Levelling up: against just "cities and skills"

Today's Industrial Strategy Green Paper repeats a very questionable piece of Westminster Received Wisdom

This is the second piece in a series on improving the economic performance of poorer places. Part one is here.

Don’t get me wrong. If we’re going to tackle Britain’s massive economic imbalances we probably need to do a lot of things in a lot of places. I don’t really want to pooh- pooh *anything* that might help anywhere.

But I think Britain’s discussion about levelling up (or whatever the new government are going to call it) is far too narrow.

The Treasury view of regional policy, which is shared by a chunk of the commentariat, is that the answer is just “cities and skills”.

There is quite a lot of that in today’s Industrial Strategy Green Paper.

The document has been quickly rushed out for today’s big investment summit - which is probably why it reads like they just whizzed the last three or four versions of this document through the civil service word-blender.

Compare the 2024 and 2017 Industrial Strategy green papers. Or the 2021 Levelling Up White Paper. It’s all the same old stuff.

I don’t mind so much the lack of anything original - but today’s paper also repeats some stuff from the past which I think is questionable.

In particular, it repeats once again a trope that is repeated endlessly in SW1: the idea that our cities are “underperforming”, should obviously be richer and should therefore be the focus of policy. Today’s doc tells us that:

“For the eight largest cities outside London combined, the gap between actual and potential productivity could be worth £47 billion.”

Why I am wary of this

I worry that behind this is a Treasury argument I have heard countless times: “Minister, you can’t help everywhere, so you should “pick” a couple of cities, and if you can revive them then growth will "trickle out” from them and lift their surroundings and…”

An overlapping HMT view is that the main cause of underperformance is people’s low skill levels rather than anything else, so that should be the focus of any intervention.

The institutional Treasury doesn’t like regional policy, which it thinks is likely to be wasteful. So every time the discussion starts up, it is immediately attracted towards trying to narrow the focus to a few places. A focus on the cities also feels more like ‘going with the grain’ of places that are reviving anyway.

The focus on skills policy also steers the conversation back towards the (incorrect) Treasury view that these problems are actually just compositional (discussed in the previous post).

The urban focus is further compounded by the excellent work of the Centre for Cities, which is not just Britain’s best think tank on regional policy but also one of its best think tanks full stop (their podcast is also great).

The only problem with it is that - as the name suggests - its focus is squarely on… cities. Indeed it is funded by the Core Cities group. The Centre has produced so much good stuff it has rather dominated the discussion, and certainly influenced Treasury officials a lot.

While Britain’s cities are definitely among the areas where we need to raise our performance, they are not so much worse than every other poor area that this justifies a single-minded focus on them over other areas.

If we look at the map of average earnings, it is true that several cities have low earnings. But then, so do lots of non-urban areas. And intermediate areas too. It’s not obvious the cities are the only place with a problem.

I have several concerns about the frequently-heard argument that runs something like: “our cities are unusually poor compared to other countries, this means they have untapped potential, so they should be the focus of policy”

First, I worry a huge amount of these perceived differences between UK cities and cities in the rest of Europe are definitional.

You can find plenty of charts purporting to show that our cities are uniquely weak compared to European peers. Page 48 of today’s publication contains the following chart. You will likely have seen something like it before:

But what is a city exactly?

Often OECD definitions of urban areas are used - or something similar and based on administratic definitions. If we use the OECD definition we see that while non-London urban areas in the UK are further back from the national productivity average than in similar countries, so are our intermediate and rural areas too. Because London is a big part of the economy and a long way ahead of all the rest.

Our cities are just a very different shape compared to most of Europe. In particular, they are a lot less dense than the rest of Europe, not least because we like to live in houses rather than flats. Only Ireland has more houses:

The difference in the shape of our cities is massive. Here are population density cross- sections across four cities in each of France, Italy, Spain and the UK. Our cities are just not the same shape as those on the continent.

Within a 3 km ring around the centre of Birmingham there are 300,000 people. The same ring in Barcelona holds 1.14 million people. Spanish cities are particularly dense, but Britain’s secondary cities are way below the average density seen in other European countries:

This means that if you use data based on administrative boundaries to compare city economies the resulting comparisons are very questionable. Here are OECD-defined boundaries for Lyon and then Leeds: lots of countryside is counted into Leeds, while only the urban core is counted in Lyon, and indeed lots of its own suburbs (in grey) are outside the tight boundary. How meaningful are comparisons of these radically different sorts of areas?

OECD-defined urban areas in the UK are much larger and less dense. City cores are both much bigger, and closer together or touching.

This is not a criticism of the OECD’s work – the areas really are closer and more like sprawling conurbations: perhaps unsurprising, given that England has 84% of the population of France in 1/5^th the area. Here’s the OECD mapping of cities and their hinterlands in the UK, France and Germany.

Many European economies are more balanced overall. But where there are imbalances cities in Europe don’t escape low from low productivity in their surrounding areas any more than UK cities do: Naples, Palermo, Valencia, Malaga, and Leipzig are relatively poor along with their regional surroundings. If you were to describe the patterns of prosperity in other countries you would probably say that Spain and Italy have a north-south gap, rather than an urban-rural one.

My second concern is about the argument that cities must be the focus is about the difference between changes rather than levels. Our cities have seen faster population growth than non-urban areas since the millennium, reversing the pattern of the postwar period where they shrank in absolute terms.

Almost all of them have seen their productivity level per worker growing relative to the national average over the same period. So even if Britain’s cities were “the problem” in the 70s and 80s, are they still “the problem” now?

The chart below shows what GVA growth has been for denser areas. It’s cumulative, so it shows you how much the densest 1% of neighbourhoods grew, then the densest 10% taken together, the top 20% and so on. Dense urban areas have grown faster, whether you cut it by job density or population density or workday density (how many people live there, plus those who work there).

It hasn’t always been like this. Deindustrialisation and the shift to “office jobs” over recent decades has favoured city centres across Europe: Joan Rosés and Nikolaus Wolf have found that over the last couple of decades capital cities in Europe have generally outperformed other places because of this. The growth of higher education, and the fashionableness of urban living have also been factors boosting cities over the last couple of decades.

So I worry a focus on cities is kind of chasing the tail of the comet: they actually seem better set for growth than many shire and coastal areas.

Third, how much does the performance of our cities represent ‘untapped potential’ which policy can easily ‘unlock’ compared to other places, in the way today’s paper suggests?

I’m particularly sceptical about relying on trickle-out growth from our cities as the way to lift other places. While many people can benefit from city growth nearby, many cannot. Lower earners with caring responsibilities are only going to travel so far for work.

The idea of agglomeration benefits, while important, is quite sloppily used in the UK. On a global scale our secondary cities are not that big or that dense.

And sadly, at present, there’s little sign of any agglomeration effects outside London.

The dots in the charts below are individual neighbourhoods (MSOAs). Neighbourhood analysis avoids the problems with the administrative definitions of places discussed above.

Measuring the number of jobs people in that neighbourhood can potentially commute to (the connectivity score) shows that in the south there is a loose correlation between how connected a place is to opportunity and the income of people there - there is a an agglomeration effect.

But there is no such correlation in the north and midlands at present¹. You can argue perhaps there should be - they would certainly do better with better transport. As Tom Forth points out, their poor transport makes them effectively smaller. But as yet there is no sign here of some sort of magic effect that is on the edge of being “unlocked”.

If we are relying on other places being pulled along by neighbouring cities there is little sign they are able to play this locomotive role today.

You can respond to this by saying that they should be doing better and should be able to pull along neighbours. But other than comparisons to (very differently shaped) cities in Europe it is not clear what the evidence is for this is.

We can and should improve connectivity in our secondary cities, which we hope will improve economic performance. But I am sceptical that this alone would have a revolutionary effect in the near term.

“Its all about skills”

I talked a bit about the fact that lower skilled people earn different amounts in different places in the previous post, so the problem is not just compositional.

There are multiple problems with relying on skills policy as a dominant tool for local growth policy. Most of the workforce have left formal education, and government skills policies inevitably touch a small number of people, and so what improvements people make to their skills are typically downstream of the kind of businesses they have in their area.

But even if we focus on young people the problem with skills as a lever is not just that higher skilled graduates move away (although many do - and most graduates from Russell Group universities live in another area by age 30).

The deeper problem is that in some areas the premium on higher qualifications is absent. Work by the IFS found that in many parts of the country the graduate earnings premium is negative - these local economies are unable to absorb or properly use higher qualified people because of the structure of the local economy. Unless you do something to change that, then increasing the number of people who go off to uni will not help much.

For example, a friend in North Devon says there are no good job for graduates locally, and looking at the map above I can see what she means. For many places “skills” aren’t the underlying issue.

Why worry?

Reading all of the above I know it comes across as harsh. There is a lot of potential to improve the performance of our city economies, and a lot of people live in them, so they are inevitably a big part of the story. And everything is connected, so you want to take action on skills, along with other stuff.

But I have been around the track so many times hearing officials and commentators repeat the received wisdom that it is just about “skills and cities”, and I think it is based on flawed analysis.

More importantly I worry it leads to flawed policy. For example, from 2014 we created a model of mayoral devolution which continues under the current government. Whether you like it or not, it certainly makes a lot more sense for urban areas with fragmented local government. But attempting to apply the same Mayoral Combined Authority cookie-cutter to shire areas has stalled progress.

The larger cities are generally better at getting lobbying the Treasury too, while equally poor non-urban areas have little voice.

I am not arguing that we shoudn’t do things in our cities, or invest in skills. It is partly because I think we need to kinda do everything that I am keen we don’t obsess about just a couple of issues.

And I worry the debate in the UK has obsessed about these things to the exclusion of other approaches that might be more effective, but which the Treasury doesn’t like and won’t help with. They distract from fixing the foundations, like energy policy. And that is what I will write about in the next post.

1. Analysis from ‘Network Effects’, Onward (2021)