MISMEASUREMENT OF THE REGIONAL DIVIDE MAY HAVE DENIED SOME UK REGIONS ACCESS TO EUROPEAN UNION FUNDS

Mismeasurement in the UK's Regional Accounts during the 1980s may have led certain parts of the country to miss out on European Union funds for lagging regions in the 1990s. That is the conclusion of Gavin Cameron and John Muellbauer of Nuffield College, Oxford in a report published in the latest issue of the Economic Journal. For example, according to their calculations, had the data been accurate, the newly created Welsh region of 'West Wales and the Valleys', which has qualified to receive 'Structural Funds' for the period 2000-06, might have got £130 million a year for the past decade.

The researchers note that despite the well-known South East-led economic boom of the 1980s and in contrast to evidence from a host of other data sources on regional earnings, the UK Regional Accounts suggest only a small rise in wages and salaries in the South East relative to other regions. There are a number of possible explanations for this mismeasurement: changes in commuting patterns, increasing part-time work, sub-contracting and pension behaviour. None appear to be significant.

Instead, Cameron and Muellbauer conclude that it was probably due to rather prosaic problems at the Inland Revenue in allocating tax records across regions. Amazingly, between 1979-90, the Inland Revenue was unable to allocate about 12% of their sample of tax records to particular regions, leaving them as 'region unknown' cases. Increased under-counting of earners in the South East appears to explain why the South East measure of earnings fails to rise in line with data from other sources.

Beginning in 1990-1, the percentage of unallocated cases was progressively reduced, and by 1995-6, it had fallen to around 1%. As the problem of unallocated cases was solved, the share of income attributed to the South East rose. This led to a surprising rise in South East relative earnings in the early to mid-1990s, at a time when the South East was actually doing relatively badly.

The problem has now largely unwound, and the Office for National Statistics is making a range of improvements to its regional and local economic accounts. But the misleading historical record for the 1980s still needs correcting.

So has the mismeasurement in the Regional Accounts had any serious implications? First, it has led people to underestimate the extent of regional divergence during the 1980s. After all, since the relative rise of the South East was understated, it follows that the relative fall of the other regions was also understated. While the Regional Accounts suggest only a small rise in regional differences in earnings during the 1980s, the New Earnings Survey says that the regional dispersion actually doubled.

More contentiously, the mismeasurement in the Regional Accounts may have led to the UK missing out on Structural Funds from the European Union (EU). For example, for the 2000-06 period, the newly created Welsh region of 'West Wales and the Valleys' has qualified for EU 'Objective 1 status' (on the basis that its GDP per capita is less than 75% of the EU average). It is possible that if the mismeasurement had not occurred, a Welsh region with reconstituted boundaries might have qualified for Structural Funds in the 1989-93 and/or the 1994-9 funding rounds.

To give a rough and speculative indication of the funding that might have been at stake, Merseyside, which did qualify in 1994-9, received about £85 per person in EU funding per year. Had 'West Wales and the Valleys' been eligible, with a population of about 1.5 million, it might have expected funding of around £130 million a year.

Note for Editors: 'Earnings Biases in the United Kingdom Regional Accounts: Some Economic Policy and Research Implications' by Gavin Cameron and John Muellbauer is published in the June 2000 issue of the Economic Journal. The authors are at Nuffield College, Oxford and this research was supported by the Economic and Social Research Council (ESRC).

For Further Information: contact Gavin Cameron on 01865-278653 (fax: 01865-278621; email: gavin.cameron@economics.ox.ac.uk); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-7878-2919 (email: nflynn@cepr.org).

For information on the economic outlook for the regions of the UK, See: www.housingoutlook.co.uk