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One of the criticisms that cities – especially successful cities – often receive is that they only work for high-skilled people. We have seen this happening recently in the US, where Amazon had to cancel plans to locate part of its headquarters in New York for fears it would only benefit high-skilled workers. Yet, what is often forgotten is that high-skilled jobs also create a lot of opportunities for people with few or no qualifications.
How? In economics, this process is called ‘the multiplier effect’. When new businesses that sell their goods and services to regional, national or international markets move to a local area, they bring money into the local economy. This creates demand for shops, restaurants and cafes and jobs in these local businesses. This is why, for example, Canary Wharf isn’t just full of bankers – it is populated by Pret and Starbucks outlets on the ground floors of its skyscrapers to meet the needs of the workers above them.
But how many new jobs in these local services are actually created? In our recent work, we found that in the period between 1998 and 2015, for every 10 new jobs created in businesses that trade outside the local area, 11 new jobs were created in local services businesses such as cafes and restaurants.
But we also found that it is high-skilled businesses that trade outside the local area, such as engineering and financial services firms, that have a much bigger multiplier effect. Indeed, over the same time period, the creation of 10 new jobs in these high-skilled businesses has led to the creation of 17 new jobs in local services. That’s because these firms bring even more money into the local economy.
There is a lot of literature on the topic, in the UK and internationally, and while different studies use different measures to capture this effect, the results mostly point in the same direction. The What Works Centre for Local Economic Growth has recently reviewed all these studies and found that, on average, the creation of 10 new jobs in businesses that trade outside the local area generates 9 new jobs in local services. It also found that high-skilled businesses, and in particular high-tech businesses, have an even bigger multiplier effect, with 25 and 19 new jobs in local services created respectively for every 10 new jobs created in these industries.
Yet, despite all this evidence, New Yorkers decided to turn down Amazon’s offer to locate part of its headquarter in the city, on the fear that the arrival of the company would benefit high-skilled people only, pricing out people with few or no qualifications as a result of the increased costs of living.
While these fears are understandable – and unaffordability in places like New York and London is a real and pressing challenge – cities should not overlook the ability of high-skilled businesses to create employment opportunities for people with few or no qualifications, as being in work is a fundamental step to help people out of poverty.
As such, rather than preventing growth from happening in the first place, for fears that this growth will create winners and losers, cities should focus on managing the costs of growth firms like Amazon bring to a local economy, ensuring that everyone can reap the benefits of it – for example by providing affordable housing and public transport.
After all, there cannot be inclusive growth where there is no strong economic growth.
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