Rumblings of the Eighties echo in North and South

News Analysis: Ominously familiar signs of regional economic imbalance show again

IN THE Eighties it was known as the Tebbit Express - named after the former Tory Trade and Industry Secretary who urged the jobless to "get on their bike and look for work".

In this case it was an InterCity train, heading down to London from Liverpool and other depressed northern cities, carrying eager unemployed in search of work in the booming capital. Unable to afford spiralling southern house prices, it was still worthwhile to check into a bed and breakfast for the week and head home on the Friday.

It was a drop in the ocean of labour demand, and this immobility of labour saw unemployment plummet in the south, creating acute labour shortages and fuelling wage inflation. Of course, uncontrolled boom in the south and recession in the north could not continue and it all ended in tears. By 1990 the economy was in recession and house prices had collapsed .

If it sounds familiar, it should do. The Confederation of British Industry last week said the shortage of unskilled labour was at its most extreme for a quarter of a century. The job losses in the north had failed to offset a growth in employment in the south, it said. The East Midlands and the south-west are said to be suffering the greatest shortages followed by the south-east and London.

Employment has hit an all-time high and the claimant count is falling. Areas in the south-east enjoy jobless rates as low as 1 per cent, and northern cities suffer from rates as high as 12 per cent.

The Nationwide building society's figures also reveal a sharp divergence between house prices in London and the south-east and the north of England, especially the big cities. London house price inflation is running at 13 per cent, with some areas hitting 27 per cent, but the picture is very different in the North.

In one area of Birmingham, prices have fallen by 3 per cent. In Salford, Greater Manchester - the area recently infamous for agents offering "buy two, get one free deals" - they fell 0.03 per cent. In London the average home costs pounds 116,170. In Tyne and Wear and Cumbria the figure is pounds 50,184.

Anecdotally, there are worrying signs. British Telecom is paying mobile engineers a pounds 50 a day living allowance, equivalent to pounds 12,000 a year so they can move to where the work is, predominantly in London and the South, at short notice.

This surge in house prices and a tightening labour market will be high on the agenda of the Bank of England's Monetary Policy Committee when it begins its monthly rate meeting tomorrow. The MPC faces a dilemma. Tightening monetary policy to control growth in the South would exacerbate the problems for the North and risk stifling an embryonic manufacturing recovery.

Steven Bell, chief economist at Deutsche bank, believes the North-South divide will become even more marked. "I would not say it is terminal but it is going to get worse and worse," he said. "Prosperity issues dictate that the South - in particular London - will continue to outperform the North."

Adam Cole, an economist with HSBC, said the regional imbalance in the 1980s was driven by a boom in the services-intensive South that required a tough monetary policy dominated by a high exchange rate, and a sharp divergence between house prices in North and South made labour mobility impossible.

He said today's mix of growth - booming services, struggling industry and a strong pound - was "worryingly similar" to the Eighties. House prices, after converging to normal levels across the country, have started to diverge again over the last two years. He added: "This almost certainly means impediments to regional labour market mobility are re-emerging in the way they did in the late Eighties. The unbalanced nature of the policy mix, the composition of growth and the re-emergence of wide property price differentials means the UK seems to be facing familiar problems in terms of the development of regional labour market inflation blackspots."

In a study for the Joseph Rowntree Foundation, Professor Ivan Turok, of Glasgow University, said 20 major cities, mostly in the North and Midlands, had lost 500,000 jobs since 1981 compared with the creation of 1.7 million new jobs across the UK.

"There is a sizeable `jobs gap' in Britain's major cities, an increasing imbalance between labour supply and demand," he said. "The urban jobs gap needs to be taken more seriously since it threatens the functioning of the national labour market, economic growth, welfare reform and social cohesion."

He said relying on national economic growth to even out the divide, or on supply side initiatives such as New Deal would not be enough to prevent outbreak of social ills such as deprivation and disorder.

The Chartered Institute of Housing said the location of the new jobs was adding to the problems by influencing where homes were built. The chief executive, David Butler said: "Unless more can be done to redress the imbalance in regional economies, social housing landlords will struggle with the problem of low demand in the North, while the pressure for new housing in the South continues." In a free market, prices of housing and labour should respond to regional variations in the economy.

So if the workforce is prevented from moving to where the work is, businesses will be forced to relocate to where the workforce is - or end up paying too much for employees.

HSBC's Adam Cole believes the data reveal a glimmer of hope. He said although areas such as the north-west and Yorkshire and Humberside saw a 14 per cent fall in manufacturing jobs in 1998, services jobs grew by 65 per cent and 41 per cent respectively.

"The evidence suggests improvement in labour mobility may have proved short-lived but there does seem significant evidence jobs are moving to areas with greater labour supply," he said. Technological advances and initiatives such as telephones call centres were a sign that capital rather than labour was becoming more mobile. He added: "Despite some signs of regional imbalances developing in a worryingly familiar way, regional labour market hot spots seem much less of a concern in this cycle."

Business leaders hope the MPC agree with that final analysis. The CBI, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Business want a freeze or cut in rates.

They are worried that too much attention to the economic powerhouse of the South will lead to a tightening of monetary policy that would further drive up sterling and make life tougher for manufacturers.

It's all very familiar.