UK Regional and Urban Inequalities

by Philip McCann

This research programme in the Social Macro hub of Rebuilding Macroeconomics aims to improve our understanding of the relationships between local and national economic shocks and local and national economic growth in the medium and long-term. The project contains four components led by me and some terrific colleagues. While the findings are captured in four separate papers, they are designed to provide complementary insights.

The first paper, written by Andre Carrascal-Incera, Raquel Ortega-Argilés, Philip McCann and Andres Rodriguez-Pose is an analysis of the long run national and interregional growth experience of the UK in the context of international comparisons. We demonstrate that over the last three decades the interregional growth experience of the UK towards very high levels of interregional inequality, is not typical of other OECD countries. Indeed, the UK appears as very much an outlier in this regard.

Moreover, the recent experience of the UK is not only different to the post-war experience of other European countries, but also atypical of its own post-war growth experience. We show that widening interregional inequality is not associated with higher national economic growth, especially in times of strong economic performance, and this is demonstrated both using OECD-wide data and a detailed comparison between the UK and Germany.

The second line of research is a paper by Patricia Rice and Tony Venables here which examines the long-run socio-economic implications of localised economic shocks in UK regions. A detailed analysis of census and employment data over four decades demonstrates that the localised de-industrialisation shocks of the 1970s and 1980s are still reflected in a range of socio-economic characteristics related to deprivation.

Most of the Local Authority Districts that experienced large negative shocks in the 1970s have high deprivation rates in 2015, and they constitute two-thirds of all Districts with the highest deprivation rates. Moreover, during the 1980s the shocks of the 1970s were slightly amplified and then slightly reversed, but only around one eighth of the 1970s adverse economic shocks were clawed back. The conclusion is that neither economic adjustment processes nor policy measures have acted to reverse the effect of negative shocks incurred nearly half a century ago, and these shocks are still manifested in long-term local scarring.

The third line of enquiry by Ron Martin and Ben Gardiner here looks at how different types of places have evolved over five decades. In particular, the research examines the resilience and recoverability of different types of UK regions over long periods and how the ability of local economies to recover from adverse economic shocks differs between different types of places.

The research links the Cambridge Econometrics Local Authority Database with the OECD definition of different types of metropolitan and non-metropolitan areas using OECD TL3 areal units. The data constructed covers five decades back to 1971 and defines the UK economy into different areal classifications, namely: Large Metro regions, Metro regions, Non-Metro-Close-to-Metro, Non-Metro-Close-to-Small-City, Non-Metro Remote.

An examination of the UK’s last four major recessionary downturns shows that different types of places behaved differently in each of the recessions. In particular, during the first two recessions the non-metro areas recovered better than metro areas whereas in the second two

recessions non-metro areas were less resilient. The differences are likely to relate to the fact that cities bore the brunt of the deindustrialisation shocks of the 1970s and 1980s whereas the shift to services tended to favour cities in subsequent decades.

The fourth and final paper here by Michiel Daams, Philip McCann, Paolo Veneri, Richard Barkham and Dennis Schoenmaker shows the effects of capital shocks on real estate investments in US cities and regions, and in particular examines how the effects of the 2007-2008 global financial crisis changes the spatial allocation and pricing of capital investments across different types of places.

The research exploits a detailed dataset of US real estate transactions in order to examine how the features of commercial clusters and cities are related to investment pricing and risk. The analysis identifies how different parts of the US urban system were differently affected by the global financial crisis. In particular, the analysis demonstrates that in ‘normal’ times during the period prior to the financial crisis, real estate markets were able to ‘correctly’ price in the structural and size-related differences between US cities.

In contrast, in the uncertain environment of the post-crisis period, investors were unable to ‘correctly’ price in investments in different cities, with the result that capital shifted markedly into the Central Business Districts of the largest and most prosperous cities. This resulted in both falls in the price of capital and increases in capital availability in large cities. These results provide a powerful explanation of why US interregional growth suddenly went from spatial convergence to divergence.

Taken together, these four lines of research enquiry consider some key aspects of the UK’s regional performance, and the links between macroeconomic shocks and regional responses.

Macroeconomic shocks have complex regional and local implications, leading to different outcomes for different regions in different time periods. Some of these shocks have long-term scarring effects which are not ameliorated by market responses, and in some cases may actually be aggravated. Indeed, the growth and scale of UK interregional inequalities point in this direction.

The reasons for these effects are complex, and it appears that capital markets pay a critical role alongside, and over and above, the more typically discussed issues around agglomeration spill-overs, sorting and clustering. The four papers emerging from this Rebuilding Macroeconomics project open up areas for further research regarding the potential policy responses which may be the most effective in helping regions to adjust to such long-run shocks.