So does increasing productivity really destroy jobs?

An automated car factory. Image: Getty.

There’s been a lot of debate about productivity in the last couple of mnonths, off the back of our new report on the ‘long tail’. In and amongst this discussion, one thorny question that has been raised is whether improving productivity is bad for inclusive growth. In particular, do improvements in productivity come at the cost of jobs?

The concern about these issues is understandable – in some sectors, improvements in productivity have come through the introduction of machines which destroy jobs. Manufacturing is a case in point. There are many fewer people employed in manufacturing today than in the past – 4m, which is 60 per cent fewer than 1978. What is less well known, however, is that the amount that UK manufacturing produces has actually gone up in that period by 17 per cent, as a result of improvements to productivity.

There are two reasons why productivity improvements don’t mean job losses across the economy. The first is that, while the sectors that have been responsible for productivity growth in recent years have not been directly responsible for jobs growth, they have spurred employment in other sectors. As the chart below shows, ‘exporting’ sectors (those that sell to a regional, national or international market), for example in the manufacturing and finance sectors, have seen large productivity growth but a fall in employment.

Those sectors that have been responsible for employment growth, on the other hand, tend to be local services: accommodation and food services, and arts, recreation and entertainment. These firms, as our briefing shows, have seen little or no productivity growth in recent decades. The one clear exception to this is information and communications, which has managed to provide both productivity and employment growth.

But the performance of these sectors is linked. While exporting businesses don’t create jobs directly, research suggests that the wage-increases they create through productivity growth also increases demand for local services, which in turn boosts employment in these sectors. This is known as the multiplier effect.

Growth in productivity and jobs, 1990-2017. Source: ONS.

The second reason is that these fears are based on what the economy looks like today, rather than what it will be tomorrow. Different sectors grow and decline through time; and it’s the rise of new sectors that historically have more than replaced jobs lost in those declining ones.

Looking at 100 years of economic development in UK cities, as we did in Cities Outlook 2018, shows this. There have been huge changes in the economy over that period, including large increases in productivity and an unabated rise of automation. Despite this, there are 60 per cent more jobs in urban Britain today than there were in 1911. And few would argue that we aren’t better off than our great-grandparents.


Increases in productivity may well mean that jobs decline in some sectors. It’s easy to envisage that retail will employ fewer people in 10 years’ time than it does today. But these productivity improvements also create new opportunities, new types of economic activity and new jobs. And they ultimately lead to improvements in standards of living – again, compare life in 1911 to today.

While this is good for the economy overall, it obviously isn’t good for individuals who lose their jobs as a result of these changes. The challenge, then, for policy makers, is not only to address the UK’s poor recent productivity performance – it is to ensure that people who miss out can benefit from the new jobs that this growth would create.

Paul Swinney is head of policy & research at the Centre for Cities, on whose blog this article first appeared.

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To see how a city embraces remote work, just look to Helsinki

A deeply rooted culture of trust is crucial to the success of remote work. (Sean Gallup/Getty Images)

When I speak to Anssi Salminen, an account manager who lives an hour outside Helsinki, he’s working from a wooden platform on the edge of a Finnish lake. With a blanket laid out and his laptop set up, the sun low in the sky, Anssi’s remote work arrangement seems blissful. 

“I spend around half of my time working somewhere else other than the office,” he says. “I can work from home, or on the go, and I also travel to the Netherlands once a month and work from there.

“The emphasis in my work has always been that it doesn’t matter when or where I work, as long as I get things done.”

For many people around the world, the shift to remote work was sudden, sparked by the coronavirus pandemic. Finland, however, is finding the transition much less significant. Before Covid-19, the Nordic nation already displayed impressive levels of remote working, with 14.1% of its workforce reporting usually working from home. Only the Netherlands has a comparable percentage of remote workers, while the UK lagged behind at 4.7%, and the US’s remote workforce lingered at around 3.6%

Anssi works for one of many Helsinki-based companies that offers its employees flexible policies around when and where they work. That arrangement is in part due to the Finnish capital’s thriving start-up scene. In spite of being a relatively small city by global standards it is home to over 500 technology start-ups. These companies are leading the way when it comes to keeping employees connected wherever they choose to work.

“Our company has a completely location-free working policy,” says Kasper Pöyry, the CEO of Helsinki-headquartered software company Gapps. “All meetings are made available for online participants and facilitated accordingly. Some employees have worked extensively from abroad on a working holiday, whilst others prefer the comfort and social aspects of the well-stocked office. Whatever works for our employees is what works for the company.”

Like Gapps, many Helsinki-based firms are deeply preoccupied with providing the necessary technology to attract talent in a vast and sparsely populated country. Finland has only 15 inhabitants per square kilometre, and companies understand that in order to compose teams of specialised expertise, they may have to seek talent outside of the city. Local governments take a similarly proactive stance toward technological access, and Helsinki offers free, unrestricted, high-speed Wi-Fi from city-wide hotspots, while the country as a whole boasts some of the best coverage in Europe. 

But encouraging remote work isn’t just about optimising the potential of Finland’s workforce – companies in Helsinki also recognise that flexibility has clear benefits for both staff and employees. 

“The idea of a good work-life balance is ingrained in Finnish culture,” says Johannes Anttila, a consultant at organisational think tank Demos Helsinki. “It goes back to our rich history of social dialogue between labour unions and employers, but also to an interest in delineating the rules of working life and pushing towards people being able to enjoy their private life. Helsinki has been named the best city in the world for work-life balance, and I think that this underlies a lot of the mentality around remote work.” 

For Peter Seenan, the extent to which Helsinki residents value their free time and prioritise a work-life balance prompted his move to the city ten years ago. He now works for Finnair, and points to Finland’s summer cottages as an example of how important taking time to switch off is for people in the country. These rural residences, where city residents regularly uproot to enjoy the Nordic countryside, are so embedded in Finnish life that the country boasts around 1.8 million of them for its 5.5 million residents

“Flexible and remote work are very important to me because it means that I don’t feel like I’m getting stuck in a routine that I can’t control easily,” he says. “When I’m working outside of the office I’ll go down to my local sauna and go ice swimming during the working day, typically at lunchtime or mid-morning, and I’ll feel rejuvenated afterwards… In winter time especially, flexibility is important because it makes it easier to go outside during daylight hours. It’s certainly beneficial for my physical and mental health, and as a result my productivity improves.”

The relaxed attitude to working location seems to pay off – Finland is regularly named the happiest country in the world, scoring highly on measures such as how often its residents exercise and how much leisure time they enjoy. With large swathes of unspoiled countryside and a national obsession with the outdoors, sustainability is at the forefront of its inhabitants’ minds, leading to high levels of support for measures to limit commuting. In January, Finland passed a new Working Hours Act, the goal of which was to help better coordinate employee’s work and leisure time. Central to this is cementing in law that employees can independently decide how, when, and where they work.

Yet enacting the new ruling is not as simple as just sending employees home with their laptops. For Kirsimarja Blomqvist, a professor of knowledge management at LUT University, perhaps the most fundamental feature that remote work relies upon is a deeply rooted culture of trust, which Helsinki’s residents speak of with pride. The anecdotal evidence is backed up by data which suggests that Finland boasts one of the highest levels of trust and social cohesion in Europe, and equality and transparency have always been key cornerstones of political thought in the country.

“Trust is part of a national culture in Finland – it’s important and people value it highly,” she explains. “There’s good job independence, and people are valued in terms of what they do, not how many hours they work for. Organisations tend to be non-hierarchical, and there is a rich history of cooperation between trade unions, employers, and employees to set up innovative working practices and make workers feel trusted and valued. 

“It’s now important that we ensure that this trust can continue to be built over technology, when workers might have been more used to building it face-to-face.”

As companies begin to look hopefully toward a post-Covid future, the complexities of remote work are apparent. Yet amid issues of privacy, presenteeism, and social isolation, the Helsinki model demonstrates the potential benefits of a distanced working world. The adjustment to remote work, if continued after the crisis, offers a chance to improve companies’ geographical diversity and for employers to demonstrate trust in their workforce. On these issues, Blomqvist believes other cities and employers can learn a lot from Helsinki.

“People are now beginning to return to their workplaces, but even as they do they are starting to consider the crisis as a jumping point to an even more remote future,” she says. “The coronavirus pandemic has been an eye-opener, and people are now interested in learning from Finland’s good practices… We are able to see the opportunity, and the rapid transition to remote work will allow other countries to do the same.”