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A recent report from the Centre for Cities paints a concerning picture of economic disparities across the UK, revealing that the average person in the country has lost out on £10,200 since 2010. However, what makes this study particularly striking is the focus on Aberdeen, a city that has experienced a staggering £45,000 decline in average income over the past decade. This decline, attributed to the city's over-reliance on the fossil fuel industry, serves as a poignant example of the potential risks associated with depending on primary products.
Why was Aberdeen so impacted by the poor growth performance in the UK? A reason for the shortfall in disposable income is its overreliance on primary products, whose prices are highly volatile by nature. This price volatility is often driven by changes in global demand, or geopolitical events. In Aberdeen’s case, it was the former. Following the US shale oil revolution, global demand for oil and gas shifted away from the city, where a third of jobs were in its export base in the 2000s. As the energy sector faced challenges, approximately 9,000 jobs in areas connected to oil and gas were lost. This not only impacted the individuals directly employed in the sector but also had ripple effects on other parts of the economy.
Additionally, this spurred a negative multiplier effect, i.e. when an initial withdrawal or leakage of spending from the circular flow leads to knock-on effects and a bigger final drop in real GDP. For instance, the city experienced a significant 30% drop in retail jobs, compared to the 6% downturn nationally. The geographical effects of the negative multiplier are made even more prominent when we consider the data.
The Centre for Cities' report emphasises that the economic struggles are not unique to Aberdeen. The overall weak economic growth in the UK since 2010 has left people with £10,200 less, on average, to spend or save. However, variations in the size of this shortfall exist among different towns and cities. Burnley, for example, experienced an average loss of £28,090 per person, illustrating the nuanced impact of economic trends on diverse regions. People in Cambridge and Milton Keynes were also made worse off by about £21,000.
Considering the last decade, one may also comment on the rise of geographical disparities when it comes to employment. While most cities and large towns have witnessed substantial employment growth since 2010, the most significant surge has occurred in London. Consequently, an even larger proportion of jobs is concentrated in and around the capital.
The increased influx of people into London - and the associated increase in the size of the UK workforce - has resulted in a more substantial rise in households' disposable income compared to other regions. However, this increase remains notably lower than it would have been if living standards had continued their pre-2010 trajectory.
Despite the disparities in employment and income, the report highlights that poor productivity growth has hindered wage increases across the board. This challenge is evident not only in cutting-edge innovation hubs but also in northern cities grappling with persistently high levels of deprivation.
So, are we set to continue to lose money? The UK government should take note of the lessons learned from Aberdeen's downturn as it navigates its economic policies, especially with regard to the energy sector. The current strategy has drawn attention as it is centred on spurring the exploration of oil and gas in the North Sea. Nevertheless, economists advise against making excessive investments in past industries, which they refer to as "sunset industries."
The economic downturn in Aberdeen is a sobering reminder of the value of economic diversity and adaptation for all of us, particularly for young people who are ready to make decisions regarding their careers. Comprehending fundamental economic principles such as the negative multiplier effect enhances our understanding of the interdependence of diverse industries and the potential consequences of excessive dependence on one industry. Learning from Aberdeen's experience and actively pursuing sustainable, diverse economic pathways that can survive the pressures of a constantly shifting global marketplace is critical as the UK navigates its economic transformation.
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