WhataretheeconomicforcespolarisingtheUK?EconomicperformancevarieswidelybetweendifferentplacesintheUK,writesHenryG.Overman(LSE).ThereisabroadNorth-Southpattern,butalsosubstantialvariationwithinthoseareas.Insomemeasures,theperformancegaphaswidenedsincethefinancialcrisis.Austeritytooreducedredistributionandsoitispartlyresponsiblefortherecentwideningofspatialdisparities.Conseqently,theBrexitvote,forexample,washighlyunevenwithsome

placesmorelikelytovoteLeaveandothersmorelikelytovoteRemain.Policy,however,needstomakesurethatpeopleindisadvantagedcommunitiescanaccesstheopportunitiesgenerated,whichwillrequiresubstantialinterventionacrossawiderangeofpolicyareas.Economicperformancevarieswidelybetweenthetowns,citiesandregionsoftheUK.Onsomemeasures,thisvariationhaswidenedsincethefinancialcrisis.Thesedisparitieshavealreadyprovedtobeakeythemeintherun-uptothe2019generalelection.Spatialdisparitiesareimportantbecauselocalsocialandeconomicconditionsaffectindividualoutcomes.Forexample,therearesubstantialdifferencesinsocialmobilityatthelocallevel:whereyougrowupmakesadifferencetohowmuchyourfamilybackgroundaffectsyourlifechances.Spatialdisparitiesalsoreflectindividualinequality.Forexample,ifindividualinequalityincreasesandpoorerfamiliesareconcentratedinparticularareas,thenspatialdisparitieswillalsoincrease.

Thelinkbetweenindividualandspatialdisparitiesiscomplicatedbythefactthatpeoplecanmovearound.Thismattersforthinkingaboutwhatspatialdisparitiescantellusaboutimportantpolicyissues.Forexample,thegeographyoftheBrexitvotewashighlyunevenwithsomeplacesmorelikelytovoteLeaveandothersmorelikelytovoteRemain.OneexplanationisthattheLeavevotereflectsthe‘revenge’of‘left-behind’places–thatis,itisastorynotaboutindividuals,butaboutsharedangerbythoselivinginplacesleftbehindbytechnologicalchangeandglobalisation.Thealternativeistothinkofthisasastoryaboutindividuals,leftbehindbythesameforces,andwheretheylive.

Thefirstwayofthinkingaboutthisappearstobedrivingthecurrentpolicyresponse.ButthesecondisperhapsamoreusefulwayofunderstandingwhywealthySevenoaksandstrugglingSunderlandbothvotedLeave.Differentkindsofpeople,withverydifferentconcernsabouttheEuropeanUnion,livingindifferentplaces–butagreeingonthesamesolution.Theotherreasonwhyindividualmobilitymattersisbecauseitmeansthatpoliciestargetedatspecificplacesdon’tnecessarilyendupbenefitingthepeoplethatwehopedtohelp.Forexample,transportimprovementsinapoorerareadon’tnecessarilyendupbenefitingpoorerfamiliesifthoseimprovementsthenleadtohigherrentsandhousepricesthatseethempricedoutoftheneighbourhood.

Takentogether,thesetwocomplications–theneedtodistinguishbetweenpeopleandplace;andthefactthatpeoplemovebetweenplaces–meanthatitisimportantforustounderstandwhatiscausingspatialdisparitiesandtothinkcarefullyaboutwhowillbenefitfromthedifferentpoliciesproposedtoaddressthesedisparities.

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DisparitiesintheUK:it’smorethanjustaNorth-Southdivide

ThereisabroadNorth-SouthpatterntospatialdisparitiesintheUK.CitiesOutlookisthemostusefulsourceofdetaileddataontheeconomicperformanceofUKcities.The2019reportshowsaverycleargeographyintermsofbothoutputperworkerandemployment,withcitiesintheGreaterSouthEastperformingbetter.Eightofthe10citieswiththehighestunemployment(claimantcount)areintheNorthofEnglandorScotland.Thereisalsosubstantialvariationwithinthosebroadareas:somenortherncities(suchasManchester)aredoingrelativelywellandsomesoutherncities(suchasIpswich)aredoingrelativelybadly.Despitemanypolicyinitiativesbythecurrentandpreviousgovernments,thesedisparitiesremainlargeandpersistent.Indeed,thesedisparitieshavewidenedsincetheglobalfinancialcrisis.Figure1showsastandardmeasureoftheextentofspatialdisparities(thecoefficientofvariation)calculatedforthe(NUT2)regionsoftheUKfrom1980to2015,thelastdateforwhichwehavedata.Disparitiesfellbetween1980andthemid-1990s,increasedintheearlydaysoftheLabourgovernmentbeforefallingagain.Theincreaseindisparitiessincetherecessionhasreturnedustoroughlythelevelofthe1980s.

Figure1:SpatialinequalityintheUK

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Source:Author’sowncalculationsbasedonEurostatdataforNUTS2regionsoftheUK

WhataretheeconomicforcespolarisingtheUK?

Bettereducatedworkersareconcentrated

AccordingtoEurostat’slatestfigures,in2018,around65%ofinnerLondonresidentshadtertiaryeducation,thehighestpercentageinEurope.Thiswasupfromaround54%in2010.Incontrast,theproportionofresidentswithtertiaryeducationinGreaterManchesterwasaround39%in2018,upfrom31%in2010.Thereisalsoagrowingwagepremiumforgraduatescomparedwithpeoplewithoutdegrees.NumbersreportedbyElliotMajorandMachin(2018)showthatin1980,malegraduatesearned,onaverage,46%morethantheirnon-graduatecounterparts.In2017,thisearningsupliftwas66%.Givenastrongandgrowingconcentrationofmoreeducatedworkersandalargeandincreasingwagepremiumforgraduates,itisnotsurprisingthatthespatialdistributionofhigherskilledworkersexplainsupto90%ofarea-leveldisparitiesinwagesintheUK(Gibbonsetal,2013).

Figure2:Sharesofpopulationwithtertiaryeducation

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Biggercitiesmakefirmsandpeoplemoreproductive

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Thereisagreatdealofempiricalevidenceofthe‘agglomerationeconomies’thatunderpintherelationshipbetweenacity’ssizeandtheproductivityofitsinhabitants.GrahamandGibbons(2018)summariseresultsfrom47studiesestimatingtheseagglomerationeconomies,12ofwhicharefromtheUK.Theconsensusestimatesuggeststhatonceweallowfortheunequalspatialdistributionofhigher-skilledworkers,theelasticityofproductivitywithrespecttosizeisaround0.02to0.03.Thismeansthatdoublingcitysizeincreasespeople’sproductivitybyaround2-3%.Whiletheseproductivityeffectsareimportant,whenitcomestoGDPpercapita,theycaneasilybeswampedbyspatialdisparitiesintheshareofskilledworkers.ThishappensintheUKwhere(ifweexcludeLondon)theoverallrelationshipbetweencitysizeandGDPpercapitaisn’tverystrong–asFigure3shows.Ourcitiesstillbenefitfromagglomerationeconomies–someonewithadegreemovingfromBlackpooltoManchesterwouldbemoreproductive–butthisisn’tenoughtoencouragethesortingofhighlyskilledworkersintosomeofourbiggercitiesoutsideLondon.

Figure3:GDPpercapitaagainstcitysizeforUKMSA

UnderinvestmentintheNorth

BecauseLondonandtheSouthEastarerichandourtaxsystemisprogressive,thereisalotofredistributionfromtheSouthtotheNorth.Butonsomemeasures,Londonreceivesadisproportionateshareofinvestmentininfrastructure.AmoreequaldistributionofinfrastructureinvestmentwouldslowgrowthinLondon.Whetheritwouldincreasegrowthelsewherewoulddependonhowthemoneywasspentbecausetheeconomicreturnstoinfrastructurevaryalotacrossplaces.Theoveralleffectonregionalinequalitieswouldbelimitedsincerelativetotheconcentrationofskilledworkers,differencesininfrastructureplayarelativelysmallroleindrivinglong-termdisparities.TheonlywayforinfrastructuretohaveabigeffectonspatialdisparitiesisifitleadstotherelocationoflargenumbersofskilledworkersacrosstheUK,awayfromLondon.

Thefinancialcrisisandausterity

LondonandtheSouthEastwereinitiallyhardhitbytherecession,buttheyhaverecoveredmorequickly.Adjustmentelsewherehasbeenslowerand,asaresult,spatialdisparitieshavewidened.LocalgovernmentinEnglandhasbornethebiggestburdenofausterityandcitiesintheNorthofEnglandhavebeenmuchharderhitthanthoseelsewhere(CitiesOutlook2019providesmoredetail).Giventhatausterityreducedredistribution,itispartlyresponsibleforwideningdisparities.[3]Theresultingcutstopublicservicesmaymeanthatausterityhinderedadjustmenttothefinancialcrisisandthattheadverseeffectsondisparitiescouldpersistinthemediumtolongrun.

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Improvingeconomicperformanceoutsidethecapital

RatherthanfocusingonLondon’sdominance,weshouldaskwhyothercitiesandtownsdonotoffersimilareconomicopportunitiesandwhatcanbedoneaboutit?Givenwhatweknowabouttheeconomicforcesdrivingpolarisation,therearetwokeyquestions:

(1)Inwhichplacescouldgreaterinvestmentandothergovernmentsupportbeusedtoincreaseproductivityandhelpcreatejobs?

(2)Howdowemakesurethatpeoplecanaccesstheseopportunities?

Evidencesuggeststhataround50%ofpeopleonlyeverworkwhilelivinginthelocallabourmarketwheretheywereborn(BosquetandOverman,2019).Thissuggeststhatthepolicyresponseneedstoberealisticabouthowfarpeoplearewillingtomoveforwork,particularlyforlesseducatedworkers(thefigurerisesto60%forthosewithoutadegree).Having‘everyone’movetoLondonandtheSouthEastisnoteconomicallyfeasible,norsociallyorpoliticallyacceptable.Thesameistruefortheotherextreme:achievingalevelplayingfieldwhereproductivityisequalized,andjobsaregenerated‘everywhere’.Weneedtoberealisticaboutthemarketforcesatwork.Equaloutcomesacrossplacesrequiresplacestohavesimilarskillcompositionandtobeofsimilarsizes.Aswiththepreviousstrategy,thisisnoteconomicallyfeasible,norsociallyorpoliticallyacceptable.

London’sstrongeconomicperformanceplaysalargepartinexplainingwideningdisparities.Providinganeffectivecounter-balancetoLondonmayrequiresomeinvestmenttobemorespatiallyfocused–forexample,byidentifyinganumberofplaces,spreadacrosstheUK,thataredoingrelativelywellandfocusinginfrastructureinvestmentonachievingproductivityandjobsgrowthinthoseareas.

‘Left-behind’places

Aneffectivepolicyresponsewillrequireincreasedinvestment(LSEGrowthCommission,2013)andthereversalofausterity.‘Left-behind’placeshavehighproportionsofvulnerablepeoplewithcomplexneedsandlowlevelsofeconomicactivity.Thiscompoundstheirproblems,aslong-termunemployment,poverty,mentalillnessandpoorhealthoftengohand-in-hand.CEPresearchsuggeststhatsmalltinkeringandminortweaksofexistingpolicieswillnotbeenoughtotacklethemultiplebarrierstosocialmobilityfacedintheseplaces.Itisalsoimportanttobeclearthatspendinginleft-behindplacesdoesnotalwaysneedtobejustifiedbasedoneconomicperformance.Thereareimportantpublicgoodargumentsthatcouldjustifyincreasedexpenditureacrossawiderangeofpolicyareas.Forexample,itispossibletoargueforsubsidisingruralbroadbandasapublicgoodwhilerecognisingthatitseconomicimpactsarelikelytobelimited.

Distributionalargumentscanalsobeusedtosupportintervention.Forexample,reversingausteritycutstowelfarebenefitswoulddisproportionatelybenefitareaswithhighconcentrationsofdisadvantagedhouseholds.Butitisimportanttoberealisticaboutthelikelyeconomicimpactofthesepoliciessothatweproperlyconsidersustainablesourcesofgovernmentrevenuetofundthisincreasedpublicexpenditure.

Conclusion

SpatialdisparitiesintheUKareprofoundandpersistent.Improvingeconomicperformanceandhelpingtotackletheproblemsofleft-behindplacesarebothimportantpolicyobjectives.Addressingthesechallengesrequiresanewapproachtopolicy,onethatallowsfordifferentresponsesindifferentplaces.Suchvariationmakesmanypeoplenervous.Butitisimportanttorememberthatweshouldcaremoreabouttheeffectofpoliciesonpeoplethanonplaces.Policiesshouldbejudgedontheextenttowhichtheyimproveindividualopportunitiesandonwhobenefits,ratherthanwhethertheynarrowthegapbetweenparticularplaces.

ThispostrepresentstheviewsoftheauthorandnotthoseoftheBrexitblog,northeLSE.ItisaneditedextractfromaCentreforEconomicPerformance(CEP)briefing.

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