The UK’s two-speed economy: why structure matters

By Dr Jennifer Castañeda-Navarrete

Recent debate around the structure of the UK economy tends to oscillate between two opposing narratives. On the one hand, there is concern about the long-term decline of manufacturing and whether the UK has become overly reliant on services. On the other hand, there is a view that the shift towards a service-led economy reflects a natural and even desirable stage of economic development.

However, while looking at the difference between manufacturing and services, we might overlook a bigger question: how various economic activities help drive growth, spark innovation, and improve living standards. Not all services contribute to the UK economy in the same way, just as not all manufacturing industries play the same role.

Section 1 of the UK Innovation Report 2026 analyses the structure and performance of the UK economy. This blog builds on those findings to explore how different economic activities contribute to productivity, innovation, and competitiveness.

Knowledge-intensive services and manufacturing industries are key drivers of innovation and growth

Knowledge-intensive services and manufacturing together account for 90% of business investment in research and development. Manufacturing alone delivers 90% of goods exports—including autos, other transport equipment, and pharmaceuticals—while knowledge-intensive services generate nearly 70% of service exports, led by financial services, computer programming, and management consultancy.

These activities also include many of the UK’s most productive industries, such as pharmaceutical manufacturing, finance and insurance, information and communication, and scientific research and development.

However, labour-intensive services account for more than half of employment and value added. In other words, the sectors that matter most for innovation, productivity, and external competitiveness are not the ones that employ the majority of workers.

This creates what can be described as a “two-speed economy”: a relatively small group of high-value, innovation-intensive activities driving productivity and exports, alongside a much larger set of labour-intensive sectors where productivity and pay remain comparatively low.

Employment growth has been driven by services

From 1997 to 2024, employment growth has been concentrated in two sections of the economy: (i) knowledge-intensive services, offering high wages and strong productivity; and (ii) labour-intensive services, often characterised by low pay and weaker productivity.

In contrast, manufacturing has seen sustained declines, although some manufacturing industries have begun to recover employment since the COVID-19 pandemic.

In the pre-financial crisis period (1997–2007), employment surged in management consultancy (6.9%), computer programming (6.6%), and employment services (6.5%), while manufacturing industries such as textiles (-9.9%), electrical equipment (-4.2%), and electronics (-4.0%) experienced employment declines.

After the financial crisis (2012–2019), the momentum shifted further towards professional and information services, with growth rates between 4% and 7%. The pandemic briefly disrupted this trend, but even then, pockets of the economy, such as information services (9.8%), warehousing (7.8%) and activities auxiliary to financial and insurance services (5.5%) expanded.

The post-COVID-19 period (2022–2024) saw an important shift.  Manufacturing employment began to grow again, particularly in electrical equipment (5.7%) and electronics (2.9%).

A tale of two labour markets

In 2025, the highest-paid sectors accounted for just 17% of the workforce, including: financial and insurance activities (£58,488), electricity, gas, steam, and air conditioning supply (£55,469), information and communication (£52,264), mining and quarrying (£50,943), and professional, scientific, and technical activities (£46,208).

In contrast, the lowest-paid sectors employed 40% of the workforce, including: accommodation and food service activities (£28,687), agriculture, forestry, and fishing (£32,784), arts, entertainment, and recreation (£32,871), wholesale and retail trade repair of motor vehicles and motorcycles (£33,158), other service activities (£33,537), and human health and social work activities (£35,744).

Rising wages at the bottom

Over the past decade, the fastest wage growth has occurred in the lowest-paid sectors. Agriculture (4.3%), hospitality (5.1%), and administrative services (4.5%) have all seen above-average earnings growth. These sectors also exhibit persistently high vacancy rates, especially in hospitality.

In contrast, higher-paid industries tended to exhibit lower vacancy rates and more moderate earnings growth, except for financial and insurance activities.

Manufacturing has traditionally recorded earnings above the economy-wide level. But from 2022, its earnings fell behind the all-industry median, placing the sector (£38,956) slightly below the national level in 2025 (£39,040).

However, manufacturing is a heterogeneous sector, with industries such as pharmaceuticals (£51,970), other transport equipment (£49,950), and automotive (£47,411) offering wages well above the national median. Manufacturing also provides better-paid part-time jobs (£17,857), with median earnings significantly above the UK median for part-time work (£14,713).

Rethinking the narrative

Manufacturing and knowledge-intensive services are the core engines of innovation, exports, and productivity. At the same time, labour-intensive services cannot be ignored, as they employ a large share of the population and shape living standards for millions.

The real challenge, therefore, is not choosing between sectors, but rebalancing the economy. The UK’s base of high-value activities is too narrow relative to its workforce size.

This has important implications for productivity and living standards. Without a broader expansion of these activities, productivity growth will remain constrained, while inequality is likely to persist as long as high-paying sectors employ only a small share of workers.

This article draws from Section 1 of the UK Innovation Report 2026. For data and more analysis on the UK’s competitive advantage in industrial innovation, see the full report produced by Cambridge Industrial Innovation Policy:

Explore the UK Innovation Report 2026