From the TUC

Are Enterprise Zones the answer? Will they create additional jobs at the levels desired?

18 May 2011, by in Economics

New analysis by the TUC shows that the Employment Zones of the 1980’s had very little effect on unemployment.

The analysis shows that from January 1984 to 1999, unemployment in the UK fell by 57% and unemployment in the Employment Zones fell by 59%;  the difference being very marginal. By 2001 unemployment had fallen by 66% in the Employment Zones since 1984, this fall was exactly the same as the fall in UK unemployment; the overall result therefore being no change.    

Current Labour MarketDespite the improvement in this month’s unemployment figures, when unemployment using the ILO’s definition, fell  36,000 to 2.46 million , unemployment still remains high in the UK. The economy still remains fragile, the OBR have concluded that ‘looking over the whole five – year forecast horizon, we expect this recovery to be weaker than the recoveries of the 1980s or the 1990s’.    

The new Enterprise Zones reflect the Government’s core belief that economic growth and job creation should be led by the private sector. The Zones will  focus on removing barriers to private sector growth with lower tax levels for business and a reduced planning regime and a lighter regulatory and administrative burden. This was confirmed in a press release by the Local Government Secretary Eric Pickles,

Growth is this Government’s number one priority and a new generation of Enterprise Zones are central to our strategy. Local enterprise partnerships can use these zones as a springboard for private sector growth and wider regeneration.

How will the Enterprise Zones operate, and where?The 2011 budget announced that the Government would create 21 new Enterprise Zones, with Local Enterprise Partnerships across England.

All Enterprise Zones will benefit from:

  • A business rate discount worth up to £275,000 per eligible business over a five year period.
  • All business rates growth within the zone for a period of at least 25 years will be shared and retained by the local area, to support the Partnership’s economic priorities and ensure that the Enterprise Zone growth is reinvested locally.
  • Government help to develop radically simplified planning approaches for the zone using, for example, existing local powers to grant automatic planning permission.
  • Government support to ensure that superfast broadband is rolled out throughout the zone.

The Government has allocated a budget of £100m. The budget confirmed that the first group of Enterprise Zones would be based within eleven Local Enterprise Partnerships lead by Birmingham and Solihull, Sheffield, Leeds, Liverpool, London, Manchester, the Bristol area, the Black Country, Derby and Nottingham, Teesside and the North East. The Government has asked Local Enterprise Partnerships to nominate the site of Enterprise Zones based on economic rationale and potential for growth. The focus of the initial Enterprise Zones is on cities and those areas that have missed out in the last ten years. The Government is also launching a competition to identify a further 10 Enterprise Zones in England by July.

Enterprise Zones have been used previously by Government; they were announced in the 1980’s budget. The focus here was on large scale projects geared towards revitalising derelict areas, which is less of an issue today. In total 38 Enterprise Zones were designated in the UK between 1981/2 and 1983/4. Following this, designation occurred on an ad hoc basis. Each Enterprise Zone received its designation and benefit for 10 years. Round one of the Enterprise Zones established included Swansea, Corby, Dudley, Wakefield, Clydebank, Salford/Trafford, Speke, Tyneside, Belfast, Hartlepool, and Isle of Dogs.

What has previous experience taught us?There is evidence that shows us that the 1980s style Enterprise Zones did not deliver the jobs on the scale that is needed today.

Employment Growth – Although Enterprise Zones supported modest employment growth they also led to jobs and firm displacement. The Work Foundation, cite evidence from previous Enterprise Zones which suggests that up to 80% of the jobs they created are taken from other places. On one hand, significant numbers of jobs and companies moved in to Enterprise Zones. By 1987, there were over 4,300 companies in the 11 original Enterprise Zones with an estimated 63,300 jobs created in Enterprise Zones. However, of these 63,600 jobs, only 13,000 were estimated to be new jobs. Many of these jobs were displaced from within the same town – estimates range from 25% of jobs displaced from within the same town to 86% of firms relocations within the same county.

The Centre for Cities report on similar findings to the Work Foundation, adding that once the incentives are removed, companies leave.  They cite the Wakefield experience, (for example the Langthwaite Business Park) shows that capital- based incentives triggered short-term private sector investment, but in the longer term, when the incentives stopped the area suffered declined. In the 12 months to 2005, eight companies left Langthwaite and 400 jobs were lost.

Financial Cost – Previous Enterprise Zones have also been hugely expensive in comparison to the number of jobs created.

The Centre for Cities report that from 1981-2003, the government forwent £437-489 million in capital allowance revenues and an additional £441-544 million in business rate revenues. Therefore, estimates of the forgone revenues to the Government range from £880 million to over £1 billion (1994-95 prices; £1.3-16 billion in 2010-11 prices), a cost to the public beyond the monies already invested in land and infrastructure.

The Work Foundation inform us that a government-funded evaluation in 1987, put the cost of Enterprise Zones at £23,000 per new job which is the equivalent to £50,000 in today’s money.  Different analysis by the Centre for Cities which cannot be compared with the previous study, shows that the public sector cost per additional job created in the zone (including relocations) is estimated at £17,000 over 10 years of the programme in 1994-95 prices (or £26,000 in current 2010-11 prices). Centre for Cities, also point out that although Enterprise Zones were not only about job creation, if cost –effectiveness is measured purely on this basis then the cost per job is high compared with recent programmes like the Future Jobs Fund, at £6,500 per job created, and the New Deal for Young People, at £3,500 per job.

International comparison of Employment Zones – Beyond the UK, comparable schemes in the US provide a similar picture of minimal growth or ineffective policies. A report into the impact of Enterprise Zones in California found that the net cost of Enterprise Zones to the state had risen to $299.3 million by 2003, up from$15.6 million in 1993. When compared against non-EZ control Zones they appeared to underperform or marginally worsen instances of employment, poverty and economic change.

The Centre for Cities report that France’s Enterprise Zone programmes had mild, short-term and localised benefits. The major evaluation of the zones found a small but statistically significant effect on movement from unemployment to work in the zones.

Enterprise Zones – are they the answer?Are Enterprise Zones likely to be effective in stimulating sustainable economic growth and promoting lasting economic prosperity? There is a simple answer to this from the evidence we have reviewed, the answer is no. We find that many of the areas that had such zones in the 1980’s are still struggling today. Unemployment rates in many of these zones remain high, for example compared to a national average of 3.7 per cent (using claimant count rates); our analysis found that apart from Swansea all the areas have a higher unemployment rate than the UK national average.

We do recognise that any support that helps people in to jobs in the areas hardest hit by unemployment is positive. We are worried that the policy of Enterprise Zones is not adequate by itself for the scale of the challenge. Other programmes are also required; the TUC have argued that the Future Jobs Fund, which the Government has abolished, was the most progressive employment programme for a generation, offering young unemployed people the chance of a real job, paid at least the minimum wage.

A factor in how productive the new Enterprise Zones will be in job creation is the amount of money available for them. Considering that the Government has allocated a budget of £100m for the new Enterprise Zones, how many jobs can be expected to be created in view of the fact that the funding is considerably less than that available in the 1980s. Using the Work Foundation figures that the cost of Enterprise Zones is £50,000 per each new job, this would suggest that only 2,000 jobs will be created.

A change within the policy of Enterprise Zones can lead to them being more effective. The new Enterprise Zones should be larger than their predecessors, in order to avoid displacing jobs from the same town. They should also be located in areas which have the potential to retain jobs in the long term, beyond the expiry date of the Enterprise Zone as recommended by the Work Foundation. Also a change in the focus of the zones; as Centre for Cities argue that there should be shift focus from capital-based rebates and allowances to incentives that focus on skills, people and intellectual property. Investing in skills can ensure that the zones lead to lasting improvements.

An area of concern for us is that there is no erosion in employment protection. We deeply disagree with the notion that employment regulation is a barrier to growth and that reducing employment rights will drive up the number of companies and levels of employment. Comprehensive TUC research has shown that this assumption is false. Macro and micro evidence from across the globe shows that there is no significant relationship between employment levels and employment protection legislation and that countries with very different levels of regulation have equal levels of success in generating employment.

The TUC analysis of unemployment data in round 1 Enterprise Zone areas can be downloaded here.

One Response to Are Enterprise Zones the answer? Will they create additional jobs at the levels desired?

  1. It’s about to get worse and you want to stop talking about cuts? | Liberal Conspiracy
    May 20th 2011, 10:51 am

    […] says the Enterprise Zones will do the trick, but historical evidence says otherwise. Export-led growth? We’re not South Korea or […]