Economy class: public or private?

Everyone agrees that the economic disparities between north and south need to be tackled. It is unacceptable that a child born in one part of Britain has hugely different life chances to one born a few hundred miles away. The chancellor, George Osborne, was careful to state that the recent emergency Budget would "promote job creation in all parts of the country." The government is rightly sceptical of the record of public-sector regeneration schemes, but goes further in seeing the size of the public sector as a barrier to regeneration.

The state is certainly a heavyweight employer in some places. More than 40 per cent of workers in Middlesbrough, in the northeast, have jobs in public administration, education and housing—far above the national average of 27 per cent and far, far above the 12 per cent in places such as Crawley, in the southeast. The private sector fails to thrive in Middlesbrough, the argument runs, because the public sector—with its generous national salary scales, cushy pensions and long holidays—snaffles up all the staff.

However, imagine Middlesbrough and Crawley as prospective locations for a business. If you offer wages of £500 a week you will struggle to recruit in Crawley—that is £63 less than the average full-time wage for men there—but get a good workforce in Middlesbrough, where it is £63 above the average. The difference in land costs is even greater: industrial land is 12 times as expensive in Crawley as in Middlesbrough. The public sector has not priced the private sector out in Middlesbrough; in fact, Middlesbrough remains a low-cost place to do business.

Other northeastern towns with smaller public sectors give some clue as to what Middlesbrough would be like without this large-scale employer. Take Easington, for instance. Jobs there pay 20 per cent less than those in Middlesbrough—although the skills base and job mixes are roughly equal—and many are out of work. This will be the reality for Middlesbrough when public-sector job cuts arrive: lower wages and higher unemployment.

In the recent film Up in the Air, George Clooney's character tells the newly unemployed: "Anyone who ever built an empire or changed the world sat where you're sitting right now." If we make large numbers of public-sector workers in Middlesbrough redundant, some will no doubt found their own businesses. But Clooney's job in the film was to placate people by selling them a chimera. Many of the brightest and the best will leave for places with better job prospects, taking their know-how and prospective incomes with them. Some will enter jobs like taxi driving, where each new entrant takes work away from existing drivers, making everyone poorer. Some will enter other labour markets, pushing wages down towards—and perhaps below—Easington levels.

Wages will certainly have to go down a long way before private-sector companies flock to Middlesbrough. Easington’s low wages are not low enough to attract businesses in any number—the town has a third fewer jobs per working-age resident than the country as a whole. Because Easington is not attracting companies, wages have stagnated over the past five years—but even that has been insufficient to price the town back into work. Without public-sector employment, the choice for towns such as Middlesbrough and Easington is a cruel one: very low wages, or very low employment levels, or some combination of the two.

There are two cities where the size of the public sector really is hurting the private sector: Oxford and Cambridge. Like Middlesbrough, these places have public-sector employment rates of just over 40 per cent. But unlike in Middlesbrough, employment levels in Oxford and Cambridge are very high. Unemployment benefit levels are three times higher in Middlesbrough than in the two university towns. That difference is crucial. When the public sector grows in Oxford or Cambridge it employs people who would otherwise be in the private sector. The answer there is not to stop the universities expanding but to allow these cities to grow as well, so that the result of university growth is not the withering of private enterprise but the parallel expansion of both sectors.

Middlesbrough is not unique; Liverpool, Newcastle and Hastings also combine low wages and employment with a large public sector. Unless we can persuade the existing private sector in these places to expand or persuade new employers to move there, cutting the public sector will simply make them poorer. Small changes to national insurance and the promise of a regional growth fund—which may simply be existing money repackaged—will not stop Middlesbrough becoming Easington. The deputy prime minister, Nick Clegg, needs to add analysis to his commitment for regional development if he is to succeed where John Prescott failed. One thing is certain: a cabinet meeting in Bradford and public-sector job cuts will not bring prosperity to the people of Middlesbrough.