How do we level up the Midlands’ local economies?

Political and policy debate on urban Britain often concentrates on the wide differences between cities across the entire country. But we can learn a lot about how urban Britain is doing by looking at differences within regions too. 

Our new report All Cylinders does this and investigates how the urban areas of the Midlands Engine are doing compared to each other, to non-urban areas and the rest of the country. It contains five key lessons for regional and national policymakers: 

1. The Midlands’ economy is urban 

The geography of the Midlands Engine partnership covers the West and East Midlands, with the absence of Northamptonshire and the addition of North and North East Lincolnshire. It therefore includes the Primary Urban Areas of the Birmingham and Nottingham conurbations, Coventry, Leicester, Derby, Telford, Stoke and Mansfield. 

Figure 1 shows that, though these urban areas are only 10 per cent of the Midlands Engine’s land area, they contain 53 per cent of the region’s employment. City centres play an especially important role, accounting for less than 0.01 per cent of the total land area and 10 per cent of total employment.  

Figure 1: The Midlands Engine’s jobs are concentrated in its cities

Source: ONS Business Register and Employment Survey (2021) 

Figure 1 shows that the types of jobs differ between different parts of the Midlands Engine too. If we choose to focus on the private sector’s ‘exporting’ jobs that trade with other places and bring money into the local economy – so, goods exports in manufacturing and service exports such as software, rather than ‘local services’ such as retail and cafes – then we see there are big differences. 

Despite the urban connotations that manufacturing has, manufacturing jobs are disproportionately in the hinterlands just outside cities or in their suburbs. In contrast, service exporters are disproportionately concentrated in city centres.  

The geographic pattern makes sense as the two types of exporting work have different needs – manufacturing needs lots of space and cheaper land, while service exporters are prepared to pay higher land prices to locate in places where they can access the largest possible graduate labour market. But it means that the industries that drive the overall economic performance of the Midlands Engine depend on cities in different ways, and that some cities may do well in some ways but less so in others. 

2. The Midlands’ cities bring prosperity to a wider area 

By looking at commuting patterns in Figure 2 we can see that these urban areas are distinct economies, but also that they provide employment for people outside of their boundaries. Almost one in five workers in the Midlands Engine who lives outside an urban area works in one of the region’s urban economies. 

Figure 2: The Midlands Engine regional economy is made of distinct local economies

Source: Census 2011 

People choose to make these urban commutes because cities are the economic motor of the Midlands Engine, especially in city centres. Workplaces wages are higher than resident wages in all of the city-centre local authorities, except Mansfield, giving commuters from the suburbs and non-urban areas a pay boost. 

3. Birmingham and Nottingham account for more than two thirds of the Midlands’ underperformance

Yet despite the important role played by the region’s cities, they and the region they are part of are not as prosperous as they should be. By applying methods to estimate the underperformance of urban economies developed by Centre for Cities, Figure 3 shows that the Midlands Engine is underperforming by roughly £18 billion a year.  

Figure 3: Birmingham and Nottingham drive the Midlands Engine’s underperformance

Source: ONS, Centre for Cities’ calculations 

Birmingham accounts for £10.5 billion of that underperformance, and Nottingham another £1.9 billion. Together they account for 68 per cent of the Midlands Engine’s total gap with the rest of the country. This is ultimately because their urban economies are not offering the benefits they should be to high-skilled service exporters, such as publishing or software, as I show below.

4. Manufacturing is a regional strength, but service exporters are struggling

This is borne out by the evidence on sectoral productivity. Figure 4 shows productivity by city for three types of activity – manufacturing, service exports, and local services such as cafés and barbers. The productivity of local services in the Midlands Engine is low but close to the national average, typically for this sector, so it cannot explain differences in economic performance. 

Manufacturing does relatively well in the urban Midlands. Figure 4 shows the productivity of manufacturing in the Midlands Engine, at £70,800 per worker, is close to the British average of £78,900. Although a few cities such as Leicester and Stoke underperform, some of the region’s cities also have more productive manufacturing sectors than Britain as a whole, such as Coventry with £95,800 and Telford with £93,700. 

Figure 4: The Midlands Engine’s service exports consistently lag the national average 

Source: ONS Regional gross value added (balanced) by industry: local authorities by NUTS1 region (2021) 

But service exports underperform quite significantly and across the board. Although the productivity of service exports in the Midlands Engine is comparable to manufacturing at £70,700 per worker, it is considerably below than the British average of £92,700 per worker, reflecting the country’s comparative advantage in services. And unlike manufacturing, Figure 4 shows no city in the Midlands Engine has a service export sector more productive than the wider country. 

Birmingham and Nottingham underperform largely due to the weakness of their service exports sectors. Their performance in manufacturing and local services are both close to the national averages, but they are laggards in service exports. As Figure 1 showed, service exports prioritise city centre locations; yet the struggles of Birmingham and Nottingham’s service exports sector indicate that the two biggest and most important city centres in the Midlands Engine are in need of serious policy attention.

5. The big cities need to change for the Midlands’ service exports to succeed

So what does this all mean for policy in the Midlands Engine? 

First, it means that policy needs to continue supporting the region’s success in manufacturing. Plentiful, cheap land in the suburbs and hinterlands with the infrastructure that industrial activity needs is a pillar of the region’s economic model, and continuing to allocate ample sites for new homes is crucial for reducing competition for space between the two uses. 

Second, addressing the underperformance of the Midlands Engine, the region’s big cities and their city centres, and the service exporting sector are all the same policy priority. Ensuring that Birmingham and Nottingham are performing at their full potential is not just a good thing for their own residents, but also for non-urban commuters and the national economy as whole. 

Fixing these problems will take time and hard work across a number of policy areas. Skills policy – both training existing residents and attracting in new graduates – will be part of it. 

Big changes to the built environment are needed too. Birmingham city centre is already seeing the benefits of new development, with highly-skilled firms like Atkins and Arup moving into the city centre. But the suburbs of the big cities will also need to shift to a more ‘mid-rise’ urban form around train stations to increase the efficiency of the transport network and deepen the appeal of the city centre to firms. But the suburbs of the big cities will also need to shift to a more ‘mid-rise’ urban form around train stations to increase the efficiency of the transport network and deepen the appeal of the city centre to firms. 

And finally, advancing devolution on sensible economic geographies that will allow local leaders to pursue and reap the rewards of local economic growth is crucial for these changes to be sustained into the long-term.