Poor productivity and high housing costs are driving a “living standards exodus” from London

Good advice. Image: Getty.

As a Londoner, I think it’s fair to say that as a city we’re quite good at giving ourselves a pat on the back (though apparently self-loathing Londoners are a thing ,too). It’s often suggested that London is an economic powerhouse, productive, innovative and leaving the rest of the country in its wake. But new research by the Resolution Foundation suggests that London could do with a bit of self-examination, too.

London’s economy is different, and in a good way: the average worker in the capital produces a third more per hour than the UK average. As a share of the workforce, twice as many people work in professional, scientific or technical roles than in other major UK cities. London’s economy has grown faster than the UK as a whole since the crisis.

But wait. When it comes to productivity growth – probably the most pressing economic challenge facing the UK – far from racing away, London’s economy is actually holding the country back. Productivity growth in the capital has been negative since the crisis.

 

How can we reconcile these two stories of economic success and failure? The answer is that London’s economic growth has been entirely driven by increasing employment and hours worked, rather than productivity improvements. This economic shift has had a profound effect on the capital’s living standards over the last decade.

The positive side of London’s new economic growth model is that it has been very good for jobs. Employment is up 5 percentage points since 2011. The capital’s employment rate is at a record high, and closing in on the UK average for the first time since the late 1980s. At a time when other major cities – particularly Birmingham – face low employment challenges London is breaking that mould.

But there’s a flipside to this story of strong employment growth – the quality of new jobs created. The big growth areas in employment across London have been low-paying, low-productivity sectors such as hospitality (up 35 per cent) and administrative services (up 29 per cent). This helps to explain London’s recent productivity problems, and why it’s experienced the biggest pay squeeze of any region of Britain. Depressingly, typical hourly earnings in London are still 7 per cent lower than they were a decade ago.


So, in some senses, London’s economy since the crisis has been a bit like the UK’s on steroids:  lack of productivity growth, a sharp pay squeeze, but lots of jobs.

But just as important as these shared challenges are the relatively unique issues London faces, particularly for those on low-incomes. The most obvious one is housing (though this is now being exported to other cities across Britain).

It will not come as a shock to anyone to learn that housing is expensive in London. But to show just how much housing acts as a drag on living standards, it’s worth noting that it turns Londoners from having the highest incomes in the country (£28,600) to being below average the UK average (£21,350, compared to the UK figure of £22,250).

London’s other unique challenge is inequality. Income inequality is around 25 per cent higher in London, and wealth inequalities are even starker. London is now the only part of the country where the typical family has no net property wealth.

Faced with high housing costs and levels of inequality, the response of many Londoners is to leave. London’s population has exploded since the millennium, driven by international migration – but it’s actually a net exporter of people to the rest of Britain. The number of people leaving London climbed to 90,000 last year, driven by rising numbers of people in their early 30s moving out. The triumph of improving London’s schools over the last 20 years is being outweighed by the disaster that is housing. If London is complacent then this exodus will likely continue.

In the past the city glossed over its problems by pointing to the fact that on most metrics it was performing better than the rest of the country. Although in many respects this is still the case, it is less true than it once was. We shouldn’t stop the heady parties that are synonymous with the capital. But we could do with a bit more sober reflection too.

Stephen Clarke is senior economic analyst at the Resolution Foundation. You can read the full report here.

 
 
 
 

Businesses need less office and retail space than ever. So what does this mean for cities?

Boarded up shops in Quebec City. Image: Getty.

As policymakers develop scenarios for Brexit, researchers speculate about its impact on knowledge-intensive business services. There is some suggestion that higher performing cities and regions will face significant structural changes.

Financial services in particular are expected to face up to £38bn in losses, putting over 65,000 jobs at risk. London is likely to see the back of large finance firms – or at least, sizable components of them – as they seek alternatives for their office functions. Indeed, Goldman Sachs has informed its employees of impending relocation, JP Morgan has purchased office space in Dublin’s docklands, and banks are considering geographical dispersion rather concentration at a specific location.

Depending on the type of business, some high-order service firms will behave differently. After all, depreciation of sterling against the euro can be an opportunity for firms seeking to take advantage of London’s relative affordability and its highly qualified labour. Still, it is difficult to predict how knowledge-intensive sectors will behave in aggregate.

Strategies other than relocation are feasible. Faced with economic uncertainty, knowledge-intensive businesses in the UK may accelerate the current trend of reducing office space, of encouraging employees to work from a variety of locations, and of employing them on short-term contracts or project-based work. Although this type of work arrangement has been steadily rising, it is only now beginning to affect the core workforce.

In Canada – also facing uncertainty as NAFTA is up-ended – companies are digitising work processes and virtualising workspace. The benefits are threefold: shifting to flexible workspaces can reduce real-estate costs; be attractive to millennial workers who balk at sitting in an office all day; and reduces tension between contractual and permanent staff, since the distinction cannot be read off their location in an office. While in Canada these shifts are usually portrayed as positive, a mark of keeping up with the times, the same changes can also reflect a grimmer reality.  

These changes have been made possible by the rise in mobile communication technologies. Whereas physical presence in an office has historically been key to communication, coordination and team monitoring, these ends can now be achieved without real-estate. Of course, offices – now places to meet rather than places to perform the substance of consulting, writing and analysing – remain necessary. But they can be down-sized, with workers performing many tasks at home, in cafés, in co-working spaces or on the move. This shifts the cost of workspace from employer to employee, without affecting the capacity to oversee, access information, communicate and coordinate.

What does this mean for UK cities? The extent to which such structural shifts could be beneficial or detrimental is dependent upon the ability of local governments to manage the situation.


This entails understanding the changes companies are making and thinking through their consequences: it is still assumed, by planners and in many urban bylaws and regulations, that buildings have specific uses, that economic activity occurs in specific neighbourhoods and clusters, and that this can be understood and regulated. But as increasing numbers of workers perform their economic activities across the city and along its transport networks, new concepts are needed to understand how the economy permeates cities, how ubiquitous economic activity can be coordinated with other city functions, such as housing, public space, transport, entertainment, and culture; and, crucially, how it can translate into revenue for local governments, who by-and-large rely on property taxes.

It’s worth noting that changes in the role of real-estate are also endemic in the retail sector, as shopping shifts on-line, and as many physical stores downsize or close. While top flight office and retail space may remain attractive as a symbolic façade, the ensuing surplus of Class B (older, less well located) facilities may kill off town-centres.

On the other hand, it could provide new settings within which artists and creators, evicted from their decaying nineteenth century industrial spaces (now transformed into expensive lofts), can engage in their imaginative and innovative pursuits. Other types of creative and knowledge work can also be encouraged to use this space collectively to counter isolation and precarity as they move from project to project.

Planners and policymakers should take stock of these changes – not merely reacting to them as they arise, but rethinking the assumptions that govern how they believe economic activity interacts with, and shapes, cities. Brexit and other fomenters of economic uncertainty exacerbate these trends, which reduce fixed costs for employers, but which also shift costs and uncertainty on to employees and cities.

But those who manage and study cities need to think through what these changes will mean for urban spaces. As the display, coordination and supervision functions enabled by real-estate – and, by extension, by city neighbourhoods – Increasingly transfer on-line, it’s worth asking: what roles do fixed locations now play in the knowledge economy?

Filipa Pajević is a PhD student at the School of Urban Planning, McGill University, researching the spatial underpinnings of mobile knowledge. She tweets as @filipouris. Richard Shearmur is currently director of the School, and has published extensively on the geography of innovation and on location in the urban economy.