How will the economic effects of coronavirus vary across areas of the UK?

There are significant differences in economic performance and wellbeing between and within areas of the UK. The health and economic crisis caused by Covid-19 is likely to exacerbate these existing inequalities.

The economic crisis caused by Covid-19 is likely to exacerbate existing inequalities and challenge the government’s ‘levelling up’ agenda. Predicting exactly how areas will be affected is difficult, but disadvantaged households and the areas in which they live are likely to be hardest hit.

What does evidence from economic research tell us?

There are large differences in economic performance and wellbeing both between and within areas of the UK.
The impact of the crisis is likely to differ across local areas, due to differences in the direct health burden, industrial composition and skill composition of places.
Establishing the relative importance of these and other factors is problematic, and therefore predicting how areas will be affected is difficult. But disadvantaged households and areas are likely to be hardest hit.
In addition to the government’s job retention schemes, the most immediate way to help the most vulnerable will be to focus on existing support mechanisms, such as welfare payments and pupil premiums, that target the most disadvantaged.
In the medium to longer term, there is scope for more ‘place-based’ policies such as targeted infrastructure investment.

Related question: Which parts of the UK have been hit hardest by the Covid-19 crisis?

How reliable is the evidence?

We have good evidence that there are significant differences in economic performance and wellbeing across the UK (for example, McCann, 2019). These differences are persistent over time and along some dimensions, the gap between places has widened in the decade following the 2008/09 global financial crisis (for example, Sensier and Devine, 2020). These disparities matter for people because local social and economic conditions directly affect individual living standards and life chances.

Spatial disparities mainly arise because of the strong tendency of economic activity to cluster in some places, driven to a large degree by the co-location of highly skilled workers and highly productive firms. There is a well-documented ‘college’ wage premium – more educated workers earn more – and good evidence of an ‘urban wage premium’ – people who live in bigger cities earn more than similar people living in smaller cities. There is some evidence that wage differences in the UK are mostly due to the concentration of more educated and skilled workers (for example, Gibbons et al, 2013).

Austerity – the sustained and widespread cuts to government budgets in the UK since 2010 – is partly responsible for widening disparities since then. A reduction in central government redistribution increases spatial inequality as access to public services is increasingly dependent on the local tax base (which is smaller in more disadvantaged areas). Several studies find that local government cuts to service spending varied significantly, with cities in the northern parts of England being particularly hard hit (for example, Gray and Barford, 2018; Centre for Cities, 2019; Beatty and Fothergill, 2013).

The direct economic effects of lockdown have been mitigated to some extent by the ability of high-wage knowledge-intensive jobs to be done from home. In contrast, many low-wage service jobs cannot be done remotely.

Several studies find that there is substantial variation in the percentage of tasks that can be done at home even within a specific occupation or industry (for example, Adams-Prassl et al, 2020). There is also evidence of differences in the spatial distribution of jobs that can be done at home and the proportion of people who are self-employed (Magrini, 2020).

Related question: Who can work from home and how does it affect their productivity?

Taken together, this evidence suggests that lower skilled workers are likely to be harder hit during lockdown, and that the immediate crisis is therefore likely to accentuate inequalities both within and between cities. There is wide geographical variation in ultra-fast and full-fibre internet in the UK, and in principle, this will partly determine the extent to which people and firms can make the transition to operating online (Ofcom, 2020).

The sectoral nature of the crisis means that there is variation across the country in the proportion of people who have either been furloughed, lost their job or lost hours and pay. Areas with high employment shares in tourism and leisure, for example, are currently much harder hit than others, as are areas with high pre-coronavirus claimant counts (for example, McCurdy, 2020).

Many areas most directly affected by the health crisis will also be hard hit by the longer-term economic crisis. Many factors will determine area vulnerability in the longer term. While areas will be more vulnerable on some dimensions than on others, some areas will be vulnerable on multiple dimensions., For example, Davenport et al (2020) identify areas that are vulnerable on three dimensions – reflecting their elderly population; their reliance on tourism and hospitality; and their pockets of socio-economic deprivation.

Unfortunately, there is relatively little evidence on how recessions play out in local areas. As the current recession stems from a health crisis rather than an economic one, there will also be differences from previous recessions.

Part of the reduction in economic activity can be considered a temporary supply shock required by lockdown. As lockdown restrictions are eased, some supply will return to satisfy pent-up demand. That said, there is also evidence that temporary shocks can have permanent effects, and to the extent that the health crisis lingers, demand could be depressed for a longer time.

Related question: How much will lifting lockdown start to reverse the UK's economic slump?

There is conflicting evidence over how long these economic effects might persist. One recent US study investigates the effects of recessions over the last 50 years and finds that local areas that suffered larger employment losses during a recession do not fully recover their employment relative to less affected areas, even after ten years (Hershbein and Stuart, 2020).

Several studies show that recovery tends to be much slower in Europe compared with the United States (for example, Beyer and Smets, 2015). Other studies also find long-lasting (negative) impacts on local areas of specific types of economic shocks, for example, as a result of Chinese import competition (Autor et al, 2013). Even if output eventually recovers, these studies will not bring much comfort to areas that experience the worst effects of the Covid-19 crisis.

What studies we have of the resilience of cities and regions in the face of shocks, show that there is wide variation across the UK. Southern and eastern regions tend to ‘bounce back’ strongly even if badly hit by a recession (for example, Martin et al, 2016). Education and skills may help the resilience of areas in responding to adverse economic shocks (for example, Lee, 2014) This pattern may emerge again in the current crisis and be exacerbated by the divide between those who are able to work at home and those who are not.

The direct effects of Covid-19 on education and unemployment, the potentially long-lasting effects of the crisis in some areas, and the existence of persistent geographical disparities more generally, raise significant concerns for young people growing up in the hardest hit communities.

Related question: How might the crisis affect children from poorer backgrounds?

A large body of research examines the effects of living in a deprived neighbourhood on education, health, labour market outcomes, crime and many other outcomes. Recent work using longitudinal data covering nearly the entire US population documents long-run effects on poverty and incarceration for children growing up in poor neighbourhoods (Chetty et al, 2020).

UK evidence shows that birthplace can have long-run effects on labour market and other outcomes (for example, Bosquet and Overman, 2019). Whether the transmission mechanism is parental or environmental remains a topic of considerable academic debate, but in the hardest hit areas, both factors look to be negatively affected by the crisis.

What further evidence is needed?

Many factors will influence what happens in local areas over time, and teasing out the most important factors given the specifics of the current crisis is not easy. Even if we could identify all the relevant factors, we do not know their relative importance in what is to come. This suggests that the main focus on understanding how the crisis is playing out in different areas will need to be on early and forward-looking indicators that give some indication of what is happening in local economies.

What should policy do?

The other big evidence gap is around the effective policy response.

Existing support mechanisms such as the job retention schemes for employees and the self-employed are already playing a major role in avoiding catastrophic job loss. Social welfare systems such as Universal Credit are also important in supporting the most vulnerable people irrespective of where they live (Brewer and Handscomb, 2020). The job retention schemes will need to evolve as they are phased out and the crisis moves from rescue to recovery (Wilson et al, 2020).

Related question: Why should the government provide income protection in a recession?

Refinement of these schemes, and of elements of the recovery package, could involve a sectoral or area-based component. On the former, some evidence suggests that the industrial structure of areas has not mattered in how regions respond to past economic shocks (for example, Martin, 2016). In contrast, as discussed above, education and skill composition do matter so it is important that these differences inform any area-based element in developing the policy response.

Other factors will also be important when thinking about area targeting. For example, the returns to infrastructure investments may be larger in some places than in others (for example, Overman, 2020). At a different spatial scale, targeting of area-based policies to improve economic opportunity would be improved if we can identify specific neighbourhoods where certain subgroups of children grow up to have poorer outcomes (as has been done in the United States by Chetty et al, 2020).

Providing additional support for public services in the most vulnerable communities will also be critical, particularly given the large cuts to the budgets of local governments over the last decade. Reversing austerity that has hit cities in the north of England the hardest, and targeting support to less-educated, lower-income workers is a key part of the policy mix that the government should be following to address long-run area disparities in the UK.

Where can I find out more?

The geography of the Covid-19 crisis in England: Alex Davenport, Christine Farquharson, Imran Rasul, Luke Sibieta and George Stoye analyse how different dimensions of the crisis – health, jobs and families – vary across England.

The enduring local harm from recessions: Brad Hershbein and Bryan Stuart study the effects of US recessions since 1973 on employment and earnings in local labour markets.

Local differences (responding to the local economic impact of coronavirus): Charlie McCurdy at the Resolution Foundation looks at what might explain the immediate labour market impacts across local authorities, with a particular focus on the role of sectoral composition.

People, places and politics: the challenge of levelling up in the UK: Henry Overman discusses spatial disparities around the UK and the role that various policies could play in ‘levelling up’ places that have been ‘left behind’.

Perceptions of regional inequality and the geography of discontent: Insights from the UK: Philip McCann discusses the evidence on the degree of interregional inequality in the UK and how it compares to other OECD countries.

UK regional productivity differences: An evidence review: A report by Robert Zymek and Ben Jones for the Industrial Strategy Council looks at the causes of differences in UK regional productivity and policies that could address them.

Levelling up regional resilience: Marianne Sensier and Elvira Uyarra explore the lessons learnt from the financial crisis about ways to improve regional resilience and help the recovery from the Covid-19 crisis.

Cities Outlook 2019: A report from the Centre for Cities explores how local government cuts since 2010 have affected UK cities.

What Works Centre for Local Economic Growth: This initiative provides analysis of policies that are most effective in supporting and increasing local economic growth.