1 Longitudinal Analysis and the Scottish Economy David Bell Scotecon University of Stirling

2 Key Issues in Scottish Economic Performance Economic Growth –Entrepreneurship –Population Decline –Skills –Economic Inactivity Widening role for economic analysis in policies under control of Scottish Parliament Can longitudinal data enhance the evidence base for policy?

3 Longitudinal Data and the Scottish Economy At present role is limited because …. –Relatively few longitudinal data sources –Scottish sample often small –Not much expertise in the use of such data

4 Key Longitudinal Datasets Individual/Household Based –BHPS –Cohort Studies –NES –Census But what about firms? –Futureskills Scotland Skills Surveys –IDBR

5 Don’t put all your eggs in the longitudinal basket! Reliance on longitudinal data should be limited Has some advantages –Controls for unobserved heterogeneity –Permits event modelling But also disadvantages –More susceptible to measurement error –It does not answer the “evaluation problem ” –Small samples may limit modelling approach and hence usefulness –The past not necessarily a good guide to the future

6 Use a Variety of Data Sources and Methods (in the Scottish context) Reconciling different results from different datasets is a useful means of understanding the datasets Replication in other datasets suggests results are more robust As does confirmation by other methods

7 Two Examples Public Sector Wages Relative Returns to Education in Scotland and Rest of Great Britain

8 Public Sector Wages - The Context Public sector pay accounts for the majority of spending under the Barnett formula Pay plays an important role in attracting, retaining and motivating public sector staff Public sector rewards influence private sector labour markets Growing pressure for reform

9 The Public Sector Premium Why do public sector employees earn more? –Compensating differentials –Efficiency wages –Bargaining structures

10 The Public Sector Premium in Great Britain Source: Labour Force Survey

11 “Explained” and “Unexplained” Components of the Public-Sector Premium Differences in mean pay may simply reflect differences in skill levels, education, experience etc. Use regression to “net out” these effects – these are the “explained” components of the public sector premium What remains is the “unexplained” component

12 Explained and Unexplained Components of Public Sector Premium Source: Labour Force Survey

13 Source: New Earnings Survey

14 Does the Premium Vary by Location in the Wage Distribution? Source: Labour Force Survey

15 But What About Individual Experiences in Moving Between Sectors? Model based on Holtz-Eakin & Rosen analysis of the impact of self employment on earnings

16 Moving between sectors (compared with staying in the private sector) Source: New Earnings Survey

17 Moving between sectors (compared with staying in the private sector) Source: New Earnings Survey

18 Moving between sectors (compared with staying in the private sector) Source: New Earnings Survey

19 Returns to Qualifications Are the returns to Scottish qualifications different from returns to English qualifications? Does the Scottish educations system as a whole perform better than the English system? Sources: Labour Force Survey, NCDS

20 Other controls, gender tenure tenure 2, age left education, Industry, marital status, number of children, size of workforce, year dummies

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22 Using NCDS to Estimate Returns to Education Not a large enough sample to construct separate Scottish estimates Not many movements between Scotland and England to separate out labour market from qualification effects But much better controls for ability and family background etc. Dummy for whether educated in Scotland or not is insignificant

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24 Conclusions Longitudinal analysis can aid our understanding of key processes in the Scottish economy Absence of longitudinal data on firms is an important omission Relevant sample sizes tend to be small Can play a useful supporting role.