• Chart of the Week
  • May 13, 2019

Lessons from the UK’s industrial policy

Workers assemble parts at an industrial-valve manufacturer.

The Light Writer 33

Direct government support for businesses—often called industrial policy—has made its way to the center of national debates. Advocates claim it could alleviate everything from global warming to deindustrialization.

But economists still know little about what happens to jobs, investment, and productivity when governments intervene directly in business activity.

A paper in the January issue of the American Economic Review sheds light on the impact that industrial policy has on employment and productivity.

Authors Chiara Criscuolo, Ralf Martin, Henry Overman, and John Van Reenen showed that subsidies to manufacturers increased employment in the UK, but only when support was given to small firms.

From 1993 to 2000, the UK offered to pay a portion of building and modernizing costs for manufacturing plants in its poorer regions. After 2000, the rules for subsidies, set by the European Union, changed. New levels of subsidies and a higher maximum became available to struggling areas.

Figure 4 from their paper (below) shows the impact the program had on total unemployment before and after the policy change in 2000.

 

 

Figure 4  Criscuolo, et. al. (2019)

 

The solid line is the average unemployment rate in areas that received less support under the new rules. And similarly, the dashed line represents areas that received more support after the laws changed.

The UK’s economy was doing well at the turn of the century so both lines have a downward slope, but unemployment declined even faster in areas with more support after 2000.

What’s more, this decrease came from manufacturers with fewer than fifty workers, and not from large corporations or any increase in productivity.

Overall, the researchers calculated that the program saved just under 156,000 jobs a year at a cost of $553 million a year—or $3,541 per job. Under more conservative assumptions, this cost can rise to as much as $24,662 per job.

Industrial policies vary widely from country to country and program to program, but the authors’ estimates help to put hard numbers on the benefits and costs of subsidizing businesses.