What would it take to level up the UK?

The government’s levelling up White Paper focuses on 12 missions that aim to reduce regional disparities in the UK. The proposals have generated a lot of discussion about whether the government is spending enough, whether devolving more powers is a good thing and how much of the plan is really new.

These are all important questions. But what does economic research tell us about whether the strategy makes sense? To answer this, the first step is to pinpoint the underlying causes of spatial disparities in economic performance. In large part, the differences in earnings we observe across the country are driven by where high-skilled people choose to live and work.

The second step is to assess what the evidence tells us about policy effectiveness in narrowing the gaps between places and, crucially, who benefits from such policies. More evidence on the latter is needed, but this is key for understanding what the levelling up agenda might achieve.

What causes spatial disparities in economic performance?

Many things determine disparities between different regions and cities in the UK. The legacy of deindustrialisation in the 1970s (Rice and Venables, 2021), the continuing shift from manufacturing to services, and falling communication and transport costs all play a part in changing the geography of jobs and the demand for different types of workers.

Spatial differences in educational attainment, the selective migration of skilled workers and differences in amenities and costs of living also help to determine the supply of different types of workers. Demand for and supply of skills interact in a way that can be self-reinforcing, meaning that large spatial differences can emerge and persist.

One important consequence of these economic forces is that spatial disparities in earnings – which the government says it wants to narrow – largely reflect the concentration of high-skilled workers. For example, the share of adults with degrees ranges from 15% in Doncaster to 54% in Brighton.

High-skilled workers tend to work in better performing labour markets, which further magnifies the advantages they reap as individuals. Indeed, at least 60% and up to 90% of differences in average wages across areas can be attributed to differences in the types of people who work in different places (Overman and Xu, 2022, writing for the Institute for Fiscal Studies Deaton Review, give more detail).

What does this imply for levelling up?

Given the economic forces that drive the UK’s spatial disparities, a pragmatic aim might be to improve economic performance in some areas outside London and the South East.

This could reduce differences between regions, if not necessarily across more narrowly defined local areas. The result would be to allow talented young people in ‘left-behind’ places to access better paid opportunities without having to move across the country.

To generate such opportunities and to counter the self-reinforcing feedback loops – which mean that the highest paid jobs are concentrated in London and a handful of other areas – large investments will be needed in a limited number of cities to attract high-skilled workers and the firms that employ them. The mention of globally competitive cities (as part of mission one in the White Paper) suggests that the government understands this key point.

Why focus on the high-skilled? Evidence suggests that the impact of targeted research and development (R&D) investment (mission two), infrastructure (missions three and four), public sector relocation and other place-based policies on, for example, wage disparities, will be small unless they significantly increase the education and skills of the workforce in an area.

This could be achieved by improving educational outcomes for children growing up there or by encouraging a much larger share of graduates and the firms that employ them to locate there.

And why focus on cities, not towns? The focus on cities recognises that the advantages of high-skilled areas are self-reinforcing. As is made clear by research on agglomeration economies – the benefits that arise when firms and people come together in cities or industrial areas – the concentration of high-skilled firms and workers generates productivity advantages for firms and better labour market outcomes for workers (Combes and Gobillon, 2015).

In turn, this attracts high-skilled workers from across the country. London’s economic advantages stem from the density of skilled firms and workers, and from its economic size – factors that are self-reinforcing. London’s economic strength also spills over to benefit towns and cities across the wider South East.

Focusing on towns, especially with limited funds and public sector jobs to relocate, does not scale up to produce large effects across lots of areas. To provide a counterbalance to London and the South East, investment needs to kick-start these self-reinforcing processes elsewhere. The fact that size is a key part of this explains why that investment needs to be focused on cities.

What kind of place-based investment might work?

Relocating large employers is one way to change where skilled workers live and work. This is one reason why the White Paper talks about moving more public sector jobs out of Whitehall.

Unfortunately, beyond the public sector job opportunities that this creates, the evidence on moving public sector employment does not suggest substantial gains in terms of stimulating wider private sector jobs. This evidence comes from large one-off changes in where public sector employees are located. Examples include the decision to locate the West German government in Bonn (Becker et al, 2021) and smaller changes, such as across UK local authorities (Faggio and Overman, 2014; Faggio, 2019).

Another option is to provide subsidies to large private sector employers to locate in lagging areas, with the objective of directly generating jobs. This would have the secondary effect of indirectly boosting productivity and earnings for other firms and workers in the area.

There is evidence from the United States that attracting a large productive employer to an area can generate wider benefits (Greenstone et al, 2010). The former regional selective assistance scheme in the UK also involved subsidies to firms to locate and create new jobs in the most lagging regions. One study suggests that the scheme was relatively cost-effective in supporting employment (Criscuolo et al, 2019).

Yet such subsidies, also used elsewhere in Europe, do not appear to deliver long-term productivity improvements in eligible areas. This suggests that subsidies on a more continuous basis may be needed to support employment gains.

The government could also change where public sector investment is spent. For example, the White Paper aims to increase R&D expenditure, both public and private, outside the South East.

There is evidence from the United States, Sweden and across countries that research expenditure in higher education institutions does generate wider benefits for an area.

But some of the research suggests that these economic benefits – for example, higher wages and higher productivity – tend to accrue to higher-skilled people and to high-tech firms more closely aligned with the university sector. Crucially, the gains are not felt universally (Kantor and Whalley, 2014).

Studies of the impact of transport investment also point to wider benefits, although these will vary across different areas depending on the extent to which transport is limiting local growth. And once again, the gains from such investments are not necessarily felt by all.

While this gives a feeling for some of the policies that governments might use, and the way that economists think about the possible impacts, another important decision for the UK government will be whether policy should be highly geographically targeted within areas.

The evidence on area-based policies targeted at small geographical areas, such as enterprise zones, suggests that these are unlikely to have substantial effects on overall spatial disparities (Neumark and Simpson, 2015). In part, this is precisely because they only target small areas, but also because they run the risk of creating costly displacement – with firms and workers simply moving within a place to take advantage of the incentives on offer.

Who sees the benefits?

Many investments are likely to benefit high-skilled workers more than low-skilled workers, in part because they directly target the kind of jobs done by skilled people.

This has a knock-on effect of increasing house prices as places become more attractive locations in which to live and work. This means that even if some of the benefits do trickle down to the lower paid in the form of moderately higher wages and improved employment rates, they might come at the cost of more expensive housing.

While trickle-down benefits are possible, London – with its many poor neighbourhoods, expensive housing and high poverty rates – demonstrates the limits of this approach.

A more equal spread of graduates, and globally competitive cities in each region, may help to reduce inequalities between regions, but it is no simple fix for improving outcomes for poorer households. Even very targeted policies, such as job subsidies that are restricted to hiring people who live in poor neighbourhoods, do not necessarily reach those at the very bottom of the income distribution (Reynolds and Rohlin, 2015 provide evidence for US ‘empowerment zones’).

What is needed to reach the poorest households?

To make sure that poorer households benefit, complementary policies must make sure that they can access the opportunities generated. Although investing in transport to poor neighbourhoods is often touted as a solution, the evidence suggests that it will not be enough.

Again, London illustrates the issues. Areas in the east of the city have good transport links to one of the largest concentrations of employment in the world, but this does not prevent low earnings for many who live there. If poorer households are to benefit from creating better performing global cities, then they will need interventions that help to improve their education and skills.

For some people, the multiple barriers that prevent them from being able to access better economic opportunities go beyond education and skills. Many of the left-behind places that the government wants to target with levelling up policies have high proportions of vulnerable people with complex needs and low levels of economic activity. This compounds their problems, as long-term unemployment, poverty and poor mental and poor physical health often go hand-in-hand.

Addressing these challenges will involve significant additional investment in childcare, and in mental and physical health services. Research suggests that small tinkering and minor tweaks of existing policies will not be enough to tackle the multiple barriers faced in these places.

The White Paper recognises these problems with its focus on education (missions five and six) and health (mission seven), but success in meeting these challenges will depend on whether effective policies are pursued and on the level of funding committed.

Some evidence on the success of an intervention seeking to tackle these issues in areas of high deprivation comes from an evaluation of the New Deal for Communities – a regeneration programme established by the Labour government in 1998 (Gutiérrez Romero and Noble, 2008).

Justifying interventions that don’t necessarily boost economic performance

Beyond a focus on economic growth, there are ‘public good’ arguments that can justify increased expenditure across a wide range of policy areas. For example, it is possible to argue for subsidising rural broadband (part of mission four) for the benefit of society as a whole, while recognising that its economic impacts are likely to be limited.

In addition, although such policies, including those around wellbeing (mission eight), pride in place (mission nine) and crime (mission eleven) do not specifically target those on lower incomes, they will often benefit poorer households most.

Improving economic performance and helping to tackle the problems faced by people who live in left-behind places are both important policy objectives. But they can involve trade-offs in terms of where and how government money is spent.

An economic strategy that aims to benefit people across the country will need to be judged on the extent to which it improves individual opportunities and on who benefits, rather than on whether it simply narrows the gaps between places.

Where can I find out more?

• Why are there regional disparities? Blog from the Productivity Institute.
• Spatial disparities across labour markets: Institute for Fiscal Studies report by Henry Overman and Xiaowei Xu.
• The impact of public employment: Evidence from West Germany’s post-war capital Bonn: VoxEU article on boosting public sector jobs to support economically lagging regions.
• How universities boost economic growth: Anna Valero and John Van Reenen on the spillover effects of universities.
• Do place-based policies matter? Report by David Neumark and Helen Simpson.
• Effectiveness of place-based policies: UK evidence: VoxEU article on programmes to improve employment in areas with poor economic performance.

Who are experts on this question?

• Philip McCann
• Henry Overman
• Marianne Sensier
• Helen Simpson
• Anna Valero
• Tony Venables

Authors: Henry Overman and Helen Simpson

Photo by Teamjackson from iStock