The Economy & Labour Force Topic Group identified an intelligence gap and for the Observatory to fill this gap by developing a regional forecasting model.
Reasons for an Observatory model
It was proposed that a model hosted by the Observatory on behalf of partners would offer cost benefits. By using a shared resource partners would see no need to commission forecasts independently.
As well as cost savings a single model gives partners access to consistent forecasts. This has the benefit of:
- Providing a framework through which dialogue and consultation can take place.
- Providing a transparent mechanism for establishing a strong evidence base.
At a minimum the model has to be capable of:
- Generating projections for key target variables.
- Generating potential alternative projections arsing from adjustments to initial conditions.
Model identified and acquired
We identified existing models that met these minimum requirements. However, it was decided to procure the Regional Economic Environment Input Output (REEIO) model. The model was developed by Cambridge Econometrics in partnership with the English Regions, and the Environment Agency. The model was delivered in February 2006.
The REEIO model was preferred over other models because:
- It integrates environmental impacts with economic activity from the production sectors.
- It has detailed sector and labour market elements.
- It was developed by a pan-regional network. This means that there are consistent models available in other regions.
The funding for acquisition of the model was provided by Advantage West Midlands through the Business Resource Efficiency and Waste programme.
Using the model
Most significantly the model has been used to provide baseline projections (PDF, 1.04MB) for the evidence stage of the Regional Economic Strategy Review.
While we used the model to generate baseline projections, the analyses were undertaken by academics at the Institute of Employment Research at Warwick University.
To date, our experience of using the model has been reasonably straightforward. The projections for the Regional Econmic Strategy Review required some slight amendment to the model’s initial conditions and this was easily undertaken.
The model has also been used to provide outputs that support the analysis of the Economic Strategy objective to achieve a low carbon economy.
Creating alternative scenarios
There are options to adjust some key variables to generate revised projections for different factors. These include:
- Population
- Labour market activity rates
- Export shares (these represent trade outside the region so include trade with the other regions within the UK as well as exports outside the country)
- Inputs to production
There are also options to generate target levels of Gross Value Added (GVA) and productivity levels. In addition, some elements of the labour market can be changed which will impact on labour supply.
Adjustments to the input assumptions are made ‘off model’ using MS Excel and then integrated back into the model.
It is evident that the level of sophistication possible is determined by the user's experience. Caution should be taken when formulating changes to the variables as the model has a fixed structure. This fixed structure means that changes do not contribute to feedbacks that do exist in reality.