Government leveling plan avoids hard choices, says Henry Overman. Tackling the economic forces driving the UK’s spatial disparities requires tackling multiple hurdles and allowing for different approaches – and the funds committed so far do not appear commensurate with the scale of the challenge.
The Government’s Upgrading White Paper focuses on 12 missions to improve the UK. Much will be said about whether the government is spending enough (almost certainly not), whether devolving more power is a good thing (almost certainly), and how different their plan is from past efforts (not much, for those of us who remember the 1990s and 2000s).
Beyond these questions, does the economic strategy make sense? If the government spent enough and gave places the right powers, would the gaps in pay, employment and productivity narrow? The answer will depend on how the government resolves the fundamental tension between the role of “Globally Competitive Cities” (part of Mission 1) and other local economies spread across the country. For economic strategy to work, evidence suggests concentrated investment in space is crucial, but politics and concern for quality of life justify equalizing spending.
Many things determine spatial disparities in Britain. The legacy of the deindustrialization of the 1970s, the continued shift from manufacturing to services, and falling communication and transportation costs are all contributing to changing the geography of jobs and the demand for different types of workers. Spatial differences in educational attainment, selective migration of skilled workers, and differences in amenities and cost of living help determine the supply of different types of workers. The demand for and supply of skills interact in ways that can be self-reinforcing, meaning that large spatial differences can emerge and persist. The race-to-the-top policy must counter these economic forces if it is to succeed.
An important consequence of these economic forces is that spatial income disparities – which the government wants to reduce – largely reflect the concentration of highly skilled workers. The share of educated adults ranges from 15% in Doncaster to 54% in Brighton. Highly skilled workers tend to work in better performing labor markets, which further amplifies individual labor market advantages. At least 60 percent and up to 90 percent of the differences in average wages between regions can be attributed to differences in the types of people who work in different locations.
This has important consequences for the “race to the top”. A pragmatic objective of the economic strategy could be to improve economic performance in certain areas outside London and the South East – by reducing spatial disparities regionally, if not necessarily in more narrowly defined local areas. This would allow young talent from left-behind places to access higher-paying opportunities without having to travel across the country.
To generate these opportunities and counter the self-reinforcing feedback loops – meaning the best-paying jobs are concentrated in London and a handful of other regions – significant investment will be needed in a limited number of cities. to attract highly skilled workers and businesses. who employ them. The mention of globally competitive cities (as part of Mission 1) suggests that the government understands this key point.
Why focus on highly qualified people? Because the evidence – much of which is discussed in a report on spatial inequalities by myself and Xiaowei Xu, written for the IFS Deaton Review – suggests that the impact of targeted investment in R&D (Mission 2) , infrastructure (missions 3 and 4), public sector relocation, and other territorial policies will be limited unless they significantly change the composition of the workforce in an area. Even a project the size of HS2, for example, will do little for the West Midlands economy unless it somehow improves the local educational outcomes of children who grow up there or that it encourages a much larger share of graduates and the companies that employ them to settle. the.
And why cities, not cities? Such investments could improve earnings in any area. However, there are many small towns, investments in infrastructure and innovation are expensive, and the number of public jobs to be relocated is limited. Focusing on cities, especially with limited funds, does not produce significant effects in many areas.
Looking to cities recognizes that the advantages of high-skilled regions are self-reinforcing. The concentration of firms and highly skilled workers generates productivity benefits for firms and better labor market outcomes for workers. In turn, this attracts highly skilled workers from across the country. In short, London’s economic advantages derive from the concentration of businesses and skilled workers, as well as its economic size, and these factors are self-reinforcing. The economic power of London also benefits the towns and cities of the greater South East.
To provide a counterbalance in London and the South East, investment must kick-start these self-reinforcing processes elsewhere. The fact that size is a key element in this cycle of self-reinforcement explains why this investment must focus on cities.
Unfortunately, we have to recognize that these policies are likely to benefit high-skilled workers more than low-skilled workers. For talented kids growing up in struggling cities, more and more nearby opportunities offer the ability to commute or move a short distance, making it easier to maintain connections with family and friends. Moreover, some of these benefits will trickle down to low earners in the form of moderately higher wages and improved employment rates, but at the cost of expensive housing.
Unfortunately, while all of these indirect benefits are possible, London – with its many poor neighborhoods, expensive housing and high poverty rates – highlights the limitations of this approach to improving outcomes for those at the bottom of the poverty distribution. income. A more equal distribution of graduates – and globally competitive cities in each region – can help reduce spatial disparities and may even help improve the overall performance of the economy, but it is not a simple solution. to improve outcomes for the poorest households. To do this, complementary investments must enable households to access the opportunities generated.
The current debate often interprets this as a question of “better transport”. For many poorer households, however, investing in transport will usually not be enough. Again, examples from London illustrate the problems – Barking and Dagenham (areas east of London) have good transport links to one of the biggest concentrations of jobs in the world, but this is not enough to prevent low incomes for many households living there. If the poorest households are to benefit from the kind of investments described above, they will need help to improve their education and skills.
For some households, the multiple barriers preventing individuals from accessing better economic opportunities go beyond education and skills. Many of the “left behind” locations that leveling aims to target have high proportions of vulnerable people with complex needs and low levels of economic activity. This compounds their problems, as long-term unemployment, poverty, mental illness and poor health often go hand in hand.
Removing these multiple barriers will require significant investments not only in education and skills, but also in childcare and mental and physical health services. Research suggests that small tweaks and tweaks to existing policies will not be enough to tackle the multiple barriers found in these places. The White Paper recognizes these challenges by emphasizing education (missions 5 and 6) and health (mission 7), but the funds committed so far do not seem commensurate with the magnitude of the challenge.
I have focused on the economics of leveling up, but it is important to be clear that leveling up spending does not always have to be justified on the basis of economic growth. There are important public interest arguments that can justify increased spending across a wide range of policy areas. And unlike economic strategy, there are strong reasons for these funds to be distributed fairly. For example, it is possible to argue for subsidizing rural broadband (part of Mission 4) as a public good, while recognizing that its economic impacts are likely to be limited. Furthermore, although these policies, including those concerning well-being (mission 8), pride in being in place (mission 9) and crime (mission 11) do not specifically target the bottom of the income distribution , they will often benefit the poorest households the most.
Places matter to people. For many people, where they grow up will become where they live and work. Disparities in economic opportunity, cost of living and amenities provide the context and directly influence the decisions they make and the life they will live.
Improving economic performance and helping to solve the problems of places left behind are two important policy objectives. Addressing these challenges requires a new approach to politics, one that allows for different responses in different places. Such variation makes many people nervous. Constituency-based politics means that political messages tend to prefer spending everywhere. However, the policy must allow for this variation. Decentralization of powers (Mission 12) will help, but the central government will still have to wrestle with the fundamental trade-off between concentrating spending to help achieve economic strategy and distributing spending to achieve other goals.
I would say it becomes easier if we remember that we should care more about the effect of policies on people than on places. If so, we should judge the success of the upgrade by how much it improves individual opportunities and who benefits, rather than just closing the gap between locations.
About the Author
Henry Overman is Professor of Economic Geography in the Department of Geography and Environment at the London School of Economics and Director of the What Works Center for Local Economic Growth. He is research director of the Center for Economic Performance.
Photo by Michael Boalch on Unsplash