Centre for Cities

Feeling the Pinch: Declining wages in cities

Nick Clegg will warn today that “the squeeze on middle-income Britain has reached ‘a state of emergency.’” This is on the back of the fact that real wages have been falling since 2008. And, as Cities Outlook 2012 illustrates, incomes in some cities are being squeezed much harder than in others.  

Undoubtedly 2011 has been a challenging year for the UK economy. Rising unemployment has forced more people out of work. But the position for many people in work has also deteriorated; poor wage growth, coupled with high inflation, has squeezed take-home pay.

Cities Outlook 2012 shows just how much wages have fallen between 2010 and 2011 across the UK's cities. Even ignoring inflation, almost half of the UK’s cities saw a decline in the average wages paid to those working (see chart below). This has been compounded by price increases in 2011. While average wages in the UK increased by £4 per week (0.8 percent), inflation averaged around 5 percent. That means that the same pound will buy you less this year than it would have last year—your weekly paycheque feels smaller.  

So when we factor in the effects of inflation, the average wages in almost all cities have fallen. In fact, only four cities (Milton Keynes, Grimsby, Southend and Worthing) saw a real increase in average wages. As the table below illustrates, even if your wages did rise on your paycheque, the increasing cost of products and services means that you can actually afford less. Ipswich saw the largest decline in ‘real’ wages; the average worker took home an equivalent of £54 less in 2011 relative to 2010.

So will the UK continue to feel the ‘big squeeze’ over 2012? The Bank of England expects a sharp fall in inflation over the year. But even if inflation falls, we could still see continued decline or stagnation in nominal wages. High unemployment means lower wages are offered for new jobs. At the same time, firms are offering less or no pay rises. While easing inflation will help, many of us may continue to feel the pinch over 2012.

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National contraction, city implications

The GDP figures released today showing a contraction of the national economy of 0.2 percent in the final quarter of 2011 underline the fragile nature of the UK’s economic recovery.  

As we stressed in Cities Outlook 2012, the impact of this contraction is likely to have been felt very differently across our cities. While some places may have seen an expansion of their economies in Q4 2011, others are likely to have seen a contraction much larger than the -0.2 percent seen at the national level. 

Although we don’t have data for ‘city GDP’, looking at the performance of different sectors at a national level can give us some clues as to how the contraction of national GDP is likely to have impacted UK cities. Manufacturing and construction both saw contractions of 0.9 percent and 0.5 percent respectively, while services saw no change to the previous quarter. The implication of this is that those cities that have a higher number of jobs in manufacturing and construction, such as Barnsley and Blackburn, are likely to have been hit harder by the contraction at a national level than others. 

We do have much more detailed data on unemployment, and this year’s Outlook focuses specifically on the unemployment challenge that cities face. This data shows that there is very strong divergence in city performance. And the worry for these places is that if unemployment continues to rise as expected throughout 2012 the gap between some of our strongest and weakest city economies will continue to widen. We’ve already seen the difference in the JSA claimant rates of Cambridge and Hull double since the start of the downturn in 2008. Continued public sector job cuts and the weak performance of the private sector mean that this gap could become ever larger.  

JSA claimant count rates across cities

Source: Nomis 2012, Claimant count, non-seasonally adjusted data

Cities will be key drivers of the recovery in the national economy. They are home to 58 percent of national employment and 62 percent of national output. As such it is vital that policy removes barriers to their growth, especially in the context of the latest disappointing national growth figures. City Deals offer a key opportunity to the Core Cities to do just that. The challenge now to Government is to expand this policy out to allow other cities more freedom to tackle their specific challenges too.

Thriving High Streets need strong city centres

The anticipated Portas Review of the High Street has been published today. And it is not short on ideas – it proposes 28 measures to “save” the High Street. The problem is that the study’s narrow focus means that these recommendations are unlikely to make much of a (positive) difference.

Some of the proposed measures seem very reasonable. Portas calls for increased accessibility, attractiveness and safety of High Streets and improved provision of parking. The introduction of “town teams” might help High Streets to be better managed if their responsibilities are defined properly. And the proposed initiatives to encourage small businesses are also commendable.

But a closer look at the Review reveals several underlying problems. Henry Overman has already pointed out that a call for reduced regulation of some parts of the High Street (such as freedoms around market trading) stands next to proposition of more red tape in others (such as forcing large retailers to support local business). And the desire to re-empower the community contradicts the fact that the poorest community members might suffer the most as higher burdens are put on chain stores that provide better variety of products at lower prices.

The biggest flaw in the report is that it treats retail sector as though it is isolated from the rest of the economy. But vibrant city centres are more than just shops. High Street retailers are dependent on footfall generated not only by Saturday shoppers but also weekday workers. The problem is that the lack of relative scale of some city centres, such as Preston and Sunderland, mean that they have a relatively small proportion of total jobs in their cities. And it is this issue that is likely to have the largest impact on city centre retail. 

It is this narrow focus that has led to proposal of the most controversial recommendation in the report that the Secretary of State should give “exceptional sign off” to all out-of-town developments. The assumption made here is that shops that would otherwise have set up out of town will now choose to locate in the city centre. The reality is much less clear and such a recommendation could serve to actually restrict overall city growth. Businesses should be encouraged to choose a city centre location because it is the most profitable place to set up, not because they are forced into a second best choice.

Portas would like to return many of the UK’s faded High Streets back to their former glory. Even setting aside changes to consumer behaviour, failing to understand that High Streets are part of wider city centre ecology will likely undermine her efforts.

Autumn Statement: cities at the heart of our economy

There were some encouraging announcements for cities in the Chancellor’s statement today, including the welcomed commitment to the National Infrastructure Plan which will support the creation of 35 new rail and road schemes across the country.  Overall there is no new money flowing through the system.  In questions from the floor of the House, Osborne also confirmed that the £20bn pension fund money that he seeks to mobilise to support investment in infrastructure was not sought to be used in a PFI-style with government underwriting projects, but as direct investment.  It seems clear that there is more work to be done and detailed negotiations to realise this private sector investment. But importantly the announcement recognises the link between the share of Government expenditure spent on infrastructure and economic growth (an increase of 1 percentage point can increase the economic growth rate by between 0.05 and 0.2 percentage points per annum).

The Centre’s research has shown that 70% of lower skilled residents live in local authority districts with fewer jobs than there are residents either in or looking for work. So any policies that can link people to jobs are good news for both these individuals and employers, and for city economies. However, there also needs to be the right emphasis on building more accessible, integrated and efficient transport infrastructure at the local level to help people living in and around cities to get to jobs. 

The announcements seeks to tackle the availability of finance to SMEs.  While already widely trailed in the press, the government's loan guarantee scheme is expected to result in banks providing loans to SMEs at 1% less than current rates.  Also it is reassuring that the issue of state aid is being sorted out up front, to speed up the flow of this finance.  The confirmation that support will be provided to mid-sized companies with a £1bn fund through a Business Finance Partnership is welcome as an alternative source of funds from the banks.  Tackling the lack of finance available to businesses should help support much needed private sector jobs growth in some UK cities.

The Chancellor’s announcement regarding capital allowances for 6 Entreprise Zones appears to have recognised the issues previously raised by the Centre where "old-style" EZs incentivised investment in commercial and industrial premises, sometime without the jobs growth following.  On the contrary EZs need to take a realistic and focused approach on creating high-quality, sustainable employment and then the accommodation to match.  The indication is that the capital allowances for the "new-style" EZs will apply to plant and machinery, not premises.  This is alongside a £1bn increase in the Regional Growth Fund, but divided up over all of the UK not just England.  We will continue to watch the effectiveness of these policies and investment, judged by job creation, with interest.

Finally, it is interesting to see emphasis on Maths with the announcement of Maths Free Schools for 16-18 year olds as part of the 1000 new free schools. This recognises the poor GCSE Maths results reported  in “Learning Curve” by the Centre last week, and its relationship with youth unemployment and weaker economies in many English cities.  Learning Curve shows that 50% of young people in cities are leaving schools without A* to C grades in GCSE Maths and English, which reduces their potential to progress to A-levels and beyond, and therefore also their opportunity to develop the skills required by employers and a more knowledge-based economy. We would urge the Government to go further in its current plans to reform school league tables to ensure that the education system is aligned with the needs of businesses. Much greater weight should be attached to Maths and English attainment when measuring school performance in order to incentivise schools to focus on these core subjects. To pay for this the Pupil Premium can be used in struggling cities to help teachers that have the difficult job of helping their pupils to attain qualifications in Maths and English.

Look our for a full briefing on the Autumn Statement from our Economist, Paul Swinney later today. 

The Youth Contract – right problem, wrong tool?

The increase of youth unemployment beyond the one million barrier has prompted Nick Clegg to unveil the announcement of the ‘Youth Contract’. The contract is a £1 billion fund that the Government hopes to create 400,000 jobs for young people. But is it tackling the root of the problem? 

Comparisons of this initiative to the Future Jobs Fund have already been drawn. While there are differences between the two – the subsidy paid to employers will be much lower this time round for example – at their most basic the two policies are essentially the same; they both equate to subsidising the employer for employing a young person. 

Setting aside the apparent u-turn by the Government, their intentions are well placed. Academics such as Paul Gregg at Bristol have researched the ‘scarring effects’ of youth unemployment. They find that unemployment at the start of young people’s working lives can have significant impacts on their future job prospects. So an attempt to address this is a good thing. 

The question is whether what has been proposed will make any difference. Firstly, offering a subsidy to employ a young person increases the relative attractiveness of employing that person over an older worker. So if the employer decides to fill a current vacancy with a young worker instead of an older one, as opposed to creating an extra new job specifically for a young worker, then this policy is likely to simply shift the problem rather than addressing it. 

Secondly, the Youth Contract is likely to have an impact on only a small part of the total number of young unemployed people. Previous Centre for Cities' work on the Future Jobs Fund labelled the policy as a ‘sticking plaster’ that needed to be carefully targeted in order to be effective. If youth unemployment is cyclical i.e. is short term, then efforts to boost demand for young people may have an impact. This may be the case in places such as Warrington and Swindon that have seen large increases in youth unemployment from a small base since the beginning of the downturn. It is these places where the Youth Contact is likely to have its largest impact. 

But in many other cities youth unemployment may be more of a structural problem i.e. not a temporary issue caused by the short term reluctance of employers to recruit. This means that places such as Hastings and Birkenhead (see map below), which entered the downturn with large numbers of young unemployed people, are less likely to see the benefit of such an intervention. They will require a longer term solution to deal with fundamental problems in their youth labour markets. 

What are these fundamental problems? Our report Learning Curve, launched yesterday, identifies the lack of Maths and English qualifications as a contributor to the problem of youth unemployment. The report shows that there is a strong negative correlation between GCSE attainment including Maths and English and youth unemployment across England’s cities. This supports previous research that Maths and English attainment are a key factor for future employment prospects. 

So the Youth Contract may well help some young people into jobs that are work-ready. But it is likely to have little impact on the large stock of young people that lack the skills that businesses require. These problems take a much longer time to address. And as such a much longer term policy response is required.

Regional Growth Fund: Seconds out

Yesterday, Nick Clegg announced the second round of the Regional Growth Fund - £1billion will create 35,000 jobs directly, and 164,000 jobs indirectly through supply chains.  The fund has been touted as one of the answers to economic recovery and as a stimulus to growth.  Will it be cost effective, and how does it reflect the current job market in different industries?  

Henry Overman’s blog picked up on the "cost per job" of the Regional Selective Assistance (RSA) compared to the RGF.  Our table below shows that there are a number of ways to calculate cost per job - they’re all "right", it just depends on your viewpoint.   It illustrates how Round 2 of the RGF compares with Round 1, and the cost per job created:

The cost per job of the RGF Round 2, if you only take the direct jobs and the public funding, is comparable to other government funded job schemes such as Enterprise Zones (£26,000 per job, in 2010 prices). The number of directly created jobs stands at 18.6% of the total jobs figures quoted by the government - all of the 164,200 indirect jobs will need to be realised in order to create value for money for the taxpayer, and deliver private sector jobs in the numbers that our economy needs.  

There is also a question as to whether the proposals and outputs identified in bids are sustained through the due diligence.  To date there are four projects that we can comment on that have had their funding confirmed on completion of the due diligence process.  The data available does not make it clear whether the job numbers quoted are direct or indirect.  But it is clear that the gearing of private: public funding is lower that anticipated in yesterday’s announcement.  

*The Middleport project has also received funding from other public sources.

It is important to note that, of the over 150 organisations who are receiving RGF round 2 monies, this only represents four and should not be considered representative of the bids as a whole.

It is also interesting to see which sectors will benefit from additional jobs created.  We have compared employment by sector within England 2010 to RGF Round 2 recipients:

The key question here is how the RGF is acting to create jobs. Rather than necessarily investing in high-growth sectors, it appears the RGF is looking to unlock growth by giving businesses access to finance where this would normally prove more difficult.  In this way the  RGF is filling a gap and investing in manufacturing firms that lack access to capital for machinery and to add jobs. Lack of access to capital has been a significant challenge for capital-intensive businesses during the recession, and it may be that bridging that gap could give some firms the jumpstart they need to grow. Whether the RGF will create the jobs it hopes, though, is dependent on the specific firms which have received funds and how they invest them.  What is really important now is that the taxpayer gets value for money from their investment in the creation of new, lasting and high value jobs.  We will have to await more information before a conclusion can be made.   

Is helping the 'High Street' doomed to fail?

Mary Portas, as seen on TV, is leading a review into the High Street for BIS. The department held a workshop last week to discuss some interim findings from the work which is due to be released in the next month or so.  But such a piece of work runs the risk of being too narrow in its approach.

We have just published an interim report looking at the common issues that are affecting growth in some of England’s mid-sized cities, such as Sunderland and Preston. A key difficulty that Sunderland and other similar cities face is that of a weak city centre economy. For example between 1998 and 2008, a time when Sunderland saw strong city wide growth in its private sector employment base, its city centre actually lost private sector jobs.

So the Portas review is timely in terms of our own research. But the issue with the current debate around the High Street is that it tends to be overly focussed on retail. And it also tends to be anti-out-of-town development - the phrase ‘High Street’ invariably conjures up dreams of a David v Goliath battle of the mighty Tesco versus the little local butcher.

But a city centre does not start and end at its High Street – retail is only one part of the private sector of a city centre economy. In Sunderland’s case the city centre suffers from a lack of scale – out-of-town employment sites limit the number of commuters into the centre each day. This limits footfall which in turn limits lunch time and evening demand on the High Street and in restaurants and bars.

No doubt many would encourage the review to call for a limit on such out-of-town development. And Mary herself expressed concern that the NPPF waters down the ‘town centre first’ requirement that is in current planning guidelines. But there are three problems with such an approach. Firstly, the current ‘town centre first’ policy has not prevented the patterns of spatial development seen in places such as Sunderland. Secondly, some businesses, such as manufacturing firms, do not need a city centre location and function better being served by good motorway access. And thirdly, cities such as Sunderland have benefitted from the strong private sector jobs growth seen on out-of-town business parks. Restricting out-of-town growth would likely have restricted overall jobs growth. And that would not have been a good outcome for the city.

Ultimately the preferences of consumers and businesses alike in many cities have driven demand for out-of-town developments in recent years. If city centres are to be strengthened then the key is to remove the barriers that currently make a central location less profitable for businesses than a site on the outskirts, rather than limiting development on the periphery. The problem is that by trying to improve the High Street in isolation, instead of understanding it in its wider context, BIS is attempting to provide a partial solution to a much wider problem. And the likely outcome is that such a solution will have very little impact as a result.

“Driving in the Fast Lane” or “Slow and Steady Wins the Race”: Comparing Obama’s and No 10’s plans for job creation and economic growth

Two countries—the United States and the UK—face deep and difficult stresses in the current economic climate. Both have large public debts as a proportion of GDP, hefty budget deficits as a percent of GDP and high unemployment. This leaves them with the same problem: how do you create jobs and increase economic growth on a limited budget?

 

	US	UK
2011 Public Debt as % of GDP	74.8	62.4
2011 Budget Deficit as % of GDP	-10.1	-8.7
Unemployment rate (August 2011)	9.1	7.9

 

While the US and the UK face the same challenges, they have taken two very different paths. Yesterday, President Obama proposed the American Jobs Act (AJA)—his answer to slow growth and high unemployment. The UK, on the other hand, has taken on specific programmes under the Spending and Growth Reviews.

The US plan is more comprehensive, tackling unemployment with a fiscal stimulus, public sector jobs, private sector tax breaks, employment incentives and skills investment to create private sector jobs. It is also:

• Immediate: Obama’s newest proposal would start spending this fiscal year and the majority would be spent by the end of 2012. This is meant to start creating jobs as soon as possible including a focus on saving teaching and emergency personnel jobs as well as construction.
• Larger scale: With a total cost of $450bn (£282bn) including $85bn for teachers and emergency personnel and $50bn for upgrading infrastructure.
• Tax-break focused: Tax cuts for businesses and employees up to $240bn in order to encourage spending and reduce the cost of labour to create new jobs.

The UK plan is more targeted, piecing together different programmes and policies under the strict goal of reducing the budget deficit and focusing on spending reductions. The main strategies are outlined in the 2010 Spending Review and the Growth Review, which includes plans like the Work Programme, the Regional Growth Fund, and Enterprise Zones policy. It is also:

• Longer term: with the Work Programme ramping up and Enterprise Zones starting in Spring of 2012 and lasting for years beyond, these programmes are focused on the long-term and not necessarily creating jobs now.
• Targeted:  The creation of specific policies and programmes from different departments has created a jobs growth approach that is more targeted on specific geographical areas (as with Enterprise Zones), parts of the labour market (as with the Work Programme), or projects (Regional Growth Fund).
• Focused on deficit reduction: The UK’s programmes attempt to create jobs with minimal effects on the public purse, meaning rather than spending money to create jobs directly, they are more focused on helping people access jobs (whether or not there are necessarily jobs available).

While the US and the UK face very similar problems, they have taken two different roads to solving them. The AJA, as proposed by President Obama, reflects America’s higher unemployment rate and greater ability to borrow, as they are willing to spend more money to create the jobs now. If the UK economy continues on its current path, George Osborne will come under increasing pressure to decide between continuing deficit reduction at its current pace or risk some relaxation of austerity measures to create jobs and get the economy growing again. Either path—strict austerity or expensive stimulus—will have important implications on the fiscal health and economic growth of our cities in the UK. With 75% of UK private sector jobs located in urban areas, the growth trajectory in our cities depends on the next steps taken by Government.

Enterprise Zones: Back to the future?

Here at the Centre, we have been closely following the Enterprise Zones debate.  Will the government be able to revive the 1980s policy (which was, at best, a patchy success story), and implement it in today’s economy? Prior to the Coalition’s announcement to reintroduce Enterprise Zones in March, Centre for Cities released research showing previous zones were often located in the wrong types of areas, expensive and delivered only a small number of additional jobs. This came out to almost £17,000 per additional job created (equivalent to £26,000 per job today).

So, we were interested to find out yesterday where the final eleven new Enterprise Zones (EZs) have been located. The government’s choices of zones show they have taken on board some of the lessons of the 1980s Enterprise Zone experiment.

There are some positive changes coming about in the new EZ programme:

• Location: Many of the 1980s EZs zones were located in rural areas which did not have built-in economic potential. Now, many new EZs are situated in areas with real economic prospects—located in cities or accessible to them via motorways—increasing their chances of success.
• Collaboration: Previously, the zones were a stand-alone strategy, rather than a part of something much bigger to grow a wider area. Today, bringing together Enterprise Zones and Local Enterprise Partnerships proves a positive step. It provides these groups of local authorities and businesses a reason to work together. LEPs will encourage revenues from business rates to be shared across borders to fund projects which span across multiple authorities, like relieving transport bottlenecks.

But Enterprise Zones are only one part of the solution needed for boosting job creation, and there are still significant concerns that the Zones will simply move jobs around the country as firms are attracted to the business rates package offered in the Zones.

So what next? As part of its wider growth review, the Government needs to look beyond EZs. To support private sector employment growth, the Government should work with local authorities to enable them to improve their wider business environment. This means getting the basics right, such as improving skills levels, tackling congestion and ensuring that the planning system supports growth. Local Authorities and LEPs should work together to do what the EZ policy has not, such as fund skills programmes to meet businesses needs, if they want to see true economic growth in their areas.

So, will Enterprise Zones offer the ‘shot of economic adrenaline’ that Communities Secretary Eric Pickles expects?  The jury is out.  But the real lifeline for cities will come in the form of longer-term policies across planning, skills and transport to make people employable and to help them access jobs.

You can't have your (wedding) cake and eat it

Today's weak GDP figures come as no great surprise. The reaction is no surprise either. The Office for National Statistics points to the impact of the Royal Wedding, while Ed Balls attacks George Osborne for his lack of a 'Plan B'.

But the impact of the Royal Wedding should not be under-estimated. As shown in our June labour market note, hours worked fell considerably in April as people took advantage of the two bank holidays to have an extended break from work. But this has clear implications for the economy - you can't have your (wedding) cake and eat it.

In some quarters there is surprise that the GDP figures are so positive at a national level. Of course, this will have played out unevenly across the UK, and it may be the case that some cities saw a contraction over the quarter. As well as the Royal wedding, the Japanese earthquake has had clear repercussions for some cities, with Nissan, Honda and Toyota experiencing components shortages. Our City Tracker provides some indicative data as to how growth varied across the country.

But it's key to note here that these impacts are only temporary. Nissan's announcement this week that it is hiring 200 extra workers at its Sunderland plant underlines this point. Using one-off events to skew the growth debate isn't particularly helpful. Politicians need to take a longer term view to formulating sensible economic policy.