Scottish Economy Watch

Inequality and constitutional change

In an earlier post I noted the evidence on the rising degree of income inequality in the UK. The key chart from the OECD's recent report Divided We Stand: Why Inequality Keeps Rising is below

The high and rising level of income inequality in the UK was, I suggested, put into sharper focus by recent political developments. Specifically, the UK government's austerity programme with associated rising unemployment and real income constraint, and the concern about banker's bonuses and CEO pay.

It was therefore a surprise to learn from an excellent article by Alf Young in Saturday's Scotsman of this recent comment by Michael Gove, Secretary of State for Education in the UK Government:

We live in a profoundly unequal society. More than almost any developed nation ours is a country in which your parentage dictates your progress. Those who are born poor are more likely to stay poor and those who inherit privilege are more likely to pass on privilege in England than in any comparable country. For those of us who believe in social justice this stratification and segregation are morally indefensible.

As Alf Young points out this

was an astonishing critique, given that it was coming from a member of a party that proposed, in opposition, to ease dramatically the burden of inheritance tax and has, in government, agonised over how quickly it could remove Labour's 50p levy on the incomes of the highest earners.

Gove's particular interest was to seek to highlight the role that private education was playing as a gateway to privilege and power across all major professions in the UK. Hence, as Alf suggests, buttressing the case for Gove's reforms of state education in England.

Alf's main point in his piece was to ask where is the debate on the role of private and state education in Scotland. Gove's writ does not run to Scotland. The Scottish Government is responsible for education here. Moreover, an independent Scotland would certainly have responsibility for a policy choice on income inequality and that would also likely be true for Devo-Max and probably Devo-Plus.

So why no debate here?

Alf Young notes that the issue of private education might be considered less salient here since pupils attending independent schools in Scotland account for only 4.31 per cent of all pupils compared to some 7 per cent in England. But he shows that the significance of private and private secondary, education is much higher in the city of Edinburgh and areas such as Perth and Kinross.

Moreover, the significance of private education should, in my view, be viewed as a symptom of the degree of income inequality.

How does Scotland compare on that score? Data from the Scottish government offer the following comparison with the Great Britain

Measures and comparisons of income inequality are fraught with difficulty - see here - so one needs to be cautious. But what these data show is that while the degree of income inequality is lower than in GB it is still quite a bit higher than the OECD average. Since 1995 the Scottish Gini coefficient has ranged between 30 and 35 while the OECD average has ranged between 30 and 31. And the OECD average is quite a bit higher than many countries that Scotland would seek to compare itself such as the Nordic countries and Germany.

Moreover, the above chart shows that income inequality was rising more rapidly in Scotland than GB since 2004-05, so that by 2009-10 there was little difference between the two: Scotland 35, GB 36.

So why no debate about this in Scotland? Why isn't this issue, given its roots in political struggle since time immemorial, a key feature of the so-called "big-debate" on Scottish independence and constitutional change?

My guess is that the parties advocating independence, especially the SNP, and those supporting the union, especially Labour, are frightened of the topic. Reversing income inequality does not give wins for everyone. There has to be losers and a few rich, and perhaps not so rich, ones at that! Therefore, better not antagonise the donors, or the business fellow travellers. We hear from some Labour party figures that when they get up in the morning they think social justice, in contrast to nationalists who think separatism and break-up of the UK. But this is surely a charade since the Labour government did little to roll back rising income inequality in Scotland and the UK. The introduction of the 50p tax on high income earners being the exception. How do they propose to operationalise their concerns about social justice if Scotland continues in the UK?

The Scottish people should be told what are the specific options and policies being proposed by nationalists and unionists to deal with rising income inequality. And we need to be told now, not reassured that everything will be fine in the nirvana of Scottish independence, or a UK union with more constitutional change.

Music: A Last Farewell - Brian Cunningham & Bud Greenwood

For those interested, Brian Cunningham has been my guitar tutor for the past four years and more. He is an inspired teacher. The only advert you will find on this site!

Scottish Jobs and Dubious Statistics

The latest Scottish labour market data published today for the quarter January to March should be welcomed. Unemployment fell by 10,000 over the quarter as employment rose by 24,000. The Scottish unemployment rate moved into line with the UK rate of 8.2% and the employment rate, at 71.2%, stayed above the UK rate of 70.5% for the 16-64 age group. For all aged 16 and over, the employment rate in Scotland moved from slightly below the UK rate to parity at 58%. But within these numbers male employment is rising (+29k) while female employment is falling (-5k).

At first sight these data from the Labour Force Survey (LFS) appear to conflict with what we know about the real economy. GDP has fallen in the UK in successive quarters to the first quarter and fallen in Scotland in the final quarter of last year. We will not know what has happened to Scottish GDP in the first quarter until mid July. However, as I noted in this recent post many analysts believe that the ONS is underestimating recent GDP growth. Business surveys such as the PMI suggest a stronger outturn performance. Against that must be set the continuing impact of fiscal consolidation, the inflation rate is falling back more slowly than the Bank of England expected due to the effects of earlier rises in energy prices, and the Eurozone crisis is worsening again.

So, there is no guarantee that unemployment will continue to fall. Indeed, it could worsen again.

Our estimates at the Fraser of Allander Institute suggest that there needs to be Scottish GDP growth of 2% per year - approximately 0.5% per quarter - for unemployment to stabilise. Faster growth for it to fall. Slower GDP growth and the unemployment rate will rise. We do seem to be quite a bit below the 2% per annum threshold at the moment.

Another reason for caution about these LFS data is the high sampling variability - for some of the issues see this Dutch research paper on the Dutch LFS. There is a huge range within which one can have 95% confidence that the Scottish LFS estimates fall as the chart below shows:

So, while LFS estimates that jobs rose by 24,000 over the last quarter, the actual change could have - with 95% certainty - been between minus 34,000 and plus 83,000. For unemployment, the LFS estimate is a 10,000 fall but the actual change in unemployment might have been anywhere between a fall of 42,000 and a rise of 22,000. A similar range of variation applies to the change in the numbers economically active and inactive.

We should also be aware that the data are produced quarterly on a rolling monthly basis. So, today we were given the data for Jan-March. Last month the data showed the situation between December and February. Hence, there are two common months, January and February between the two releases. It is therefore incorrect to say as is implied here that unemployment has been falling in Scotland for two successive quarters. It hasn't. In the first quarter of this year, Jan - March it fell by 10,000. In the final quarter of last year, Oct- Dec, it rose by 16,000.

Finally, we should be concerned that the data as currently released do not allow us to drill down and ask how the 24k jobs change is broken down into part-time jobs and full-time jobs, or hours worked. Nor do we know age composition of the recent unemployment change. Yes, we are given data in the latest release on part-time and full-time jobs, hours worked and the age distribution of employment and unemployment. But these data are only provided up to the year Oct 2010 - September 2011. So, we just don't know what's happening recently.

It is clear from the data to September 2011 that full-time jobs are falling while part-time jobs are rising. This is significant, because it is not impossible that labour demand has fallen with GDP even though the number of jobs rose and unemployment fell. This would be the case if the loss of labour input through the fall in full-time employment was greater than the gain in labour services from the rise in part-time employment. It is a possibility. But we just don't know.

Surely, the ONS can do better than this?

Benefits: Ground Control to Sir Tom

Sir Tom Hunter is reported today as believing that Scotland has become far too reliant on the state and that benefits have corrupted the nation's work ethic. He is quoted in the Sunday Times as saying:

The fact is the welfare state has simply enabled us to become pampered, dependent people who expect what others strive and grasp for... For those most vulnerable, most in need in our society, (the welfare state) is sacrosanct. ... However the pendulum, in my view, has swung too far and we expect too much from our state when in many respects we have not earned that expectation.

The basis for Sir Tom's comments is data from the UK Department of Work and Pensions, which reveals that Bridgeton in the east end of Glasgow has 85 per cent of working age adults in receipt of benefit. Further, seven of the ten areas with highest receipt of benefits per working age adult are in Scotland and four of them are in Glasgow.

No one doubts Sir Tom's sincerity. I personally stand in awe of his philanthropy and his magnificent contribution to the promotion of entrepreneurship in Scotland and the good of economy generally. But on this issue I fear he has not been well advised. Indeed, it might be said that he has inadvertently played into the hands of the present DWP and its benefit cutting agenda.

No one doubts that Scotland has too many people locked into a cycle of extreme deprivation and disadvantage. Many of them are located in the Glasgow area. It is a tragedy that more is not being done to break the cycle and assist them to attain a state where they no longer need to rely on benefits.

But is Scotland much out of line with the rest of the UK? Indeed is Glasgow?

The chart below shows benefit expenditure per voter - electorate - in England, Wales, and Scotland:

Yes, benefit spending - data exclude housing benefit and council tax benefit - per voter is higher in Scotland than England by 9 percent. But spending in Wales is higher than in Scotland also by 9%. Hence Scotland is not dramatically out of line with the rest of Britain.

So, what is going on?

What Sir Tom, and I think also the DWP, may not properly understand is that the interaction of the jobs market and the housing market leads to the spatial concentration of different social groups within a city. So, if I do well at my work and get promotion I might be able to buy a house in the West End or over in the South side. But, if I lose my job and can't keep up my mortgage payments I may lose my house and eventually move into social housing in Bridgeton or Rutherglen.

What we see from that stylised example is that the unemployed and benefit dependent families tend over time to concentrate in certain areas. On the other hand, the better-off, upwardly mobile, go to the West End, South side, or just outside Glasgow to places such as Bearsden. Hence, the high proportion of benefit recipients in Bridgeton. (On housing market segmentation see inter alia Christine Whitehead here.)

Don't believe me?

Well look at this chart

Benefit Spending per voter in Scottish Westminster Constituencies 2010-11

The chart may be difficult to read but it shows the benefit spending per voter in each UK Parliamentary constituency in Scotland. The spend in the median constituency is £2,813 a little lower than the mean of £2,832. At the lowest extreme stands the West Aberdeenshire and Kincardine constituency with a spend of £2,016 per voter, while at the top of the spending range stand 3 Glasgow constituencies. The one with the highest spend of £3,756 per voter is Glasgow North East, closely followed by Glasgow East at £3, 724.

But note: there are 3 Glasgow constituencies with a benefit spend below the Scottish median and mean: Glasgow South (£2,782), Glasgow Central (£2,666) and Glasgow North (£2,382). Indeed, Glasgow North has the sixth lowest spend in Scotland and is below the average for England.

Scotland clearly has problems of multiple deprivation leading to higher levels of benefit spending than in England. But less than in Wales. The incidence of this deprivation and need for benefits is clearly in Glasgow. Yet, within cities poor deprived people tend to live in certain areas while the better off live in other different places.

It is also probable that concentration of large numbers of deprived individuals and families in one area may make it harder for many to escape the stigma of deprivation see this book especially Ch 4 by Alan McGregor. And some of these may become dependent people.

But Sir Tom, there is no evidence of pampering. Nor is there evidence that Scotland has become far too reliant on the state, or that benefits have corrupted the nation's work ethic.

Scotland and Glasgow's problems of deprivation and benefit dependency are far more complicated than that.

Scottish PMI: another false dawn?

The latest data for the Bank of Scotland Purchasing Managers' Index (PMI) produced by Markit purports to show continuing growth of private sector business activity in Scotland during April. Growth was slightly stronger in Scotland in April than in the UK after being weaker in March. But growth weakened in April compared to March in both Scotland and UK - see chart:

Markit data show from their surveys that Scotland was the third fastest growing part of the UK in April after the West Midlands and London.

However, we should not get carried away. The PMI score has been above 50 for the past 16 months indicating continuing growth. The most recent UK and Scottish PMI data appear to conflict with the outturn GDP figures, with the ONS data suggesting a fall in GDP over the past 6 months. It may be that the ONS data will be revised upwards for the first quarter and many analysts believe that the ONS is underestimating UK growth - see here. Yet, others argue that negative construction growth and falling GDP is the inevitable outcome of the UK fiscal consolidation and large cutback in public investment, which, as Jonathan Portes points out, was down 25% in the UK last year.

At best the latest PMI data for private sector activity in Scotland show weak growth and a faltering recovery.

Fiscal consolidation continues to bite, the inflation rate is falling back more slowly than the Bank of England expected due to the effects of earlier rises in energy prices, and the Eurozone crisis is worsening again.

In these circumstances, it would be a brave person who saw much hope for future Scottish growth in the latest PMI data.

Scotland's R&D: problem, or opportunity?

Formal macro approaches to growth demonstrate both theoretically and empirically the key role of technological progress and innovation in the growth of productivity and GDP - see here. At the more micro level there is research that demonstrates strong links between the growth of firms and innovation. And, there is much research evidence that R&D, and business R&D in particular - see this - plays the key role in innovation. Hence, there is much evidence that R&D has a positive relationship with productivity growth alongside other influences. R&D also can play a major role in technology transfer because it allows companies to learn about leading technological advances - here - and may raise the absorptive capacity of the firm - this.

However, both research and policy need to understand better the relative roles of domestic R&D and technology transfer to domestic innovation at the regional level. The role of research in the higher education (HE) sector, the significance of commercialisation from the HE sector, and the extent to which innovation and private sector R&D are informed by research in the HE sector and vice versa, also need to be better understood.

Scotland is a case in point. The chart below draws on recent Scottish Government data and highlights both the low absolute and relative level of business R&D (BERD) in Scotland and the high levels of higher education R&D (HERD).

It is also evident from the chart that HERD was on a rising trend over the past decade while BERD displayed a declining, all be it shallower, trend.

When we examine Scotland's GDP performance we see that over the period it is broadly similar to the OECD average as this chart shows:

Does this mean that HERD is a substitute for BERD?

I doubt it.

First, other drivers of growth may be playing different roles in Scotland compared to the OECD. Secondly, one of these drivers may be the role played by the branches of foreign multinationals located in Scotland. They bring in new products but most of the R&D is done elsewhere. Hence, measured Scottish innovation should be a lot higher than business R&D and this is what the data for Scotland in the Community Innovation Survey appear to show. Thirdly, it seems unlikely that HERD is a direct substitute for BERD. There may be some R&D that ordinarily would be done in companies that is done in Scottish universities. But for the most part HERD is less close to the market and much research may have little prospect of commercialisation, such as economics research perhaps! Yet, Scottish universities appear to do quite well on measures of commercialisation, see this and this. It would appear to be the case that Scottish businesses do not take sufficient advantage of university research. But the universities cannot escape total responsibility for this since the knowledge exchange systems that currently exist can hardly be described as open.

Either away, Scotland has a major resource in the research undertaken in its large HE sector. Business in Scotland does relatively little R&D by international standards. This does not appear to be too much of a current problem for Scotland's GDP growth rate. Other drivers of growth, whether HE R&D, innovation in foreign multinationals based here, or others not specified, appear to be compensating.

But if Scotland is to rebalance its economy more towards manufacturing and trade, it is hard to see the low level of business R&D as anything but a weaknesses; as is the apparent failure of Scottish business to capitalise more on university research.

Changing this situation offers a continuing challenge to industrial policy in Scotland.