Poor productivity and high housing costs are driving a ‘living standards exodus’ from London

Published on Incomes and Inequality

As a Londoner 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. However new research by the Resolution Foundation suggests that London could do with a bit of self-examination as well as backslapping.

London’s economy is different, and in a good way. The average worker in London 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 face low employment challenges (particularly Birmingham) 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 the city. London’s population has exploded since the millennium, driven by international migration, but it is 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.

This post originally appeared in City Metric.