Undercover Economist

Tata Steel, Port Talbot and how to manage industrial decline

‘The wounds of a large industrial closure run deep. The entire economic ecosystem of an area can collapse’

The possible closure of Tata Steel’s operations in Port Talbot casts a deep shadow over the area. There’s something familiar about this depressing story. The shipyards of the Clyde and the cotton mills of Manchester have faded. The coalfields of Derbyshire, Nottinghamshire and South Yorkshire were all around me as I grew up in Chesterfield during the miners’ strike of 1984-85. Now the mining jobs are gone. Further afield, there are the job losses in the automobile production lines of Detroit, for the shoemakers of Kobe in Japan, or at Eastman Kodak in Rochester, New York.

So what should be done when communities are wounded by such blows? One tempting answer is “everything”; that the government should nationalise troubled operations or adopt similar big-bazooka tactics, such as high trade barriers or large subsidies. It’s easy enough to make the emotional case for this but the practical case isn’t so plausible. Would nationalisation have saved Kodak’s film business? Is Manchester the place for a 21st-century Cottonopolis?

Sometimes, government can help restructure a troubled business — as with the Obama administration’s interventions in the case of General Motors, or the long but ultimately successful nationalisation of Rolls-Royce in the 1970s.

However, taxpayers are always at risk of being saddled with the role of supporting industries in inescapable structural decline. The political economy of these cases is skewed towards preservation rather than creative destruction. Old industries under stress have much to gain from government support, and can point to people who need help. There is no constituency for jobs that have not yet been created.

So a different answer is that we should do nothing. This laissez-faire reasoning points out that economic change inevitably creates losers but, ultimately, society is better off. We cannot resist change, only adjust. Former autoworkers, steelworkers, and coalminers need to pick themselves up and move to where fresh jobs are available, or retrain.

There is a logic to this argument but it glosses over the deep wounds of a large industrial closure. It isn’t just that workers lose jobs. The entire economic ecosystem of an area can collapse. Newly jobless workers find that their homes are worthless, their pensions too sometimes.

And workers with the kind of skills that are under pressure from technology or trade may find that they move from one sinking lifeboat to another, with their new jobs under threat from the same forces that destroyed the old ones. More radically, retraining — maybe as a neurosurgeon or data scientist — would solve that problem, but then so would discovering a Rembrandt in the attic.

Between the ideologically pure answers of “do everything” and “do nothing”, we have the current consensus, “do something”. But what?

There are three broad approaches to looking after the losers from economic change: try to bring new jobs to people; try to help the people change to find new jobs; just send money.

Bringing new jobs to people is the most natural idea, but regional regeneration is difficult. Depressed communities often stay depressed. A Sheffield Hallam University study from 2014, The State of the Coalfields, found that 30 years after the miners’ strike, coalfield communities have lower employment rates and higher reliance on disability benefits. The track record of place-based regeneration policies is patchy and sobering.

If the jobs won’t move, perhaps the workers can? An influential 1992 study by economists Olivier Blanchard and Lawrence Katz found that the US labour market once worked this way. While a shock could have a lasting effect on a local economy, the unemployment rate itself would subside, “not because employment picks up, but because workers leave the state”.

But new research from Mai Dao, Davide Furceri and Prakash Loungani at the IMF finds that US workers move less than they did back in the 1980s. Instead of moving, they are more likely to stay put and stay jobless. (Mobility has improved in the European Union, albeit from much lower levels.)

We don’t really know why mobility is falling in the US. Maybe because dual-income households find it harder to move — but then the same pattern is seen for single people. Housing costs increasingly prevent poor people from moving to booming areas such as New York and London in search of work.

“My guess is that there’s no one reason for the fall in mobility,” says Betsey Stevenson of the University of Michigan, also formerly chief economist at the US labour department. Stevenson, like many economists, argues that education must be a huge part of the answer to economic shocks. The jobs have changed, and so must we.

Education is, indeed, a remarkable thing. Lawrence Katz has observed that between 1979 and 2012, the wage gap between a US household of two college graduates and a household of two high school graduates grew by around $30,000 — a sum that dwarfs most shifts in the economic landscape. But it is easy to be glib about retraining: governments are tempted to use training programmes as a way to make work and shift people off the welfare rolls.

So a final answer as to how to compensate the losers is the simplest: give them money. That is a strategy that offers both more, and less, than it might seem at first glance. But that is a topic for next week.

Written for and first published at ft.com.

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