Denser, smarter cities will boost UK productivity

Good morning. Stephen here: I don’t have all that much to add about the government’s U-turn on cuts to welfare spending — or, at least, not much that I don’t think is better served by waiting to see how Labour MPs respond to today’s announcement in the House outlining concessions on the cuts. Fortunately, Georgina has written an excellent piece about the UK’s productivity problem, so over to her.

Part of the UK’s productivity malaise boils down to this: our cities have a decent number of high-skilled people, but too few end up in high-productivity roles, especially outside London. One potential solution is to supercharge where productivity growth is happening in the economy (spoiler alert: knowledge-intensive services). Getting the UK back on track will require funnelling more people into those high-output jobs — and the path forward lies in improving the UK’s biggest cities.

You’re gonna carry that weight

The UK’s productivity problem distinguishes it from its peers and we have long known why.

Under-investment in equipment, research and development, training and infrastructure, by both the public and private sector, plus an overcomplicated tax code, are among the reasons. Then there’s Brexit and the costs it introduced to trade and scaling up. According to the National Institute of Economic and Social Research, labour productivity (the amount of GDP produced by an hour of labour) is increasing at a slower pace than it would have in a no-Brexit scenario.

But something we don’t talk about enough, maybe because it is more difficult to concretely explain, is the role of London’s productivity slump*. A slowdown in London is bad for the rest of the country — it drags down national economic growth and reduces the amount of government revenues that the Treasury can redistribute to other areas. It raises the stakes for the secondary cities.

Before the financial crisis, London drove much of the UK economy’s productivity growth as digital and finance services boomed. Its productivity (output per hour) increased at 2.9 per cent a year between 1998 and 2007, well above the 2.1 per cent growth at the national level. Since then London’s productivity growth has slowed to about 0.3 per cent a year.

The capital is still the most productive region, but it is underperforming compared to the likes of Paris and New York.

If London had maintained its pre-2007 productivity growth, the UK economy would have been £54bn larger in 2019 alone — equivalent to adding two Edinburghs to national output, according to the Centre for Cities think-tank. In 2019, that would have raised £17bn for the exchequer. In 2022, the total foregone tax revenue would be at least £20bn, at a rough estimate by the CfC’s Paul Swinney.

The Kibs are all right

What can policymakers do about it? Big cities have benefits that draw in high-productivity, knowledge-intensive business services (Kibs): namely, a deep pool of skilled workers, shared infrastructure and cross-fertilisation of ideas through a network of other high-skilled businesses, a process known as agglomeration. These need to be capitalised on.

While London has the fourth-highest shares of employment in IT, finance and similar service industries of any G7 city (San Francisco is number one) — it trails peer primary and secondary cities for productivity. This suggests it could be even more productive if current planning constraints were changed to encourage high-quality office space in city centres, and increase the numbers of high-skilled workers who can access them in a reasonable commute.

Second cities are not driving productivity as they should — nor are they dense enough

London’s slowdown is a national problem — it is no longer compensating for the UK’s other core cities, which are underperforming too. Though the UK’s secondary cities are middle-of-the-pack in the G7 for their number of high-skilled workers — with more than Frankfurt and Hamburg, for example — these skills are not translating into the high-productivity outcomes they should (nor the Kibs jobs I was talking about). Of the bottom 20 large cities for productivity in the G7 (there are 112 cities in the G7 the size of Nottingham or larger), 7 are British, the CfC reported.

Studies have shown the path for urban productivity growth runs through creating jobs in services, rather than manufacturing (which is sometimes suggested as a solution for places that underwent heavy deindustrialisation).

Even in the throes of Brexit, British services trade has proved resilient, partly because many UK-based companies have set up EU subsidiaries that cushion the impact. London and some secondary cities are already hubs for this but many others lag behind.

France’s secondary cities have fared better. Resolution Foundation analysis found between 1995 and 2018, the share of exports from France’s big cities that consist of services increased by 21 percentage points. The services export share in two of France’s second cities (Bordeaux and Lille) grew more quickly than in Paris — in 2018 Lille had a higher services export share than Paris (Lille has the highest density of retail and ecommerce company headquarters per square kilometre in Europe — as the chart above shows, with relatively low office costs.)

One way to tackle the underperformance of big cities outside London — which make up 57 per cent of the gap between the UK’s current economic performance and where it could be if it became the second most productive country in the G7 — could be to densify around transport hubs, helping cities make the most of their skilled workforces. Job creation in the north west of England has not kept pace with the region’s productivity gains. The CfC recommends building taller housing and offices near train stations:

[Places like Birmingham, Manchester and Leeds] have densities that look more like American than European cities, but street patterns more akin to European ones . . . British cities are cramped, but not dense.

Towns are likely to benefit if their neighbouring big city became more productive and prosperous.

Much of the productivity debate is about whether automation will lead to a sudden reversal of Britain’s fortunes. That may happen, but it will take some time to achieve (and observe in our data). In the interim, the UK would do well to focus on where productivity growth is rising fastest — and scale it up.

*It’s worth noting the headline “productivity” figure is unlikely to capture the whole story. In the health and care sectors, which don’t have market prices, statisticians use proxies such as hours worked or numbers of treatments. Email me your suggestions for measuring productivity.

Now try this

Here’s one fascinating and positive use case for artificial intelligence.

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