1. Dr John MoffatRichard Price Building, Room F49Email: J.D.Moffat@swansea.ac.ukOffice Hours: Tuesday & Friday, 1:30-2:30pm

2. Section Outline The following topics will be covered in the next fiveweeks:1. The Case for Regional Policy2. UK Regional Policy3. EU Regional Policy4. Devolution5. Regional Funding The exam will be a two hour written examination(worth 45% of the final course grade) on all thematerial covered in semester 2Topic 1: The Case for Regional Policy 2 3. Readings The main textbook for this section of thecourse is: Armstrong, H. & Taylor, J.(2000), Regional Economics andPolicy, 3rd ed. Oxford: Blackwell This weeks reading is: Armstrong & Taylor, chapter 83Topic 1: The Case for Regional Policy 4. Learning Outcomes Students should be able to answer the followingquestions: What are the main justifications for the existence of aregional policy? Should regional economic disparities be alleviated by amarket-based or an interventionist approach?4Topic 1: The Case for Regional Policy 5. The Case for Regional Policy Regional policy aims to reduce disparities in livingstandards across regions Arguments for a regional policy can be based onconsiderations of: Equity Policy motivated by equity concerns aims to make thedistribution of income/wealth more equitable Efficiency Policy motivated by efficiency concerns attempts to makesome people better off without making anybody worse off5Topic 1: The Case for Regional Policy 6. The Equity Case Substantial differences in living standards lead todissatisfaction and resentment This is most strongly felt by those whose livingstandards are poor through no fault of their own A regional policy motivated purely by equityconsiderations could make certain people worse off6Topic 1: The Case for Regional Policy 7. The Efficiency Case To understand the efficiency case for regional policy, askthe following question: How would somebody living in a wealthy region (such as aLondon banker) benefit from, or at least not be harmedby, government policy that seeks to create employment forpeople in disadvantaged regions (such as the North East)?Topic 1: The Case for Regional Policy 7 8. The Efficiency Case Most obviously, reducing unemployment indisadvantaged regions, without leading to a loss ofincome/jobs elsewhere (i.e. displacement), will makethe whole nation better off Those who were unemployed will produce output andwill not have to be supported through transferpayments such as unemployment benefits The social costs associated with unemployment(discussed earlier in the course) will also be reduced8Topic 1: The Case for Regional Policy 9. The Efficiency Case Congestion costs arise in regions that experience rapideconomic growth because of excess demand forinfrastructure and public services According to the Eddington Transport Study(2006), reducing the travel time for all business travelon the roads by 5% could generate around 2.5 billionof cost savings Congestion can be relieved by shifting the demand forinfrastructure and public services away from congestedareas and towards under-performing regions whereinfrastructure is used less intensively9Topic 1: The Case for Regional Policy 10. The Efficiency Case Low unemployment regions experiencing fast growthwill tend to experience labour shortages The resultant wage inflation will be transmitted topoorly performing parts of the country throughnational wage-setting and inter-plant bargainingwithin firms National inflation rates can therefore be reduced byequalising unemployment rates across regions so thatlabour shortages do not arise in fast growing areas10Topic 1: The Case for Regional Policy 11. Policy Alternatives There are two main approaches to removing disparitiesin economic performance: Market-based (neoclassical) approach generally favoured by those on the right Interventionist (spatial Keynesian) approach generally favoured by those on the left As will be seen in the next lecture, the interventionistapproach has been the dominant approach in recentBritish history11Topic 1: The Case for Regional Policy 12. Market-Based Approach Proponents of this approach argue that if marketsare allowed to operate efficiently, disparities inwages and unemployment rates will beautomatically eliminated though: Wages falling in areas of high unemploymentand rising in areas of low unemployment Workers migrating from low wage to high wageareas12Topic 1: The Case for Regional Policy 13. Market-Based Approach Assume a country with tworegions, North and South In the North, the wage is W1 andthere is unemployment of L2-L1 This unemployment can beremoved by a fall in the wage toWN But if there are regions (i.e. thesouth) with a higher wage ratethan WN, this difference inwages will induce migrationfrom the North to the South (seenext slide)Topic 1: The Case for Regional Policy 13Source: Adapted from Clark (2010)WageEmploymentSN1DNWNLNW1L1NorthL2 14. Market-Based ApproachTopic 1: The Case for Regional Policy 14Ss2W*L*WageEmploymentSs1DsWSL2SouthWageEmploymentSN1DNWNL1SN2W*L*NorthSource: Adapted from Clark (2010) 15. Market-Based Approach But wage differentials may not arise in the first place ifwages do not respond to local labour marketconditions because of: Industry-wide collective wage agreements rather thanlocal wage bargaining Unemployment benefit and income support that is toohigh and too easy to access A minimum wage that is too high15Topic 1: The Case for Regional Policy 16. Market-Based Approach Even if there are significant wage differentials acrossregions, there are barriers to the migration of labourbecause: Workers may be unaware of opportunities to obtain higherwages elsewhere Workers may not be able to afford to migrate because: House prices are too high in low-unemployment areas They currently live in subsidised housing Workers will lose some of their pension entitlements if theyleave their present employer Workers may be unwilling to incur the psychological costs ofleaving friends and family16Topic 1: The Case for Regional Policy 17. Market-Based Approach The solution is therefore to remove theseconstraints on the free operation of the market: Increase wage flexibility by: Reducing benefits and making them harder to access Reducing union power and encouraging more localwage bargaining Reducing the minimum wage To what extent can these policies be pursued in theUK?17Topic 1: The Case for Regional Policy 18. Net replacement ratio summary measure ofbenefits entitlements, 2000-2010 (%)Topic 1: The Case for Regional Policy 18Source: OECD (2013)0102030405060702001 2002 2003 2004 2005 2006 2007 2008 2009 2010France Germany Japan Spain United Kingdom United States 19. Union density, 1960-2010 (%)Topic 1: The Case for Regional Policy 19Source: OECD (2013)01020304050607080901960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010Germany Italy Sweden United Kingdom United States 20. Minimum wage relative to average wages offull-time workers, 2000-2011 (%)Topic 1: The Case for Regional Policy 20Source: OECD (2013)01020304050602000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011France Japan Netherlands Spain United Kingdom United States 21. Market-Based Approach Even if large wage differentials exist, the costs ofmigration may need to be cut by: Raising public sector rents to market levels Encourage portable private pensions Increasing the affordability of accommodation in lowunemployment areas Making it easier to access information aboutemployment opportunities in other regions To what extent can these policies be pursued in theUK?21Topic 1: The Case for Regional Policy 22. Mean weekly rents net ofservices, England, 2008-2009Topic 1: The Case for Regional Policy 22Source: DCLG (2010) 23. Proportion of employees withworkplace pensions, 2011Topic 1: The Case for Regional Policy 23Source: ONS (2012)Defined benefitschemes aregenerally lessportable thandefined contributionschemes andtherefore discouragemobility 24. Average house prices, July-September 2012Topic 1: The Case for Regional Policy 24Source: BBC (2013)050,000100,000150,000200,000250,000300,000350,000400,000450,000500,000GreaterLondonSouth East South West East Anglia WestMidlandsEastMidlandsYorks &HumberNorth West Scotland Wales North NorthernIreland 25. Market-Based Approach Even if the government were able to encouragemigration from low to high wage regions, this may nothelp in removing disparities in economic performance This is because those leaving low wage areas will tendto be younger, higher skilled workers who willcontribute most to economic growth Furthermore, migration to high wage areas will createextra demand for over-utilised social infrastructure25Topic 1: The Case for Regional Policy 26. Interventionist Approach This approach, also known as the spatial Keynesianapproach, argues that direct state intervention isrequired to remove disparities in regional economicperformance Such disparities are viewed as the consequence of: Structural weaknesses in the regional economy A lack of investment as capital drains from poor to richregions26Topic 1: The Case for Regional Policy 27. Interventionist Approach The solution is supply-side policies to: Encourage the migration of capital into high-unemployment areas Encourage indigenous growth in high unemploymentareas Enhance competitiveness by regenerating highunemployment areas through public investment in thesocio-economic infrastructure27Topic 1: The Case for Regional Policy 28. Interventionist Approach A serious criticism of the interventionist approach toregional policy is that it creates deadweight spendingwhere public money is spent on private sector projectsthat would have gone ahead anyway One way around this is through providingdiscretionary rather than automatic assistance (seenext lecture) But even when discretionary assistance isprovided, funding may still go towards projects thatare not successful (see next slide)28Topic 1: The Case for Regional Policy 29. Interventionist Approach The governmentprovided the DeLoreancar factory in NorthernIreland with 80 millionto produce the DMC-12(BBC, 2005) Production started in1981 but fewer than9,000 cars wereproduced before thefactorys closure in 1982Source: Kevin Abato29Topic 1: The Case for Regional Policy 30. Summary Regional policy can be justified on efficiency andequity grounds The market-based approach to regional policyattempts to remove distortions which prevent themarket from equalising unemployment and wage ratesacross regions The interventionist approach is based on theassumption that direct state intervention is required toremove regional disparities in economic performance30Topic 1: The Case for Regional Policy 31. Next topic:UK REGIONALPOLICY31Topic 1: The Case for Regional Policy