Policymakers must take intangible assets seriously when designing policies to address regional inequalities. Investing in human and social capital is fundamental to closing the UK's regional gaps, writes Dr Saite Lu.
“If your plan is for one year, plant rice; if your plan is for ten years, plant trees; if your plan is for one hundred years, educate people.”
Guan Zhong (720–645 BC)
The regional disparities in the UK, as measured by various indicators, are among the widest in the OECD (Organisation for Economic Co-operation and Development). The North–South divide has long been a concern, with the northern regions of England generally having lower incomes, higher unemployment, and lower living standards than their southern counterparts. Inequality is also prevalent at the local authority level within the high-wage regions, including as the Greater South East. For instance, according to the Office for National Statistics’ (ONS) latest data, the annual earnings in Portsmouth and North Norfolk in that region are consistently ranked in the bottom 10 percent in the UK.
The current UK government aims to address this challenge through its plans for ‘levelling up’. In the policy debate around ‘levelling up’, a good deal of attention has been focused on tangible assets, particularly infrastructure. But to ensure its success, policymakers must focus also on improving human and social capital across the UK.
This blog argues that when designing regional policies to build human capital, policymakers must formulate an integrated policy framework that incorporates other interlinked intangible assets – particularly social capital – within the economy.
Human capital is the knowledge, skills, competencies, and attributes (including health) embodied in individuals that enable them both to attain personal, social, and economic wellbeing and contribute productively to the economy.
As well as being one of the most fundamental determinants of living standards, productivity is also the key driver of wages. The hourly wage is simply the product of output per hour (productivity) and the share of total labour income within an economy (wage bills/total output). Greater London and the South East are on average 48 percent and 22 percent more productive than the rest of the UK. The urban areas account for most of the productivity differentials between regions in the UK. Many UK cities are also underperforming when compared with European cities of a similar size. If such output gaps could be closed by increasing the productivity of other cities, the UK’s annual GDP would increase by more than 3 percent.
Building human capital requires investment in high-quality education, training, and healthcare. However, it also needs to be maintained: human capital can diminish over time due to a lack of skills usage, ageing, illness, and the emergence of disruptive technologies that make existing skills less useful.
Brain drain can be another issue for ‘left-behind’ regions. With highly skilled workers migrating to economically advanced regions – mainly London – regional inequality becomes self-reinforcing. Although the advanced regions have benefitted from the inflow of a highly skilled labour force, the movement of labour has also led to other socio-economic issues such as congestion and high housing costs. Therefore, to reverse the brain drain it is critical to develop strong markets for professional households in regional cities/towns across the UK.
Social capital generally refers to ‘connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them‘. It can improve productivity directly. According to relational theories in psychology and sociology, interpersonal relationships and other relational constructs such as trust and liking, directly impact everyone’s creativity, learning, and productivity in the workplace. The evidence supporting this theory has been confirmed at the micro-level using social experiments. Our recent research using the European Social Survey (ESS) and previous studies based on the World Value Survey (WVS) suggests that the positive association between social capital and productivity also holds at the macro-level.
There are at least three channels through which social capital can positively influence human capital accumulation.
First, by being in the left-behind regions, students are not only subject to inequality of access to educational resources but they are also less likely anyway to invest in further education and training. The lack of high-paying jobs in the region will create a misperception of returns from education and training. It is thus likely that individuals will underinvest in education and training. The UK data indeed confirm the positive correlation between the percentage of the degree-level educated population in a region and productivity growth.
Social network effects can trap the regional economy at the low productivity end of the spectrum. People tend to follow what others do within their social networks in order to fit in. Conversely, however, research shows that having aspirational figures within their social networks can significantly influence people’s perceptions and decision making. Therefore, it is essential to take into account social influences when designing human capital policies.
Second, the diffusion of new technology can be much faster and more successful within a community with a high degree of social interaction and cohesiveness. For any new, productivity-improving technology (or skills) to replace the existing predominant technology within an economy, the number of users must pass a certain tipping point. For example, for someone to switch from using Excel to Python, there will be an initial cost (either in terms of effort, time, or money) to learn the new technology. Such costs are worthwhile if enough of their peers also decide to switch to Python as well. Otherwise, the new and more productive technology will fail to accumulate a large enough user base to succeed.
The Grameen Bank in Bangladesh offers another practical example of the potential economic role of social influence. Initiated by the Nobel Peace Prize laureate Professor Muhammad Yunus, the bank is famous for its group lending approach to promote inclusive finance among the poor. The newly created social network initially acts as a safety device to ensure repayments are made by low-income families who lack collateral and credit history. However, there are additional benefits. It improves people’s trust in institutions, enhances social cohesiveness and strengthens the social networks within local communities.
Third, human capital stocks are often measured by formal educational qualifications or by earnings. Such measures fail to account for the health dimension, which includes wellbeing. There is a vast amount of literature in psychology and sociology that emphasises the importance of social capital in improving people’s subjective wellbeing. Evolutionary psychologists suggest that people’s desire to form and maintain social bonds is deeply wired into human biology. The need to belong is fundamental to the survival and even the reproduction of human beings.
Furthermore, having close relationships with families, friends, and colleagues appears to have a significant positive impact on one’s mental and physical health throughout life. We can even feel happier by simply having social interactions with random people in the street or being around others. In the short run, social capital has a multiplier effect that jolts us with a shot of positivity and happiness. In the medium and long terms, social capital acts as a social safety net that enables us to be more resilient to setbacks in life and recover faster from adverse events.
The COVID-19 pandemic has made the challenge of levelling up more complex than ever. During the first wave of the pandemic in 2020, we saw numerous acts of compassion and solidarity worldwide. In the UK, households showed their appreciation for front-line NHS staff by sharing a weekly applause on their doorsteps. People sang for their neighbours on balconies in Italy. However, in recent months, we have also witnessed the rise of hate crimes against Asian minorities, along with the worsening of existing inequalities. Whether the pandemic will result in a more cohesive society or a more divided one in all our different regions is not yet clear. Whichever it is, policymakers must take intangible assets seriously when designing policies to address regional inequalities. Investing in human and social capital will be fundamental to closing the UK’s regional gaps.
Photo by Manuel Peris Tirado on Unsplash
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
