The National Impact of Regional Policy: Supply-Side Policy Simulation with Labour Market Constraints in a Two-Region Computable General Equilibrium Model

In a UK context, research into regional policy impacts has focused largely on the effects of a policy on the target region, with any consequences for other regions being largely ignored. This study aims to address this issue by providing a comprehensive evaluation of regional policy, focusing on both the regional and national implications of a policy shock. The paper examines the system-wide effects on the Scottish and rest of UK (RUK) economies of an increase in labour efficiency in the Scottish traded sectors. The research is carried out in an inter-regional computable general equilibrium framework of the Scottish and RUK economies, under alternative hypotheses regarding wage determination and inter-regional migratory behaviour. The findings suggest that regional policy can have significant national spillover effects, even when the target region is small relative to the RUK. Furthermore, the configuration of the labour market is important in determining the post-shock adjustment path of both economies. In particular, while Scottish economy results are sensitive to alternative versions of how regional labour markets function, RUK region effects prove to be even more so.