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Purpose and design

LEFM has been developed by CE in collaboration with the Institute for Employment Research at the University of Warwick. It has been commercially available and continually developed since the early 1990s. It is used extensively by local agencies and by CE for more specialised consultancy projects. It is, to our knowledge, the only software package in Europe tailored to model regional and local economies and designed to conventional commercial software standards.


LEFM projects economic indicators through an explicit representation of expenditure flows

LEFM’s structure draws heavily on that of MDM, Cambridge Econometrics’ Multi-sectoral Dynamic Model of the UK economy and its regions, and it shares the same underlining software. The key strength of LEFM is that it is designed to project economic indicators for a local area by explaining the output of local industries through an explicit representation of expenditure flows in the area and their links with the world outside the local area. In this it differs from other methods of local economy modelling which typically link local output or employment (by sector) directly to national or regional output or employment. Such methods include shift-share or econometrically estimated equations. While these methods allow a user to derive projections for local output or employment growth from national or regional projections, they offer little scope for introducing an explanation of local performance relative to these higher levels, and they are typically not suitable for analysing the indirect effects on the local economy arising from the opening of a new enterprise or the closure of an existing one.

Figure 1 below summarises the model’s accounting structure, which follows the social accounting matrix approach adopted in MDM. In most cases, the variables shown in the diagram are disaggregated (eg by sector for output and employment).

 

The structure of LEFM



LEFM uses considerable detail

LEFM is also distinguished from other approaches by its sectoral detail. It identifies 41 sectors (defined on SIC03), allowing (for example) electronics to be distinguished from electrical engineering, and computing from other business services. Detailed disaggregation by sector is usually valuable because different sectors have different prospects (eg technological change is driving much faster changes in electronics and computing than in the other sectors with which they are commonly combined), because they have different employment characteristics, and also because it allows local knowledge about specific firms to be more easily incorporated in the forecast. There is, however, a cost to working in such detail: most variables in the model have to be disaggregated by sector (or a similar classification: see below for more details).


LEFM’s Main Inputs and Outputs

The main input assumptions used in LEFM are:

  • forecasts for the UK and region in which the local economy lies for selected variables, including
    • the components of domestic final expenditure, disaggregated into spending by function as published in the UK National Accounts
    • components of personal incomes
    • gross output, value-added and employment by 41 sectors
    • matrices to convert the components of domestic final expenditure into commodity demand for 41 sectors
    • input-output coefficients and projected changes projected changes in occupational structure and gender
    • forecasts for the local economy
    • population by 5-year age band and gender
    • participation rate by gender for a constant level of unemployment (these are then adjusted by the model in response to actual changes in unemployment)

    Outputs for the local economy (to 2025) include: 

  • gross output, value-added and employment by sector
  • employment by gender and status
  • employment by occupation
  • components of final expenditure (exports and imports are treated as to/from the local economy)
  • personal incomes
  • demographic indicators, including unemployment

    Simulation frameworks 

    LEFM contains a number of simulation modules that complement the core model. A feature of all the modules is the facility of the user to customise any assumptions that are used so as to more closely approximate local conditions and to facilitate important sensitivity analysis 

  • Impact module

    This is designed to consider in great detail the impact of a plant opening (or closing) on the local economy. It allows assumptions to be made in great detail as to the precise nature of the local supply links. 

  • Replacement demand

    Forecasts of total numbers of people that are expected to be employed in particular occupations in the future can give a misleading impression of job opportunities and training needs. It ignores the need for employers to replace employees who may leave through retirement, career moves or other reasons. The replacement demand module has been designed to provide indicative estimates of this demand to consider alongside the more familiar needs from the expansion of the local economy.

    The module also has the facility to generate projections of replacement demand by type of qualification. 

  • Labour market accounts

    This module enables the user to consider the possible scale of reasons for any imbalance between projections of labour supply and demand. The main reasons for any imbalance are double-jobbing, non-claimant unemployment, inward and outward commuting and individuals on training schemes. The module allows a detailed picture of the dynamics of the local labour market to be built up and for scenarios to be developed around possible future developments (eg what are the implications if the scale of net-commuting remains unchanged in the future?). 

  • Skills

    Future implications for skills can be inferred from the forecasts for occupations and qualifications. LEFM incorporates an explicit skills forecasting module which provides projections for the future demand and importance of particular generic skills in the local economy, including verbal, manual, problem-solving, planning, client communication, computing and autonomy. 


    LEFM's features and capabilites 
    Using LEFM 
    Examples of projects using LEFM


    For further information, including prices, and to order the service, email:
    Mike May-Gillings
    Manager, UK Local Economy Services