The UK has been facing stagnant productivity growth since the financial crisis and London was one of the major drivers behind this. Despite stagnant productivity growth, the Capital was still able to grow faster than the rest of the country. While London’s productivity growth has flat lined since 2007, its economy continued to grow because of a ‘jobs miracle’ that the Capital experienced. Given this, should we be so concerned about poor productivity growth?
Can London continue its (damaged) growth model for another decade?
As jobs grew faster than the national average so did overall economic growth
After the financial crisis, the capital had a combination of stuttering productivity growth and strong job growth often characterised as London’s jobs miracle. Around 1.2 million extra jobs (26 per cent, 1.9 per cent a year) were created in London between 2007 and 2019, outpacing the rest of the UK.
The result was that London accounted for a third of all the UK’s economic growth. As illustrated in Figure 1, the Capital’s GDP growth (2.0 per cent a year) was almost twice the rest of the country, which was almost entirely driven by job creation. London alone accounted for one third of the growth since 2007.
Figure 1: Despite stagnant productivity growth, London remained a key driver of economic growth
Source: ONS. Greater London.
Consequently, the UK’s economy has further concentrated in London in recent years. In 2019, the Capital accounted for 24 per cent of the UK’s overall economy, up from 22 per cent in 2007.
London’s growth model is under pressure
This post-financial crisis growth model – highly dependent on job creation in London and low productivity growth – had at least two limitations. First, wages are unlikely to grow in an environment of weak productivity. This is bad for standards of living.
This has interacted with a second problem – London has not built enough homes to keep pace with the expansion of the city over the period. The result is that house prices continued to rise, being 71 per cent higher in 2019 than in 2007. And this meant that wages for renters in particular are likely to have been squeezed long before the country was hit with the recent cost of living crisis. Second, under the existing constraints, mainly around housing, this model erodes earnings after housing costs, especially for renters.
As job growth creates additional pressures on the existing housing supply, house prices have been rising. In an environment of stagnant productivity and wages, it also meant that rising house prices have been eroding London’s wage premium. Figure 2 shows that median earnings after housing costs are no longer significantly higher in London than in the rest of the UK; this mostly affects workers who do not own a property in the Capital.
Figure 2: London’s wage premium mostly disappeared
Source: GLA Intelligence. Data from FRS, 3-year average median equivalised income AHC indexed to 2019/20 prices.
As the London wage premium has been eroded due to increasing housing costs (and not strong wage growth elsewhere in the UK), the result is that the benefits of moving to London are significantly lower than a decade ago, which (combined with a more restrictive migration policy) ultimately reduces London’s economic potential (i.e. ability to attract firms and talent) and ability to compete in the global economy over the long term. This in turn is likely to make kickstarting productivity growth all the more difficult.
While job creation is welcome, growth without productivity growth in the long run is no recipe for increasing prosperity. London needs to see its source of growth change if both the Capital and the UK are to become more prosperous. And this needs to be coupled with increased rates of house building if future wage increases, should they arrive, are to be kept by the suppliers of labour rather than the owners of land.
The national economy and London need productivity growth to improve living standards in the long-term. However, without building much more homes, potential productivity and wage gains in the Capital could mostly fall into the pockets of landlords.