A NOTE ON REGIONAL POLICY AND MIGRATION IN THE UK

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1 A NOTE ON REGIONAL POLICY AND MIGRATION IN THE UK Prof Steve Fothergill Centre for Regional Economic and Social Research Sheffield Hallam University September 2010 This note synthesizes a range of accumulated knowledge on the relationship between regional economic policy and demographic change in the UK, with a view to informing the work of the Royal Commission on Environmental Pollution. It draws principally on the author s own long experience in this and related fields. The paper does not, however, attempt to provide a comprehensive literature review, which would be a more substantial exercise. Does regional economic policy work? Strategic issues The UK has a long history of active regional economic policy, extending back to at least the 1930s. Over this long period the intensity of efforts to promote economic growth in less prosperous parts of the country have varied. The late 1940s, the 1960s and 70s, and the first decade of the present century probably represent, in their different ways, the peaks in the intensity of effort. The fact that much the same regions and local areas are the problematic ones today as in the 1930s often prompts the suggestion that regional policy has failed. This conclusion is wrong. What needs to be kept in mind here is that the industries that once underpinned the economies of large parts of the North, Scotland and Wales employers such as coal, shipbuilding, steel and heavy engineering have mostly disappeared or shrunk to a shadow of their former selves. Yet very substantial population and economic activity remains in these places. The key to understanding the policy impact lies in estimating what would have happened in the absence of regional policy. The difference between what actually happened, and what would have happened in the absence of policy, is the proper measure of the policy effect. 1

2 The classic evidence Reflecting the long history of UK regional policy, studies of its impact date back at least to the 1960s. By the early 1970s a tried and tested method for measuring the policy impact had been developed and was generating results that were consistent with other evidence, for example on the location and scale of inward investment. The crowning achievement amongst this research was undoubtedly the study by Moore, Rhodes and Tyler (1986) for what was then the DTI. It provided estimates of the impact of regional economic policy that were based on plausible estimates of what would have happened in the absence of regional policy, rooted in comparisons of employment trends in periods of strong and weak regional policy. Their study concluded that from 1960 onwards regional policy had in total diverted 600,000 manufacturing jobs to the four main assisted regions (the North, Scotland, Wales and Northern Ireland), of which 450,000 jobs still survived in the early 1980s. The gross cost per job to the Exchequer averaged 40,000 (at 1981 prices). The discretionary schemes of financial support similar to those still in operation today came in at a lower cost - 17,000 per job at 1981 prices (or perhaps c 80,000 at today s prices). These estimates commanded wide academic credibility. So it became safe to conclude that regional economic policy did indeed work, though it is wasn t cheap. What we also learned from this classic evidence is that some types of regional support are more cost-effective than others. Discretionary grants are cheaper, in terms of the Exchequer cost per job, than automatic financial incentives, and blanket labour cost subsidies are the least cost-effective of all. The most cost-effective tools are administrative controls (present-day planning controls would fall into this category) but these run the risk of stifling investment altogether or diverting it abroad. The disintegrating evidence base From this point onwards the evidence base began to deteriorate. This is mainly because the technical challenge of disentangling a policy effect becomes much harder: The policy-off 1950s, which once offered a guide to underlying trends, retreats in time and relevance A wave of closures among manufacturing plants attracted to the assisted areas begins to offset on-going positive policy impacts Regional policy itself fragments into multiple component parts, for example with the growing involvement of the EU and of regional agencies (eg the RDAs) 2

3 The focus of regional policy spreads beyond just manufacturing, its original focus, to include parts of the service sector, including for example the location of government jobs The geography of the assisted areas also becomes more complex, with different programmes often targeting different places The net effect is that the simple, overarching analysis of the impact of policy has become a thing of the past. It has been replaced by programme-byprogramme and agency-by-agency evaluations. There is good reason to be sceptical about the real value of most of these studies. Apart from the old difficulty of establishing what would have happened in the absence of policy, by looking at the component parts of regional policy such studies tend to overlook the fact that successful job creation often arises from the simultaneous actions of several different players. There is, as a result, a tendency towards over-counting, as the same job gets counted more than once by different players. In some evaluations, the vested interest of sponsors probably also taints the published results. The net impact of regional policy cannot therefore be estimated simply by adding together the published estimated impacts of individual programmes or agencies. That said, in just about all these evaluations a positive policy impact is usually identified. One of the better examples is the evaluation of the recent impact of Regional Selective Assistance (Kingston University et al 2006) which generates positive numbers that are broadly consistent with the classic Moore, Rhodes and Tyler estimates for this same scheme back in the 1970s. That regional policy has a positive impact is confirmed by local studies. The former coalfields have arguably been the part of Britain most in need of economic regeneration. Here the evidence is that by the middle of the last decade rather more than half the 250,000 jobs lost from the coal industry since the early 1980s had been replaced by new jobs for men in the same areas (Beatty, Fothergill and Powell 2007). A study by the Audit Commission (2008) confirms that up to the onset of the 2008 recession the former coalfields were gaining employment. It is not self-evident that a revival in the coalfield economy was always going to happen a spiral of decline could have set in instead and the whole of the revival may not be attributable solely to regional economic policy, but it has unquestionably helped. Whether devolution to Edinburgh and Cardiff (and more recently Belfast) has also helped is a moot point. The theory is that regional policy will now be implemented with greater sensitivity to local circumstances and should therefore be more effective. The practice is that major aspects of regional economic policy remain standardised across the UK (EU funding arrangements are a case in point) and fashions in thinking and practice tend 3

4 to be shared across the whole of the country. Nor is it clear that the devolved administrations have taken the opportunity to spend more on regional economic development than would otherwise have been the case. Regional policy: some conclusions The evidence is therefore that: Regional policy does unquestionably work in altering the location of economic activity But exactly how large that impact has been has not, in recent years, been reliably determined And as a result, the cost-effectiveness of current regional economic policy is impossible to determine at all reliably Taking the long view, and bearing in mind the relatively firm base of the Moore, Rhodes and Tyler estimates, it would probably not be unreasonable to suggest that regional economic policy has directly influenced the location of a million UK jobs. Most of these will be jobs that would otherwise have been located in other parts of Britain, but some will be new to the UK as a whole. Second-round multiplier effects increase the total. Multiplier effects operate through a number of channels. The wages earned in the businesses supported by regional policy sustain further local jobs, for example in retailing, and there are local supply chain impacts that add further to employment. These effects alone tend to be modest - perhaps a multiplier of 1.2 or 1.3 (see Armstrong and Taylor 2000). However, an additional multiplier effect operates via the impact of jobs on the distribution of population around the country (discussed further below). Substantial numbers of jobs in the now-dominant service sector tend to be tied to local population levels, for example through public sector funding formulas. So an area that gains manufacturing jobs as a result of regional policy might, via the influence on population levels, in the long run expect to gain additional jobs in schools, hospitals and local government. These economic base multiplier effects are potentially substantial. Adding all these multiplier effects together suggests that the overall impact of regional policy on employment in the assisted areas may be nearer two million. These jobs are widely spread across the North of England, Scotland, Wales and Northern Ireland. The Midlands probably has proportionally fewer, partly because a smaller proportion of the Midlands has been targeted for support and partly because the Midlands was targeted later than elsewhere. 4

5 On the whole, the experience has been that firms can operate successfully and profitably in these places. The major branch plant closures of the 1980s, for instance, which hit the Northern regions disproportionately hard, mostly occurred for reasons unconnected with their location (Fothergill and Guy 1991). The impact on migration The theory Standard economic theory suggests that migration will occur from low-wage regions to high-wage regions. Also, because the same theory suggests that wage levels will be determined by the balance between labour demand and supply, the effect will be for migration to occur from high to low unemployment regions. In the UK context, regional labour markets don t match this model very closely. Regional wage levels don t respond strongly to labour market imbalances. Instead, national pay bargaining and cultural norms keep regional differences in wage levels fairly small. Furthermore, in so far as average wages in London and the South East are some way ahead of the rest of the country, this partly reflects differences in occupational structure (with more high-level white collar jobs in and around London) and higher housing costs in the South do much to close the gap in real wage levels. But inter-regional migration does still occur on a significant scale in the UK. The main driving factor seems to be the availability of jobs, rather than wage levels. Workers migrate from the places where jobs are in short supply to those where they are more readily available. Availability depends not simply on whether jobs are increasing or decreasing but on the overall balance in the local labour market, which includes pre-existing unemployment, economic inactivity and the natural increase in the workforce. Thus it is perfectly possible, in some circumstances, for growing employment to co-exist in the same place with net out-migration. Furthermore, it is the relative availability of jobs between places that drives inter-regional migration. In a recession for example, when the number of jobs may be declining everywhere, migration can still be expected into the regions with the tightest labour markets. Following this logic we might expect that if regional economic policy works in altering the location of employment around the country it will also, via migration, affect the distribution of population. The evidence Unfortunately, UK research into regional policy has tended to take place separately to research into migration. Few studies attempt to build the links. 5

6 A notable exception is Gudgin (1996), which looked at experience in the 1980s and early 1990s. This confirmed a link between regional job shortfalls and net migration. Expressed as a share of the working age population, the reduction of 13 per cent in the job shortfall in the South West of England, for example, was associated with net in-migration to the region of 9 per cent. In the North West of England an increase of 13 per cent increase in the job shortfall was associated with net out-migration of 4 per cent. Likewise, at the sub-regional scale, data for for a range of localities demonstrates a clear relationship between changes in employment and netmigration among the working age population (Beatty and Fothergill 2003). But how powerful is this link? The problem here is that the effects of employment change on migration are likely to be lagged. They don t happen all at once or very quickly. Thus the full effects of employment changes in one decade are still likely to be making themselves felt on migration flows during the following decade. In broad terms, the admittedly dated evidence from the studies quoted above suggests that, over a decade or so, a 10 per cent increase in employment (relative to the national average) is associated with a 5 per cent increase in the working age population attributable to net migration. Over a longer period (say a generation) that impact will be higher. Because of the impact of job availability on migration, the main long-term impact of job creation attributable to regional policy is in fact on the distribution of population. Rather than drastically lowering unemployment in the assisted areas, the main impact of regional economic policy is to stabilise their population levels. This is a rather fundamental point that, astonishingly, tends to be overlooked. So who are the migrants? The starting point here is the comprehensive review by Champion et al (1998). On links with the labour market, the review confirms that among the circumstances at origins and destinations, labour market factors are of vital importance in stimulating longer-distance migration. What this review and other evidence also confirms is that longer-distance migrants tend to be: Younger, with migration rates at their highest among the year old group and up to ten times higher than the migration rates for older workers and retirees Better qualified, with graduates far more likely to move between regions than those with no or few qualifications Often these two groups overlap: it is the UK s young graduates who are the most mobile of all. 6

7 What the evidence also shows is that the modest net flows of migrants between places hide much larger gross flows in either direction. Paradoxically, it is the places with the highest in-flow of migrants (and usually the strongest economies) that also experience the largest out-flow of migrants, even if the net flow is strongly positive. Conversely, in Britain s weakest local economies the migration flows in both directions are smallest the composition of the local population here is the most stable. The evidence, notably from Jackman and Savouri (1992), also shows that the volume of migration flows rises and falls with the economic cycle. This is because longer-distance migration is related to the flow of job vacancies, which declines in recessions as labour turnover declines. The Champion review notes that public sector housing is seen as a barrier to longer distance mobility. It also confirms that migration is greatly affected by the state of the housing market and spatial variation in the availability and cost of housing. Migration: some conclusions The evidence on the link between migration and jobs is therefore that: Successful regional policies will alter the distribution of population via their impact on migration These impacts are potentially very large but surprisingly overlooked If we take the earlier and admittedly speculative figure of two million as the number of jobs whose location may have been influenced directly or indirectly by regional economic policy, we can speculate further that, once migration effects have worked themselves out to the full, these two million jobs may have resulted in an extra 1.5m residents of working age in the assisted regions. Mostly these will be residents who would otherwise have migrated to other parts of the country. Add in the impact on the non-working age population that is, children and retirees and the net effect may have been to raise population in the assisted regions by as much as 2.5 million. The highly speculative nature of these estimates must be emphasised. But at 2.5m the possible cumulative impact of regional economic policy on population levels in the assisted areas is equivalent to the entire population of North East England (2.6m) and only just less than the population of Wales (3m). 7

8 Complicating factors So far, so good: there is unquestionably a link between regional economic policy and the distribution of population around the country. But the complexities of the real world need to intrude. International migration Even before the post-2004 influx of migrant workers from the EU accession states, international migration was becoming an important component in understanding the dynamics of employment and population in the UK regions. This has been incisively documented by Rowthorn (2004). In simple terms, what has happened since the mid 1990s is that a substantial part of the increase in employment in London and the South East has been met by international migration into the region. This has choked off what would otherwise have been a substantial job-driven flow of migrants from North to South within Britain. Population is therefore higher now in the North than would otherwise been the case. Indeed, net out-migration came to a halt in the northern regions during the 1990s. In effect, even if there had not been a surge in international migration the population of London and the South East would probably not have been a great deal smaller. In simple terms, there would have been more northerners down south, and fewer Poles. The scale of the influx of migrant workers since 2004 is likely to mean that, despite having weaker labour markets than the rest of the country, the northern regions too will have recently recorded net in-migration of working age adults. The urban-rural shift Overlain on the regional pattern of population and employment change in the UK is a second and, taking the long view, generally more powerful locational trend. This is generally known as the urban-rural shift. From the 1950s to the 1990s, the decentralisation of people from Britain s largest cities and towns was driven partly by the decentralisation of jobs, especially in manufacturing. More recently employment in the cities has picked up relative to the rest of the country, but there continues to be a gradual decentralisation of population (and a concomitant increase in commuting) mainly for housing reasons. The urban-rural shift therefore continues, and it is not just the places within easy commuting distance of cities that are gaining population. 8

9 London London is something of a special case, not just because it is so much larger than other UK cities but also because it is the prime destination for migrants from abroad and because it lies at the hub of the urban-rural shift. In focussing so often on the prosperity of the greater South East we tend to forget that the population of London actually fell from a peak of nearly 9m at the end of the 1930s to a low-point of just under 7m in the early 1990s. London s population has since bounced back, but it still remains some way short of 8m. From the mid 1960s to the present day, London s manufacturing employment also fell from 1.5m to just a few hundred thousand. London generates massive and distinctive migration flows of its own. It experiences a huge in-flow of migrants from abroad and from elsewhere in the UK, many of the latter comprising young graduates. It also experiences a huge out-flow of migrants to its commuter belt and beyond. Many of the outmigrants are somewhat older. London has as a result developed a distinctive population profile that sets it apart from other UK cities or the country as a whole. Students Students in full-time education now represent a non-negligible migration flow within Britain that owes little directly to the availability of employment. The migration flows associated with higher education are mostly towards the main cities, stripping smaller towns and rural areas of a sizeable proportion of their younger working-age population. In the destination towns and cities, the presence of students can now have a substantial influence on key economic variables. It is not uncommon in university towns for the employment rate (the share of adults of working age in employment) to be ten percentage points lower than would otherwise be the case. Students distort the normal relationships between jobs and migration. There may be longer-term impacts as well. There seems to be an emerging tendency for some young people to stay on in the city where they have studied. In time, bearing in mind the huge numbers now involved, this too could begin to exert a powerful influence on the distribution of population. Concluding thoughts If the starting point of the Royal Commission on Environmental Pollution is that it would be good to take the strain off natural resources and the environment in the South East of England by promoting a more balanced distribution of population, the key conclusion of this note is that it should be 9

10 possible to ease the population pressures in the South East by promoting regional economic development in the rest of Britain. Exactly what measures regional economic development should consist of, and who should be responsible for their implementation, are matters of major debate in their own right but beyond the scope of this note. On the other hand, the Royal Commission should not be deluded into thinking that regional economic development comes cheap. If it really were cheap and easy, the problems would no doubt have been solved years ago. Nor is there reliable evidence currently available, off the peg, to compare the costs of regional development in the North with the costs of responding to overdevelopment in the South. 10

11 References Armstrong, H and Taylor, J (2000) Regional Economics and Policy, Blackwell, London. Audit Commission (2008) A Mine of Opportunity: local authorities and the regeneration of the English coalfields, Audit Commission, London. Beatty, C and Fothergill, S (2003) The Seaside Economy, CRESR, Sheffield Hallam University. Beatty, C, Fothergill, S and Powell, R (2007) Twenty years on: has the economy of the UK coalfields recovered?, Environment and Planning A, vol 39, pp Champion, T, Fotheringham, S, Rees, P, Boyle, P and Stillwell, J (1998) The Determinants of Migration Flows in England: a review of existing evidence and data, DETR, London. Fothergill, S and Guy, N (1991) Retreat from the Regions; corporate change and the closure of factories, Regional Studes Association, London. Gudgin, G (1996) Regional problems and policies in the UK, Oxford Review of Economic Policy, vol 11, pp Jackman, R and Savouri, S (1992) Regional migration in Britain: an analysis of gross flows using NHS central register data, Economic Journal, vol 102, pp Kingston University, Aston University and University of Warwick (2006) Evaluation of Regional Selective Assistance (RSA) and its successor, Selective Finance for Investment in England, report to DTI. Moore, B, Rhodes, J and Tyler, P (1986) The Effects of Government Regional Economic Policy, DTI, London. Rowthorn, R (2004) Combined and Uneven Development: reflections on the North- South divide, paper presented at HM Treasury. 11