The Gap Years

Our analysis of enterprise in England since 2002 has found that despite substantial investment in deprived areas, the gaps between these and wealthier areas are widening.

Background
For most of the past 15 years the UK has experienced sustained economic growth. But inequalities have widened, and pockets of severe deprivation have developed, because the benefits of growth have not been equally shared.

Around 60 per cent of workless households are concentrated in just 40 districts of the UK. Many of the unemployed are unskilled males from ex-industrial areas such as Wales and parts of northern England.

Efforts to regenerate deprived areas have focused largely on increasing levels of enterprise. Whether through people starting their own businesses or newly created jobs being taken up, enterprise is seen by policy-makers as a solution to the problem of unemployment. It is also seen as a way to boost productivity and wider economic growth.

But how sure can we be that the enterprise programmes so favoured by government are making a real difference? These programmes have not been rigorously evaluated. Some may have been seen to work on their own terms, but overall they have not made a significant impact on growing inequalities. A recent report from the Public Accounts Committee, for example, found that the initial effectiveness of the New Deal relied on supporting those facing fewest barriers to employment.

This report presents the findings from research that set out to explore the relationship between enterprise and employment. We examined levels of enterprise across England and assessed whether the changes observed were associated with fewer people claiming benefits. We did this by exploring how the distribution of enterprise and claimants has changed over time between England’s local authorities, and between the most deprived neighbourhoods.

The purpose of this was to see if government policy is succeeding in improving enterprise trends in deprived areas, and to assess the extent to which the benefits of any increase in enterprise are reaching those communities with the highest levels of unemployment.

We set out how key areas’ shares of enterprise and benefit claimants have changed, which allows us to draw conclusions about:

• the extent to which deprived areas have grown relative to the average;
• the relationship between these increases in enterprise and any reduction in claimant rates.

We have used two units of analysis: the 20 per cent most deprived local authorities and the 20 per cent most deprived neighbourhoods. We have compared data with these two segments with statistics for the wider region and for England as a whole.

Our aim was to spell out the implications of the above for current and future economic development policy. At the start of a recession, and with increasingly limited resources at our disposal, these questions take on a new significance and urgency.

Summary of findings

1. Enterprise is becoming less equally distributed across England

• Since 2002 the most deprived boroughs as a group have seen a fall in their share of enterprise relative to England, while the share of the least deprived boroughs has risen.
• Over the same period, less than a third of the most deprived local authorities have seen an increase in their share of enterprise relative to England as a whole.
• Comparing local authority or regional enterprise data with the national picture masks how dramatic the inequalities can be at neighbourhood level, where only four per cent of deprived areas have seen an increase in their enterprise share relative to England.

2. Claimants are becoming more concentrated in deprived areas

• Since 2002 seven out of ten of the most deprived 20 per cent of local authorities have reduced their national share of claimants relative to England as a whole, and six out of ten have achieved this relative to their region.
• But again there is a different picture at neighbourhood level. The share of claimants has risen in 84 per cent of the most deprived neighbourhoods relative to their local authority.
• The most deprived neighbourhoods have increased their share of claimants relative to the local authority more often than they have reduced it.
• It is certainly the case that this may have coincided with a decrease in absolute claimants in those areas. But this was not happening at a fast enough rate to reverse relative trends.

3. Growth at the local authority level does not usually lead to growth in the most deprived areas

On the whole, the enterprise gap between the least and most deprived local authorities has widened. Even in those local authorities where the enterprise share has increased, the most deprived areas have seen falls or at best lower increases. The implication is that enterprise and employment growth in deprived areas may require more than simply growth at the local authority level.

4. Enterprise creation is only part of the solution to deprivation

• Increasing enterprise share does appear to be associated with decreasing claimant share in the most deprived 20 per cent of local authorities. Where share of enterprise increases, the share of claimants is more likely to decrease.
• However, there is still a significant proportion of authorities where claimants are decreasing alongside a decrease in enterprise share. This suggests that other factors are having a significant impact on claimant numbers in addition to the impact of enterprise levels.
• The factors that make it hard to increase enterprise share in the most deprived neighbourhoods may include low demand; falls in the supply of commercial and industrial land over time; and higher costs for insurance.
• The implication is that enterprise creation at the macro, regional or borough level alone is not enough to address economic inequality.

5. Further research is required

We tried to compare the policy inputs in the years leading up to the outcomes studied in this report. Specifically we looked for details of the types of economic development programmes that had been implemented in these areas in the years prior to 2002, and the amounts of public-sector investment that these programmes had absorbed, in order to understand better the relationship between spend and effectiveness.

This proved fruitless, however, because the information we needed was not available. This situation should improve in the future with the new duty on local authorities to report on spending as part of the Sustainable Communities Act.

More research is also required on variables other than numbers of enterprise. For example, how do the size, ownership and nature of an enterprise, as well as travel to work areas, affect employment and other economic outcomes?

New policy ideas
A continuation of existing enterprise and employment policy is unlikely to reverse the trends outlined in this research. Instead, what we need are new ideas about how to use the instruments of government policy to tackle inequality. As part of this research we have tested a menu of options with economic development officers from the most deprived authorities to get their views on what is likely to help them achieve their objectives. The list this produced was far from exhaustive, and some suggestions will require further research in order to gain a fuller understanding of potential impacts.

The most popular response by far was for more emphasis on removing barriers to entering work. This was followed by greater emphasis on stimulating local demand, and policies to target more closely those that are economically inactive. These chime with the findings from the quantitative research. There was also a lot of support for use of fiscal policy as a mechanism to combat area-based disadvantage.

The results for the informal economy and sustaining local services suggest that they are not seen as important to economic development officers. A small majority of respondents thought that a focus on maintaining existing businesses, supporting networks and more joined up policies would be helpful.

The need for new measures
Current policy assumes that differences in enterprise rates are the result of market failure. Interventions are therefore directed at removing the barriers to business formation and increasing the numbers of business start-ups in deprived areas.

Yet not every business start-up is beneficial to economic development, and neither is every closure detrimental. Not every type of business activity brings the same value to an area. Areas where there is a range of businesses of different types and sizes may be more resilient to economic change.

Policy discourse tends to focus on ‘closing the gap’ between different localities and regions. But it is still a problematic approach when setting goals for policy. This is because it rests on the ‘growth model’ that assumes that all areas need to continue growing.

If we are serious about creating more equal enterprise and employment outcomes then the data would suggest that policies that leave the existing structure unchanged are not likely to be effective. It is quite possible that a more radical departure is required that would involve major structural reform to create the incentives for economic growth in poor areas.

Getting the measures right is not just about understanding effectiveness and defining success. The ways in which success is measured help determine what gets prioritised and resourced. Share of enterprise and employment are therefore only part of the picture of economic well-being. They should be supplemented by other measures including the diversity and ownership of businesses, the strength and quality of local business networks, and subjective measures of satisfaction with local shops and services.

A policy fixation with things that can be readily counted has contributed to an emphasis on new businesses in measuring success. Policies to maintain share in deprived areas – such as ensuring land remains available – are also important, however. Such policies would result in different activities from those shaped by policies to increase share. This is particularly important where maintaining share is linked to essential services such as banks, post offices and grocery stores, as these can play an important role in the community irrespective of the employment they create.

Any targets to reduce the enterprise gap should be set against appropriate benchmarks. Indicators used should also recognise other comparable areas and should not exceed the levels of change that have occurred in that area or others unless there are strong reasons to do so. All indicators used should also recognise that shifts in enterprise structure take place over longer periods of time than are normally associated with economic development strategies.

Conclusions
Our analysis of enterprise in England since 2002 has found that despite substantial investment in deprived areas, the gaps between these and wealthier areas are widening. Regeneration policy focuses on enterprise share because it is assumed that an increase in share will improve employment opportunities in the local area. This is happening to some extent but the most deprived neighbourhoods are not benefiting.

Changes in enterprise share in these areas would appear to be part of complex longer-term structural trends, which are likely to be difficult to reverse. Government must begin to collect the evidence it needs to make sense of the interrelationship between various factors if local economic development and regeneration initiatives are to change people’s lives. As we press ever further against environmental limits, and with public finances under considerable strain, new (and more imaginative) ideas for addressing economic inequality are required.