If we build it, will they come?

26th October, 2017

What role can government investment in the built environment play in turning around struggling neighbourhoods? Unfortunately, not much, according to the evidence that we found and summarised in our evidence review on Estate Renewal. I say ‘unfortunately’ because these investments can play an important role in providing people with a decent standard of housing. While many of us would think that this was justification in and of itself, evidence of a strong economic impact might help secure even further investment. Claims of such a possibility have certainly been used to make the case for investment in the past.

If investment in housing doesn’t have the desired impact, then surely commercial investment must do? All those shiny new buildings that government helped subsidise, full of happy workers must be making a difference to local growth? My co-authors and I try to tackle this question in a new discussion paper recently published by the Spatial Economics Research Centre. We study the local economic impacts of a major regeneration programme – the Single Regeneration Budget (SRB) – aimed at enhancing the quality of life of local people in deprived neighbourhoods in the UK.

The methodological challenge is one that occurs in so many local growth evaluations: how do we construct a counterfactual comparison group for the group of areas that are receiving investments. In our paper, we try several approaches. Our first empirical strategy is to simply compare changes in the number of jobs and the employment rates in locations close to a SRB site to observationally identical locations elsewhere. We then compare locations close to a SRB project to locations further away from the same SRB project. Finally, we examine the effect on employment rates by comparing areas close to SRB projects to similarly defined control areas, close to locations that only receive SRB funding in later periods.

All of these approaches lead to similar conclusions. We find that subsidising the development of commercial space through the SRB created some additional workplace employment in the targeted places (although we can only partially assess to what extent these were displaced from further afield). However, despite the increase of new local jobs, we find no evidence that these jobs went to local people or improved the employment outcomes of local residents. Moreover, our evidence suggests we can rule out the possibility that these projects were a cost-efficient way to improve local employment. Indeed, our results suggest that the cost of creating an additional job for a person living in the target areas was at least £6 million! Thus our study provides a striking example of the challenges government face when trying to help the residents of deprived neighbourhoods by “bringing jobs” to them through investment in shiny new buildings.

If this result feels counter intuitive, try stepping back and thinking about the underlying economics. If government subsidies new buildings in areas where the supply of commercial space is not a problem, what might we expect to happen? We would expect the new, subsidised space, to fill up with firms looking for high quality space at a low price. As evidenced by vacancy rates in these buildings (which are often, although not always low), this is what usually happens. But where do those firms come from? The most likely answer is somewhere nearby in less attractive space that is not subsidised. Government evaluations usually miss this ‘displacement’ because they only focus on vacancy rates or employment on the subsidised sites. Shifting these jobs doesn’t help local people find employment, so the impact on them is minimal.

One final point, which also links back to the housing renewal evidence with which I started. If we measure the impact of these investments through area level employment and use the right comparison group then we will see positive effects as firms shift in to the new buildings. Similarly for housing renewal, if new richer people move in, and poor people move out, area average income will increase. Sometimes, this displacement might actually meet policy objectives. Perhaps the local authority wants to concentrate employment on a smaller number of key sites to help with public good provision such as transport and broadband. Personally, I find it a little harder to make the case for publicly sponsored gentrification – which is what this amounts to in the case of estate renewal. Although even there it’s possible that this might be justified – e.g. because sales to richer families help subsidise improvements on the rest of the estate. But this highlights, once again, the importance of clearly stating policy objectives and then carefully evaluating to see whether or not what policy is doing helps achieve those objectives.

In the case of SRB, where the objective was specifically to help disadvantaged people our evidence urges some caution. Other aspects of SRB spending may well have helped (we are not evaluating those) but the billions spent on subsidising commercial space appears to have achieved very little in terms of the stated objective.

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