Stuck in place? How government policy traps workers in low-wage regions

Pay scales, benefit rates and social housing rules all quietly reward staying in low-productivity regions, even when moving would raise wages, productivity and growth.

Professor Len Shackleton is an Editorial and Research Fellow at the IEA. This article is based on a talk he gave this week to the Beloff Conference organised by the IEA and the Vinson Centre at the University of Buckingham.

Britain’s rotten overall productivity record has many causes. One neglected feature is the difference between geographical areas. Gross Value Added (GVA) per hour worked is 50% higher in London than in the North East. It’s over 25% higher in the South East than it is in Wales. There are similar variations within regions. Take the North West: GVA per hour is just under 50% higher in the centre of Manchester than it is in Blackpool.

Higher productivity in an area reflects factors such as investment by businesses and the government, infrastructure, agglomeration economies, skill levels of workers and so on. It is, broadly speaking, associated with higher wages. Historically, this has led to workers moving from low-productivity areas to areas where productivity and pay are higher. This was a necessary feature of the Industrial Revolution, with workers moving from rural areas to the new factories and mines or helping to build the canals and the railways which snaked across the country to speed transport of goods and people.

This was facilitated by the breakdown of old legal restrictions on moving around the country. The Tudor and Stuart Settlement Laws had made it difficult for a workman to enter a town or parish in which he was not born. This was to keep down the costs of Poor Relief and to protect local time-served craftsmen from cheaper competition.

Nowadays such restrictions have gone, and people can move from town to town and from region to region. Yet relatively few do so. Only 1–2% of those of working age move region each year, with perhaps 2–3% moving between local authority boundaries in the same region. These numbers are markedly smaller than in the United States – where internal migration across the vastness of the country far outstrips anything we see here – and they appear to have been falling in the last twenty years or so. A third of Brits spend most of their lives within a small radius of where they were brought up, and 75% never leave their broad home region apart from holidays.

Low internal migration locks many people in work which is below their potential. One indicator of this is the number who are ‘overqualified’ for their jobs (their highest qualification being above the modal qualification for the role). On this definition, 22.3% of those employed are overqualified in the North East, compared with 18.4% in the South East and 18.7% in the East of England.

Graduates are a particular concern. Around a third of all graduates are currently in non-graduate jobs, and this proportion has been rising. There are considerable variations in the proportions by region. Graduate ‘underemployment’ is markedly higher in Scotland, Wales and the North East than in London, the South East and the East of England. An interesting finding from the Resolution Foundation is that these variations are associated with remaining in the same region as the university from which you graduated.

Photo by Ben Elliott on Unsplash

Why don’t more people – the young in particular – get up and go in pursuit of higher-paid jobs? If they did, they’d have better long-term career prospects, productivity nationally would rise and the economy would grow faster. Some put reluctance to pack their bags down to culture and attitudes, with love for place and staying near family and friends being more important to many people than material factors. There are differences between ethnic groups which tend to support this hypothesis: people of White, Black African and Chinese heritage are markedly more likely to move between regions than those of Pakistani, Bangladeshi or Black Caribbean heritage.

This may be reasonable, perhaps even admirable. But in deciding between staying and going, the scales are often tipped by government policy which alters the balance of incentives.

For example, having national pay grades for public-sector jobs distorts local labour markets. Take teaching, where the U3 point on the scale (the maximum level on the Upper Pay Range) in the North East is 144% of the median earnings in the region. The same point in Outer London (even including the OL allowance) is just 113% of local median earnings. In relative terms, you are much better off – and much more likely to be able to own your own home – in the North East rather than moving.

You can see the same effect with statutory minimum wages. The National Living Wage is 77% of median earnings in the North East, but only 51% in London.

Regions with low-productivity have high benefit dependency. National rates for benefits mean the ‘replacement rate’ (what you get in benefits relative to what you could earn) is high in low-productivity regions. Those on benefits are often in social housing. In the North East, there are 108 social homes for every 1,000 people; in the South East there are just 48. Somebody moving to London for work is likely to have to rent privately. Rent takes 55% of median earnings in London, as against 30% in Yorkshire and the Humber. While this isn’t the direct result of government policy, high rents in some parts of the country are the consequence of planning restrictions which have cramped housebuilding for many years.

At a subregional level, similar planning restrictions have delayed or prevented investments which would have facilitated easier commuting – for example the long-delayed Lower Thames crossing which would have opened up job opportunities in Kent to Essex residents, and vice versa. And government spending choices have prioritised improvements to already well-endowed London, such as the Elizabeth line, over revamping railways across the North, which might facilitate commutes from Liverpool to Manchester or even Leeds. Much-hyped subsidies to Manchester buses contrast with very poor bus services in many rural areas.

Different policy decisions could significantly improve mobility between and within regions, leading to higher average productivity. Although between the wars government policy actively sought to encourage movements of labour between areas, since 1945 policy has almost exclusively focused on ‘taking work to the workers’. Tax reliefs and subsidies have been used to encourage private-sector businesses to relocate to depressed regions, while government offices have been moved – recently the ONS to Newport, the Treasury to Darlington and now Andy Burnham’s Number 10 North. The record of this type of policy has often been poor. Jobs have been moved around, at least for a time, but productivity differentials haven’t changed much. It’s time to redress the balance by thinking about ways in which we can facilitate market-led movements between and within regions.