On your bike

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26 January 2011

The work and pensions secretary Iain Duncan Smith is looking to make people more mobile. He reasons that to help millions of people 'trapped in estates where there is no work… sometimes you just need to be able to move to the work'. Will this policy be effective, and what about those left behind?

Professor Henry Overman, director of the Spatial Economics Research Centre (SERC), notes that it is certainly true that some places are better at generating jobs. Between 1998 and 2008, Manchester added 33,700 private sector jobs while Stoke lost 20,900.

Places that are better at generating jobs also pay higher wages. Gross value-added per person ('income') in inner London is twice that in the Tees Valley and Durham. Taken at face value, this suggests that Mr Duncan Smith has a point: shouldn't we help people move if it doubles their income?

Unfortunately, things are more complicated than this comparison suggests. One reason why incomes differ across areas is because different types of people live in different places. Comparing average incomes in the Tees Valley to London muddles this composition effect with the effect of moving. Loosely speaking, the comparison captures what happens if a steel worker from the Tees Valley moves to London to be a banker.

A better comparison comes from following people as they move and seeing what happens to their labour market outcomes. Unfortunately, data is not available to do this for unemployment but SERC research has been able to do it for wages.

It turns out that the lowest wage area in Britain has wages about 20 per cent below the average area. But following individuals moving from the lowest wage area to the average area, their wages only increase by six per cent. As a result of the composition effect, area averages overstate the wage gains from mobility threefold. Getting people to move may help, but not as much as might be hoped.

Why do people not move in response to these differences? Here, according to Professor Overman, the coalition government is 'half right'. The housing market is a large economic barrier to migration. The government is right to focus on the social housing allocation system as one part of the problem.

But where the government is in danger of going wrong, he argues, is on the supply of private housing. At present, it is unclear that the 'new homes bonus' incentive will be sufficient to generate new private housing in successful places.

Even if policy can encourage mobility, what about those left behind? For the local labour market, out-migration may help, as the direct effects of reducing excess supply are likely to outweigh indirect effects arising from reducing the size of the labour market. Offsetting this are the negative effects of living in a place with a declining population.

Here, Professor Overman argues, policy must help to address the worst negative consequences. This calls for a different policy mix than that pursued traditionally. But in a world of limited resources it may be worth trying because decades of policy aimed at 'turning places around' simply does not seem to be working.

From the ESRC magazine Britain in 2011