City of London Economic Research

The UK’s productivity puzzle: regional and sectoral differences

Maxine Kennedy, Research Officer in the Economic Development Office

This week’s blog looks at the new data on productivity in the UK.

What is productivity and why is it important?

Productivity, measured as output per worker, per job and per hour, tells us how efficient resources are being used and is a key indicator of how well the economy is performing.

Long term global data has shown that productivity accounts for the majority contribution towards Gross Domestic Product (GDP), and as such is a key determinant of economic performance, and an indicator of a country’s living standards.

What is the long-term trend in UK productivity?

Often termed the ‘productivity puzzle’, UK productivity has been relatively stagnant over the past decade or so. Following the economic downturn in 2007/08 productivity fell, and despite a strong labour market, it has not yet returned to the pre-crisis trend.

UK, seasonally adjusted, quarter 1 (Jan to Mar) 1994 to quarter 4 (Oct to Dec) 2016[1]

Source: ONS. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/octtodec2016

There are several hypotheses for this: first, that the financial crisis led to decreased lending and investment in potentially productive firms; that a lack of investment in equipment and machinery has meant that employees are not working with the most efficient technology available; that there are slowing rates of innovation, or that employees are not making the most of their skills at work. Others have also proposed that how we calculate productivity doesn’t capture the rising importance of the digital economy.[2]

It is also interesting to note that there are sectoral differences affecting productivity. For instance, it has been noted that increased compliance and regulation in the financial services sector following the crisis may have had a negative effect on productivity in that sector, though this may be only be for the short term while the sector adjusts.[3]

However, economists believe that none of these reasons on their own can explain the trend, hence it being coined a ‘puzzle’.

What does the latest UK productivity data show?

The latest data was released by the ONS earlier this month and shows a positive upswing in productivity. Productivity in Q4 2016 was 0.3% higher than Q3 2016, and 1.1% higher than in Q1 2008, immediately prior to the recent economic downturn.[4]

However, the 0.4% quarterly growth remains below the 1994 to 2007 average, and even the ONS warn that the recent positive trend doesn’t indicate an end to the UK’s productivity puzzle.[5]

Regional and sectoral differences in the UK’s productivity?

Andrew Haldane, Chief Economist at the Bank of England, recently analysed UK productivity by looking at firm level data, showing the differences and similarities between firms through a regional, sectoral and export status lens.

We might suspect that productivity varies considerably across the UK’s regions. Looking at data compiled by the ONS and the Bank of England, we can see that overall, London’s productivity is the highest of any region in the UK; it is 75% higher than the region with the lowest productivity, which is the North East.[6]

However, looking at data on productivity at the firm level, we can see that high productivity firms consistently feature in every region in the UK. The distribution does vary from region to region, but the same pattern is seen throughout: a smaller pool of highly productive firms, compared to a majority number of lesser productive firms.

The graph below shows that London has a tighter distribution of highly productive firms (i.e. there are more highly productive firms and fewer low productive firms in London as opposed to the North East, where the pattern is reversed).

Firm level productivity distribution, by region

 

Source: ONS, ONS Research Database, BvD and Bank of England calculations. See: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf

Looking at the firm level data across different industries, we see a similar trend. There are overall differences between sectors, for instance the information and communication and the professional, scientific and technical activities are the most productive (this might not be so surprising since we would expect to see innovation particularly in these sectors), and manufacturing tends to be more productive than construction. It’s important to remember that each sector also faces unique circumstances that affect productivity.[7]

Yet, again, we see a similar pattern: within each sector there is a similar distribution, will all sectors having a smaller number of highly productive firms, who are innovating and leading the way, and a larger number of less productive firms.

Firm level productivity distribution, by sector

Another key finding is the difference between firms who export as compared to those who don’t. The graph below shows that those firms which do export, and so are faced with global competition, tend to be highly productive. This suggests that openness to global trade is a key contributor to long term economic growth.

Firm level productivity distribution, by export status

Source: ONS, ONS Research Database, BvD and Bank of England calculations. See: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf

Quite clearly, productivity is crucially important to the future of the economy, and consequently we’re seeing more focus on the topic by the Government and other stakeholders. In 2015, the Government launched its Productivity Plan – the latest update to its implementation is here: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/931/931.pdf

[1] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016

[2] See: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbis/87/87.pdf

[3] http://pwc.blogs.com/press_room/2015/06/financial-services-firms-want-government-to-reduce-cost-of-regulatory-compliance-cbipwc.html

[4] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016

[5] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016

[6] Latest data available for the regional level. See: http://www.lse.ac.uk/Events/2017/03/20170320t1830vOT/The-Productivity-Puzzle

[7] http://www.cbi.org.uk/better-off-britain/Productivity.html

London at work

 

By Robert Clear, Researcher in the City of London Research Team

 

Here we present a brief snapshot of London’s working age population, taken from the latest Office for National Statistics (ONS) data.

London’s working-age profile

The most recent Annual Population Survey (APS) data show that in December 2016 the total number of working age people in London – those aged between 16-64 – was 5,927,900. There was an almost even gender split, with 2,964,600 men and 2,963,100 women – a difference of only 1,500. The table below breaks down the working-age groups in the capital, showing that the largest group was the 35–49s.

London’s labour supply

According to the Labour Force Survey, in February 2017 the total number of people aged between 16 and 64 in employment was 4.5 million – approximately 73.4% of the working age population. This figure is slightly lower than the total for the UK, which stands at 74.6%. The data shows that the total number of working age people in employment in London is fractionally down on the previous quarter, when 8,000 more people were reportedly in employment (4.508 million). This is the first decline since the second quarter of 2015, when the employment figure dropped by 34,000.

Hours worked per week

The two tables below show the average hours worked weekly by those in employment, comparing London with the UK in December 2016 (APS data). In both cases, the largest group are those who worked 35–44 hours per week, each around 45% of the total. The most notable difference is that in London the second largest group are those who work over 45 hours per week (28.8%), whereas in the UK it is 10–34 group (27.4%).

London

UK

Public and private sectors

APS data for December 2016 suggests that the overwhelming majority of employed Londoners worked in the private sector: 3,602,500 compared to the 868,500 who worked in the public sector – 80.6% of the working population compared to 19.4%. The table below reveals an interesting split between the sexes in their pattern of employment. The data shows that, relative to their respective working populations, around twice the percentage of working women are employed in the public sector than men.

Gross weekly pay

Gross weekly pay remained significantly higher in London than the rest of the UK in 2016 (the latest reported year), at £670.80 against £538.70, according to ONS’s annual survey of hours and earnings - resident analysis. Since 2008 there has been a pay gap of over £100 between the capital and the UK as a whole. Gross weekly pay for women in 2016 was £609.50 for London against £480.50 in the UK, and for men it was £733.20 against £577.80.

Claimant count

ONS’s seasonally adjusted claimant count puts the total in London in March 2017 at 114,655– 2% as a proportion of claimants plus total workforce jobs. This compares to 2.2% for the UK.

 

 

 

UK Financial Services – Clustering and Concentration of Firms and Jobs

 

By Dr Laura Davison, Head of Research at the Economic Development Office, City of London Corporation

 

In this article, I've analysed data on the distribution and location of UK firms and jobs in financial services, highlighting how highly concentrated employment is in large firms, and how concentrated financial services clustering is in particular locations.

Across the UK, there are 1.07 million people employed in financial services and insurance (2016) - 3.1% of UK jobs - with two thirds (66%) of these located outside London. There are 89 thousand UK financial and insurance businesses (2016) - 1.6% of the UK total - of which 21 thousand employ at least one person.

Across the UK, in all sectors most businesses are small - 91% employ fewer than five people. Large businesses - those with 250 or more employees - are rare. Out of a total 5.5 million private sector UK businesses, only 7,200 (0.1%) are large employers - 355 (5%) of these large employers are financial services businesses.

Financial services employment is highly concentrated in these large firms - although they make up only 0.4% by number of UK financial services firms, they account for 72% of the sector’s jobs. Large firms play a much more significant role as employers in financial services than other industries - across all sectors, the equivalent proportion is 40%, and only the utilities industry (68%) comes close to this level of concentration (all other sectors are below 55%).

You can see this difference in the following two charts, where I've plotted the distribution of businesses and jobs by firm size, for the UK overall and for financial services specifically.

 

 

You can see from the first chart how similar the spread of firms is by size, for the UK overall and for financial services. But as the second chart shows, in terms of how jobs are distributed across these firms, it’s a very different picture.

It’s particularly noticeable that financial services employment is heavily concentrated in the really large firms - those with more than 500 employees. Across all UK sectors, there are 3 ½ thousand of these firms, of which 210 (6%) are financial services businesses.

These 210 firms account for 67% of the UK’s financial services jobs - the equivalent figure across all UK sectors is 35%. 

So, large employers are clearly very significant employers in financial services. But even this high proportion masks some differences within the industry, given the different types of activities it encompasses.

Banks are a substantial sub-sector in financial services, making up around 40% of financial services jobs[1], with insurance being another well-recognised component- nearly 10% of financial services jobs.[2] [3] But the businesses that provide what’s known as ‘auxiliary’ services are also very important. They provide the market infrastructure for transactions to take place, and a range of sales, fund management and advisory services - and together account for around 40% of financial services employment.[4]

As the following chart shows, these don’t all have the same patterns of employment though.[5]

 

This chart really emphasises just how important the largest firms are for employment in banking and insurance - with 84% of banking jobs in the 80 companies with 500 or more employees, and 81% in the 35 very large insurers and pension funds. By contrast, the auxiliary jobs are much less concentrated - 42% in the 95 very large firms.

It’s also worth noting that the ‘more than 500 employees’ category (the highest category for the Office for National Statistics reporting of firm size) is a little misleading when it comes to financial services. The largest banks – HSBC, Barclays, Lloyds and RBS – each employ tens of thousands of people across the UK.

The financial services industry isn’t just concentrated in a small number of firms, it’s also concentrated in particular geographic locations. ONS have just released their latest analysis looking at how jobs in different sectors are located across the UK, and where they are particularly concentrated – known as the ‘location quotient’.

The map below shows this for financial services.[6] A score above one illustrates a relatively high concentration of jobs; the lower the score, the lower the concentration.

 

As you can see, a number of areas have high financial services concentrations – eight regions have a score greater than one, including Eastern Scotland, West Yorkshire, and Cheshire. Inner London East (3.14) and Inner London West (3.00) are the highest.

Even within London, there are strong and distinctive geographic concentrations of financial services firms and jobs. Of the 210 very large (500 plus employees) UK financial services firms, 90 are based in London, covering 65% of London’s financial services employment. Around 60 of these firms are based in the City of London, and 15 in Canary Wharf (Tower Hamlets).[7]

To show where London’s financial services jobs are concentrated, I’ve plotted these across London boroughs, using a handy cartogram template from the GLA’s London Datastore.[8] Of London’s 362 thousand financial services jobs, 78% (282 thousand) - are based in the City of London, Tower Hamlets, and Westminster.

 

 

Jobs in different sub-sectors are strongly concentrated in particular areas – London’s banking jobs are largely split across the City of London (42%) and Tower Hamlets (31%), while fund management is concentrated in the City of London (46%) and Westminster (40%).

 Insurance is the most strikingly concentrated sub-sector, with 74% of London’s jobs located in the City of London (4% in Tower Hamlets, 3% in Westminster). Even within the 1.12 square miles that constitute the City, insurance is tightly clustered in the East, whereas financial services are more evenly spread.

You can see this in the two following maps, which we commissioned as part of a series looking at firm movements and locations (firms in colour moved in the 2012-14 period, those in grey were stable).

 

 Overall, then, you can see just how concentrated financial services employment is, in very large firms and in particular areas, especially in London. London’s financial services cluster is often highlighted as one of its key competitive strengths – with firms in close proximity benefitting from access to a skilled and specialised workforce, ease of knowledge exchange and shared innovation, enhanced reputation and profile, a large customer pool, and the wide range of related professional services that have grown alongside the cluster.

 

[1] Here when referring to ‘banks’, I've used SIC code 64.1 ‘monetary intermediation’, which also encompasses building societies and credit unions.

[2] Here I’ve used SIC codes 65.1 and 65.2 – insurance and reinsurance.

[3] Business Register and Employment Survey (2015 data, released 2016)

[4] SIC code 66 – ‘Activities auxiliary to financial services and insurance activities’

[5] NB Here I’ve used the overarching SIC codes - 64, 65, 66 respectively – due to data availability at this level

[6] NB draws on 2015 data

[7] NB ONS figures are rounded to the nearest five

[8] Business Register and Employment Survey 2015 data, published 2016.

Tech and the City - is it the place to be for fast-growing tech?

 

By Maxine Kennedy, Researcher in the City of London Research Team

 

The tech sector identifies the City of London as having all the ingredients for startup success – talent, capital, superb infrastructure and potential for partnerships with larger corporates – according to a new research report launched at MIPIM, the world’s largest property convention.

Commissioned by the City of London Corporation and the City Property Association, in association with Cushman and Wakefield and KPMG, the research aimed to find out whether the City is still attractive to cutting-edge businesses – is it the place to be for fast-growing tech, and if not, why not?

This is an important time to be asking this question: tech jobs now make up approximately 8% of the City’s workforce, and the City is one of the few London boroughs to have seen year-on-year growth in the number of startups. The growth of AI and automation is likely to affect traditional City sectors, namely financial and professional services.

Interviews were carried out with landlords, large corporates, the tech sector and other interested parties and focused on startups in the fintech, legaltech and insurtech spheres.

For me, three interesting themes came out of the research:

 

1. There remains a misperception about the cost of being located in the City. Some firms interviewed for this study view the City as a traditional and expensive location, yet firms were surprised at the relative cost of renting here. Property owners were quick to point out that for every modern high-rise and listed building, there are other offices that offer a better fit in terms of size or budget. City rents are generally lower than in Paddington, Marylebone and Mayfair, and on par with others such as Southbank and Shoreditch.

 

2. As well as office space at a suitable cost, what startups really need is flexible leases that allow them to scale. Co-working spaces, such as WeWork are growing rapidly, reflecting the demand for this type of space. WeWork alone accounted for 342,450 sq ft across 6 deals in the City in 2016 and 546,549 sq ft across 7 deals in 2015, making them the tenant who acquired the most space in the City in both 2016 and 2015. Yet, there are only a handful of new entrants and the feeling is that demand is still outstripping supply. The research found that just under half of those in accelerator or incubator spaces are in a co-working or shared working space. A further 20% are located within parent organisations - showing how few are in traditional leased space.

 

3. The City’s built environment was highlighted as a key draw, especially in terms of its many transport links but there was a feeling that the perception of the City could become more aligned with tech if there were more independent and pop up shops and street vendors. Promoting the many hidden green spaces such as churchyards was also as a way to make the City more appealing to the start-up culture. Placemaking, therefore, is increasingly becoming integral to a competitive offer.

 

Overall, interviewees felt that by promoting emerging technology startups the City would ultimately benefit from being at the centre stage of advances in innovation.

These findings echo those of a report we released last year, which found that SMEs and startups in the City really value flexible space to support their growing business. The research also highlighted that small businesses believe that being located in the City helps them to attract the best talent.

Click here to read the full report