performance in recent years has renewed interest in the issue of productivity. The UK has lower levels of productivity relative to most other G7 economies and it has seen productivity grow more slowly than its peers since the global financial crisis of 2007-09.

Data from the Office for National Statistics (ONS) show that the UK’s productivity performance is not evenly spread across the country. London and the South East have the highest productivity, followed by Scotland. But Wales and most regions of England lag behind with a substantial productivity gap.

In comparison, Northern Ireland has the lowest productivity of any UK region. When measured by GVA (or ‘gross value added’) per hour worked, productivity in Northern Ireland is almost 20% lower than the UK average.

As Figure 1 shows, this is not a new phenomenon. Low productivity in Northern Ireland preceded the global financial crisis of 2007-09 and existed before the Troubles of the 1970s to the 1990s. Even prior to the partition of the island of Ireland, the six counties that would go on to form Northern Ireland still experienced a productivity gap relative to the rest of the UK.

Figure 1: Northern Ireland’s output per job (UK=100)

Source: Jordan and Turner, 2021

A number of different causes of Northern Ireland’s persistent productivity gap have been identified (Jordan and Turner, 2021). First, Northern Ireland’s economic structure is more heavily concentrated in low productivity sectors, such as agriculture and retail. In addition, Northern Ireland is geographically peripheral, including from networks and new ideas.

The nation also has historically lower levels of investment in capital and research and development (R&D), an infrastructure gap, ineffective and poorly targeted policy interventions and institutions that do not promote or prioritise economic efficiency.

Yet the most extensive evidence points to low human capital – demonstrated by a significant skills deficit – as the main cause of Northern Ireland’s productivity gap.

How big is Northern Ireland’s skills deficit?

The extent of Northern Ireland’s skills deficit can be seen in the educational attainment of the working age population, shown in Figure 2. There are two main aspects to this skills deficit: an ‘attainment gap’ and a ‘brain drain’.

Figure 2: Educational attainment of individuals aged 16-64, in 2020

Source: Nomis, ONS Annual Population Survey

The attainment gap reflects the proportion of individuals leaving school with no or low qualifications. This is higher in Northern Ireland, where 21.4% of those of working age have low or no qualifications, compared with Wales (17.9%), England (16.1%) and Scotland (15.1%). There is a wide range of evidence that this educational underachievement in Northern Ireland is strongly linked to social deprivation (Northern Ireland Audit Office, 2021).

A brain drain also affects skill levels in the workforce. Northern Ireland has a relatively lower proportion of tertiary-educated individuals, at 38.0%. This is similar to Wales (38.5%), but lower than in England (42.8%), and much lower than in Scotland (49.0%).

The brain drain has two main causes. The first is individuals leaving Northern Ireland, either to study at university or for employment after completing their degree. At the time of the 2011 census, almost one-third of those born in Northern Ireland and who possessed a graduate level education were living in Great Britain (FitzGerald, 2019).

This has improved for more recent graduates, with around 80% working in Northern Ireland 15 months after graduation (Ulster University Economic Policy Centre, UUEPC, 2022). Regaining those who leave to study in Great Britain remains an issue: on average, 64% do not return to work in Northern Ireland within six months of graduation (Pivotal, 2021).

The second cause is the failure to attract students from other UK regions to study at universities in Northern Ireland. Where Scotland and Wales see net inflows of students, and England a modest outflow, Northern Ireland sees a substantial outflow (Pivotal, 2021). Only 6% of those studying in Northern Ireland are from other UK regions. The comparable figure for Scotland is around 15%; and for Wales and the English regions, it is around 40% or more (UUEPC, 2022).

How does the skills deficit affect the local economy?

Evidence for the UK demonstrates the importance of a skilled workforce for productivity (Abreu, 2018). The UK has a relatively highly skilled workforce – and improvements in skill levels have contributed to productivity growth over the past decade – but there are also large regional disparities in educational outcomes and skills.

As the OECD highlights in a recent report, Northern Ireland’s low levels of skills have important implications for both productivity and wider economic performance.

If Northern Ireland had the same educational attainment as Scotland, it would add 0.25 percentage points to the growth rate of GDP, through improved productivity (FitzGerald, 2019). Improving the skills of the local workforce would be of benefit to small and medium-sized enterprises (SMEs). Their productivity is harmed not only by low basic literacy and numeracy skills, but particularly by the lack of softer skills, including attitude, communication, and motivation (McGuiness et al, 2008).

A shortage of skilled labour has been highlighted as holding back Northern Ireland’s future growth prospects (UUEPC, 2022). Between 2020 and 2030, the demand for those with an undergraduate degree or higher is expected to account for 37% of job posts created. To avoid further skills shortages, it will require an increased supply of those with higher skills, particularly in STEM (science, technology, engineering, and mathematics) subjects.

A skilled workforce is one of the most important criteria for attracting foreign direct investment (EY, 2020). Better education and increased foreign investment were two key reasons for the Republic of Ireland’s improved economic performance at the end of the 20^th century, a period known as the ‘Celtic Tiger’ (Ó Gráda and O'Rourke, 2021).

Today, foreign owned firms in the Republic of Ireland have much higher productivity than their domestically owned peers (Goldrick-Kelly and Mac Flynn, 2018).

In contrast, lower levels of human capital in Northern Ireland reduce its ability to attract foreign investment (Siedschlag and Koecklin, 2019). It also limits the potential for beneficial spillover effects for local firms when this investment does take place (Goldrick-Kelly and Mac Flynn, 2018).

Skills among firm management are also a potential barrier to productivity growth in Northern Ireland. A global study of managerial skills and practices found that firms in Northern Ireland do not score as highly as their peers in Great Britain when compared with best practice (Bloom and Van Reenen, 2010). More recent evidence for the UK, which excludes Northern Ireland, shows that there is a close link between better management practices and higher productivity (ONS, 2018).

Finally, Northern Ireland faces a paradoxical situation regarding its share of higher skills. Despite the relatively low proportion of the working age population with tertiary qualifications, it has a higher concentration of individuals educated to degree level in employment. Those qualified to degree, masters, or PhD level (NQF Level 6+) account for 37% of employees in Northern Ireland. This puts it ahead of the UK average of 34%, and second highest of any UK region, behind only London (UUEPC, 2022).

This higher concentration of degree-qualified employees partly reflects higher rates of economic inactivity in Northern Ireland (those of working age not seeking employment), and that these individuals have no or low qualifications. But it also suggests that the high qualification levels of current employees is not being translated into higher productivity.

This could be because their graduate qualifications are not well matched to their job role, with this mismatch constraining productivity (UUEPC, 2019). Or it may reflect employees’ skills being under-utilised: 37% of employers in Northern Ireland report having employees with both qualifications and skills that were more advanced than those needed for their current job. This figure is higher than anywhere else in the UK (Department for Education, 2018).

What can policy-makers do?

The existence of a skills deficit has long been recognised by policy-makers. While improvements have been made to reduce the number of individuals leaving education with no or low qualifications, progress has also been made elsewhere in the UK, and thus Northern Ireland’s skills deficit has persisted.

This means that there is still an important role for government in addressing the skills deficit. A key part of this is coordinating between employees and employers to break out of the current ‘low skills equilibrium’, where low value-added output (and hence low productivity) is the result of both a supply and demand problem for skills, which is self-reinforcing without government intervention (Mac Flynn, 2017).

Earlier this year, the Department for the Economy (DfE) launched its latest skills strategy, ‘Skills for a 10x economy’. This includes three strategic goals to be achieved by 2030:

Increasing the proportion of individuals leaving Northern Ireland higher education institutions with first degrees and post-graduate qualifications in narrow STEM subjects (that is, core sciences, maths, computer science, engineering and technology).

Increasing the proportion of the working age population with qualifications at level 2 and above (that is, at least five GCSEs at grades A* to C or equivalent).

Increasing the proportion of the working age population with qualifications at level 3 and above (that is, two or more A-levels or equivalent).

These strategic goals are a good starting point for addressing Northern Ireland’s skills deficit, and they are supported by a further 49 recommendations and three policy enablers. A welcome aspect of the recommendations is the emphasis on lifelong learning, and a recognition that raising skills levels, and hence productivity, is as much about those already in the workforce as it is about future generations yet to join it.

As the new skills strategy notes, its success will largely be determined by the level of investment in skills made by the Northern Ireland Executive. Between 2010/11 and 2019/20, public sector spending in Northern Ireland on higher education, further education and industry skills fell by around one-third in real terms (DfE, 2022).

A skills deficit is not the only reason for Northern Ireland’s low productivity. Nevertheless, if the nation is to address its productivity gap relative to the rest of the UK, it will need a more highly skilled workforce and this will only happen if the new Executive makes investment in skills a priority.

Where can I find out more?

A low skills equilibrium in Northern Ireland? Paul Mac Flynn examines whether there is a ‘low skills equilibrium’ in Northern Ireland and the role of government in addressing it.
Northern Ireland’s productivity challenge: Exploring the issues: David Jordan and John Turner examine the reasons for Northern Ireland’s productivity gap relative to the rest of the UK.
Investment in education and economic growth on the island of Ireland: John FitzGerald examines the links between education and economic growth in Ireland.