CEP Big Ideas

32 Lincoln’s Inn Fields is the new home for LSE’s Department of Economics and six research centres – CASE, CEP, IGC, STICERD, SERC and the Centre for Macroeconomics. This is an introduction to two of the Centres: CEP and SERC. CENTRE for ECONOMIC P E R F O R M A N C E

Big ideas Professor John Van Reenen Director Professor Stephen Machin Research Director

What the Centre Does

CEP has made major contributions to the understanding of growth, unemployment, education, management, innovation and labour market institutions such as the minimum wage.

The Centre has some 100 research staff, associates, postgraduates and administrative, IT & Data staff. Senior staff are drawn mainly from LSE faculty, with significant contributions from UCL and other UK universities, Harvard, Stanford and Princeton. They work with a core of 30 full-time research staff and around 30 postgraduates registered for the PhD, mainly from continental Europe, working in apprenticeship mode on Centre research projects. Leading world economists including Paul Krugman, Alan Krueger, Richard Freeman and Daniel Kahnemann are regular visitors to the centre.

Overview

Research programmes

Core funding of the Centre is from the ESRC with matching funding from the UK and overseas governments, charitable foundations, and business.

PROGRAMME TITLE

Established in 1990, the Centre for Economic Performance (CEP) focuses on the links between globalisation, technology and institutions (especially in education and the labour market) and how these forces effect productivity, inequality, employment and wellbeing.

CEP publications

Prof. Alan Manning Prof. Sandra McNally Prof. Stephen Machin Dr. Emanuel Ornelas Prof. Francesco Caselli Prof. John Van Reenen Prof. Richard Layard

ISSN 1362-3761

ISSN 1362-3761

Centre Pi ece Centre Piece The Magazine of The Centre for Economic Performance

Volume 17 Issue 1 Spring 2012

Jobs in a recession

CEP Discussion Papers (1197 deposited since 1998) have been cited on average 12.5 times each, putting the series 9th in the world out of the 134 institutions registering over 500 papers since 1998, and more than around three times the average citation level of papers.

PROGRAMME DIRECTOR

Communities Education and Skills Labour Markets Globalisation Macroeconomics Productivity and Innovation Wellbeing

UK growth Energy taxes Executive pay Oil and conflict

Corporate innovation Language barriers Industrial policy School funding

The Magazine of The Centre for Economic Performance

Benefits of competition Youth unemployment Team performance

Volume 16 Issue 1 Summer 2011

Chernobyl University fees Land use planning

WHAT FUTURE FOR THE DOLLAR?

The Centre also produces CentrePiece three times a year, a

Edward Balls, Shadow Chancellor: “CentrePiece

magazine unique in the UK that features CEP’s latest

provides a refreshing and stimulating look at the new

research findings in readable but serious articles which

economic ideas and practice. I would thoroughly

show how the findings stand up, why they are important

recommend it to anyone interested in contemporary

and their implications for economic and social policy.

economics and policy making”

Special Reports, Occasional Papers and Policy Briefings on

Gavyn Davies, Macroeconomist and Chairman,

areas in which the Centre has expertise are also brought

Fulcrum Asset Management: “…it’s clever, easy to read

out and published on the Centre’s website.

and above all, it’s full of cutting edge research”

http://cep.lse.ac.uk/_new/publications/default.asp

Times Educational Supplement: “Essential reading and should find its way into every school and college library”

If you wish to subscribe to CentrePiece,

Ruth Lea, Economic Adviser and Director of Arbuthnot

please complete our online form at

Banking Group and Director of Global Vision:

http://cep.lse.ac.uk/centrepiece/subscription.pdf

“CentrePiece provides an excellent forum for informed and

or send an email to CEP.CentrePiece@lse.ac.uk

stimulating debate. I strongly recommend it” Business Economist: “The presentation is glossy, colourful, snappy, well-illustrated and readable. Would that economics

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could be more often so attractively presented”

What has CEP Done for Economic and Social Policy?

What Difference Has it Made?

The Centre’s research contributes not only to the development of economics but has had significant impact on policy: providing the intellectual basis underpinning the New Deal, the Working Families Tax Credit and the Minimum Wage, the R&D tax credit as well as the EU’s 1997 Luxembourg guidelines. CEP staff have been actively involved in policy and advice: for example, Stephen Nickell, Sushil Wadhwani, Charlie Bean, Willem Buiter and David Blanchflower, all past members of the Centre, have served on the Bank of England Monetary Policy Committee; Paul Gregg has served on the Chancellor’s Council of Economic Advisors; Richard Layard has advised the Department for Education and Skills on the New Deal, and the Department of Health on Mental Health Reform; John Van Reenen has been senior advisor to the Department of Health and Downing Street on productivity and enterprise. Jonathan Wadsworth is a Member of the UK Migration Advisory Committee, a Government appointed panel of four economists given the task of drawing up a list of skilled

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occupations with shortages that could sensibly be filled by immigrants to the UK and Stephen Machin is a commissioner on the Low Pay Commission.

The Centre evaluates many key public policies to see if they have any benefits and to who these accrue and whether they outweigh any costs. Examples have been the Literacy Hour in primary schools, the Job Seeker's Allowance for the unemployed, the New Deal for Young People, R&D tax credits to promote firm innovation and an evaluation of the Climate Change Levy and its aims to reduce greenhouse gas emissions.

In order to give some case studies of how our research has led into policy and thinking, CEP published a Big Ideas series in CentrePiece and on our website at http://cep.lse.ac.uk/_new/publications/bigideas.asp between 2008-2012. The series gives ten case studies of how CEP research continues to have an enduring influence on the popular debate.

Valuing schooling Wellbeing and public policy through house prices A series of influential CEP studies has confirmed the widespread belief that there is a link between house prices and the quality of local schools – and explains the nuances of the findings and their significance for public policy for education, cities and social mobility.

What makes people happy? Since CEP organised its first conference on this question, its research into what makes people happy and how society might best be organised to promote happiness has been a central part of the Centre’s agenda. The research has contributed greatly to successive governments’ recognition that promoting happiness should be a legitimate ambition of public policy.

In bringing together prevalence

statistics for depression and anxiety, the costs of training and employing therapists, potential cost savings in the DWP, and the benefits to individuals and society of improved mental health and wellbeing, Professor Layard was able to make a strong case for investment by central government in cognitive behavioural therapy and his work inspired the creation of the Improving Access to Psychological Therapies programme.

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Innovation policy

How competition improves management and productivity

Keeping in mind the importance of competition and labour market flexibility for productivity growth, the Centre shows the impact of research on how policy-makers can influence innovation more directly and effectively – through tax credits for business spending on research and development (‘R&D’).

Research on the drivers of productivity growth and its impact on the design of new policies in the UK and the European Union aimed at fostering greater competition has evolved in the Centre. The methodology developed has surveyed management practices in many sectors (for example manufacturing, retail, healthcare and education) – and in many countries. It is productivity, the measure of output per input which drives the growth of real wages and consumption. Our world management survey carried out over 8 years in 20 countries on 10,000 firms explains the UK's lagging productivity performance compared to the US, France and Germany by looking into the quality of its management practices. We have shown that better management practices are associated with higher productivity, profitability, return on capital employed, sales growth and firm survival rates.

What are the implications for policy?

A higher proportion of university educated managers improves productivity therefore the government needs to encourage the increase in management education and supply of capable managers; it needs to improve access to business advice and skills of smaller firms which have more difficulty in accessing them. Firms need to make more frequent changes of plant manager, review more regularly changes in operations management and implementation of lean

technology and practices. Since we find that increased product market competition incentivises firms to innovate, it is important to ensure that regulatory barriers to setting up and expanding businesses are kept to a minimum; international policy should focus on advancing further trade liberalisation and strengthening the European Union's services directive to make it easier for businesses to set up or sell their services anywhere in Europe. Finally, our research shows that within country differences are bigger than between country differences, and that it is the tail of low performing firms which need improving to really make a change to the UK's lagging position. A large proportion of these are family owned and attempts to incentivise them to recruit professional managers should be made – CEP also recommend removing the zero inheritance tax rating on business assets passed within families since this could encourage the continuation of poor productivity performance.

In another strand of research, CEP conducted interviews of managers in 1200 hospital cardiology and orthopaedic units and highlighted the potential of improving management practices in hospitals as a strategy for combatting UK's hospital's poor productivity record compared that of other rich countries. Using a management practices measurement survey developed with McKinsey and Co., and matching these with

publicly available hospital level outcome statistics our research revealed that hospitals with higher management scores (especially operations and people management, had better clinical outcomes such as lower mortality rates from emergency heart attacks as well as higher levels of patient satisfaction and enhanced financial performance. In the UK a one point improvement in the management score on a one to five scale is associated with a 6% fall in deaths from heart attacks.

The resulting policy recommendations were that the government should promote competition by removing inefficient providers and relax restrictions on hospital growth but must continue to ensure that markets operate effectively, publishing and promoting measures of provider performance; should regulate minimum standards; should only allow price competition in certain sectors (price competition between state and private sectors has not been shown to work).

Hospitals should also employ more managers who combine clinical and managerial skills via more attractive career paths for clinicians into management.

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Economic geography

The UK’s National Minimum Wage

Economic geography seeks to understand why prosperity is so unevenly distributed across cities, regions and nations. Innovation is one key driver of growth – and it has been the focus of a substantial body of research from the Globalisation Programme at CEP. The related Spatial Economics Research Centre (SERC) has also revealed the importance of the geographical location for productivity growth.

The Centre played an important role in providing the intellectual context for the implementation of the UK’s National Minimum Wage and in evaluating its impact. CEP predicted that setting the NMW at a reasonable rate would have no negative effects on employment and events have proved the accuracy of this prediction. The consensus view across the political spectrum is that the policy has been a success, benefiting 12 million low paid workers and reducing wage inequality. This policy is also indicative of the potential benefits of government support for research. The Economic and Social Research Council (ESRC), which recently awarded CEP £6.08 million over a five-year period, commissioned a consultancy report aimed at measuring the impact of its funding. Focusing on the Centre’s contribution to the implementation and evaluation of the National Minimum Wage, the report tried to assess the value of CEP research, concluding that: ‘Of course, it is impossible to attribute with any precision the value generated, but if we start with a gross benefit of £1.2 billion attributed to the policy then even if only 2% of that gross benefit is attributable to CEP that equates to £24 million in 2008 prices.’

Established in 2008, SERC is based at the LSE and brings together leading researchers in the economic geography field from across the country, including those from the Universities of Glasgow, Newcastle, Oxford, Strathclyde and Swansea.

SERC was funded in its first 3 years by grants from the Economic and Social Research Council (ESRC), Department for Business Innovation & Science (BIS), the Welsh Assembly Government (WAG) and the Department for Communities and Local Government (DCLG). Since 2011, funding has continued from the ESRC, BIS, and WAG.

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Education

Intergenerational mobility

CEP recognized that education is a key policy instrument for addressing the social problems of unemployment, rising inequality and falling intergenerational mobility and became one of the founding partners of the Centre for the Economics of Education (CEE), which was set up in 1999 by the then Department for Education and Skills. The education group at CEP has made a contribution to many important policy questions as well as advancing academic research in this area. One of the big questions addressed by our research is what works (or not) to improve school performance. More specifically, what are the consequences of various types of school policy and institutional structures for raising educational standards in schools?

And do these policies and structures benefit some children more than others?

Often the work of the Centre has changed the way that commentators think and talk about society and the economy. Frequently, this becomes so hard-wired into the policy discourse that CEP is not even directly mentioned! How many people know that the decline in social mobility between generations born in 1958 and 1970 repeatedly mentioned by politicians and commentators was first discovered

by CEP? The original article (published in 2005) on the research continues to be downloaded from our website – a total of 69,852 times in 2012 alone. Our interest in intergenerational mobility is in part encouraged by the recognition of the UK’s high inequality levels and exceptional child poverty rates that impact negatively children’s life chances. More recent work has attempted to understand more about the link between inequality and mobility, both in terms of how inequality may influence different measures of social mobility, and more profoundly whether greater inequality in a nation leads directly to less social mobility.

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Big idea: Rising wage inequality Significant research findings on wage inequality have emerged from the Centre over the past three decades. Recent academic literature on rising inequality began in the early to mid-1990s. It sprang from a recognition that wage gaps between higher and lower paid workers were rapidly widening in a number of countries, notably the UK and the United States. There are at least two main aspects of this research to which CEP economists have made significant contributions and shaped the debate: (1) the careful use of large-scale microeconomic data on individuals’ wages and employment to document what happened and to measure accurately the extent to which the wage distribution widened. (2) The second significant contribution was to develop a better understanding of the proximate causes of rising wage inequality. Our work has shown that the recent rises in UK wage inequality have mainly been due to a combination of skill-biased technological change and institutional changes affecting the labour market. But what kind of policies could be implemented to reverse the trend in inequality? The long-term policy has to be the building up of human capital.

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Big idea: Unemployment and welfare to work

About SERC

Unemployment and welfare to work have been one of the most high profile areas in which the combination of theory and careful empirical analysis at CEP led to policy developments in the UK and other European countries, including the EU Luxembourg guidelines enjoining every country to reduce long term unemployment rather than stem the inflow into short-term unemployment and also including the ‘New Deal’. CEP’s research informed the ‘New Deal’ policies in Britain, Denmark and the Netherlands - where those struggling to find work were required to accept government training and help in searching for work in order to receive benefits.

When the New Deal was introduced in 1998, giving help to 18-24 year olds to find jobs, job finding rates increased by 20%.

The Centre’s work on unemployment and welfare has also changed the way economists think about these problems - as adopted recommendations from CEP were evaluated,, theoretical understanding of these issues were enhanced.

Since 2008 SERC has published a total of 132 discussion papers and 11 policy papers. The Centre continues to offer affiliation to promising young academics from across the EU as well as hosting a number of international visitors each year. These activities have led to increased collaboration with researchers across the EU as evidenced by the fact that nearly half of our discussion papers published in the last year involve one or more coauthors based outside the EU (13 out of 30 papers).

Finally, we have put particular effort in to our KE activities through the SERC blog post (over 300 postings) see http://spatial-economics.blogspot.co.uk

and Twitter @LSE_SERC The Centre aims to provide high quality independent research to further understanding as to why some regions, cities and communities prosper, whilst other don't. SERC’s five core research programmes explore disparities, their effects and potential remedies at all spatial levels including regional, city-region, local and neighbourhood www.spatialeconomics.ac.uk/SERC/research

SERC also conducts a number of independent research and consultancy projects. Recent examples include work for the Manchester Independent Economic Review, Department of Transport and National Housing and Planning Advice Unit.

The Centre aims too, to influence and improve policy decision-making at the national and local levels, connecting UK policy makers with international expertise, research and good practice in diagnosing and tackling such differences.

The Centre is directed by Professor Henry Overman, Professor of Economic Geography at the London School of Economics. SERC’s research director is Dr Stephen Gibbons. www.spatialeconomics.ac.uk

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CEP in the Future The Centre has, more recently, advanced new areas of

improving knowledge about the costs and benefits of

work. The new Community Programme embodies a

staying on in education and going to university. Our other

radical new line of research that incorporates the

new randomised control trials (RCTs) have been in Indian

importance of values and beliefs in shaping economic

textile firms where firms’ productivity was measured

outcomes. The programme has produced new research on

before and after interventions by management consultants

crime, including crime and the scarring effects of

advising on modernising management practices. Similarly,

unemployment, crime deterrence effects of the August

we have also run an RCT on the introduction of worklife

2011 riots, and hate crime and terror attacks. The effects

balance management practices (the option to work from

of immigration on anti-social activities, on the housing

home) in the largest travel agency in China.

market and on welfare services have also been Finally, the Centre’s most recent work has focussed on

investigated.

making an authoritative contribution to the formulation We made advances in new methodological

and implementation of a long-term growth strategy in the

approaches with Professor McNally carrying out one of

UK by its setting up of the LSE Growth Commission

the first randomised evaluations (at a reasonable scale)

www2.lse.ac.uk/researchAndExpertise/

within the ‘economics of education’ in the UK involving a

units/growthCommission/home.aspx whose report

two year experimental intervention through a randomised

was published in January 2013 and by its research on the

control trial of an information campaign in London

determinants of growth and productivity - some of which

Schools on the economic returns to staying on in

are presented in a separate panel.To receive email

education and the implications of different choices at

briefings on all events (seminars, public lectures,

university.. The ‘information campaign’ was effective in

http://cep.lse.ac.uk

www.spatialeconomics.ac.uk

The Centre for Economic Performance is an ESRC

Economic prosperity in the UK is very unevenly distributed

interdisciplinary centre studying the determinants of

across space. Tackling these persistent disparities is a key

economic performance at the level of the company,

policy objective. Providing a rigorous understanding of the nature, extent, causes and consequences of these

the nation and the global economy.

For further information on its work, publications and events see http://cep.lse.ac.uk

disparities, and identifying appropriate policy responses, is the primary objective of the ESRC funded Spatial Economics Research Centre.

or contact cep_info@lse.ac.uk

To join SERC’s mailing list, to receive notifications regarding the Centre’s publications and/or events please contact: Follow CEP on Twitter @CEP_LSE

www.spatialeconomics.ac.uk/SERC/contact/

And CEP’s director on @johnvanreenen

email/default.asp.

Spatial Economics Research Centre

CENTRE for ECONOMIC P E R F O R M A N C E Centre for Economic Performance London School of Economics & Political Science Houghton Street London WC2A 2AE Tel: +44 (0)20 7955 7673 Fax: +44 (0)20 7404 0612