Tales of the city

London Skyscrapers

What makes some cities thrive and prosper while others struggle, persistently failing to respond to attempts by policy makers to turn them around?

This is one of the central questions that preoccupy Professor Henry Overman| and his colleagues at the Spatial Economics Research Centre (SERC), based at LSE. SERC brings together leading researchers, from across the country, who are looking at the differing fortunes of cities, what lies behind these disparities and what can be done about them.

“Notwithstanding the current financial crisis, some British cities have made a remarkable turn-around in the last 10 – 15 years,” says Professor Overman.

In the early to mid-nineties, for example, Birmingham, Manchester and Newcastle were all losing population. However, by the mid ‘noughties’ they were following London’s lead and experiencing positive population growth. In contrast, across the same period, both Liverpool and Sunderland continued to lose population.

Those cities that are doing well have profited from structural changes in the UK economy. These include the decline of manufacturing and the rise of activities that particularly benefit from being in urban places – service industries and high tech industries such as finance and insurance for example.  

These industries, in turn, have attracted affluent, highly educated workers back into the cities. This helped increase the productivity of our cities and has meant that they have emerged as places of consumption in a way that they weren’t until relatively recently.

“In SERC we try to understand urban economic performance by looking at two components – people and place,”says Overman. “Do the people that live in a place have high or low skills? And how productive would any individual be in a particular place?”

To begin to answer this question, Overman, along with colleagues Steve Gibbons| and Panu Pelkonen|, tracked the wages of hundreds of thousands workers as they moved between different places in Britain. They found that people and place matter. Moving from the least productive to the most productive place increases salaries by 16 per cent. But the difference in average wages for these areas is a whopping 67 per cent, a fact that can be explained by the difference in population composition.

“London is a highly paid city because it is full of people that would earn highly wherever they were, and they earn even more because they live in London,” explains Overman. “In contrast some of the UK’s northern cities are made up of a lot of people that wouldn’t earn very much wherever they lived in the UK. And they earn even less because they are living in that particular place.”

What explains these differences in productivity? Size is one important factor – as the size of place increases so wages tend to increase also.  Economists think this is because people benefit from being near to other people – to exchange ideas with them, to learn from them, to buy and sell to one another and so on.

In addition it’s good for a place to be near to other places that are successful. Firms can do more business and it allows people to commute for work.  

There is also an element of luck – your city may, for instance, be home to an industry that is doing well. And some places are just more entrepreneurial or innovative.

All these factors tend to reinforce one another and make a city more resilient in economic downturns.

city streetBut translating this understanding into policies that successfully turn around struggling cities has been very difficult.  SERC researchers evaluated a number of such government initiatives, and found they have had little impact  – for example, merely shifting jobs around an area or making small, low productivity firms slightly larger.

But while it’s difficult to increase productivity, Overman argues it is possible for policy to have a large impact on changing the cost of living and doing business in cities.

SERC’s Christian Hilber| and Wouter Vermeulen found that if a Local Authority (LA) in the South East, with a planning regime that was average for the region, relaxed its planning restrictions so that they were the same as an ‘average’ LA in the North East, house prices would reduce by 25 per cent.

Christian Hilber, along with Paul Cheshire|, also looked at how planning restrictions impact on the cost of office space.  Looking at how much it costs to rent office space, versus how much it costs to build it, gives an idea of the tax imposed because of the constraints put on developers. In London’s West End it costs eight times as much to rent office space as it takes to build office space. Compare this to Manhattan, where it costs only 50 per cent more to rent as opposed to building.

Overman points out the paradox: “The government creates policies to encourage struggling areas to become more productive that don’t work. At the same time they do things that really push up the cost of living and doing business in more successful places.

“If we care about urban economic performance of UK cities we need to front up to the fact that some places will do well and some places will do badly – and there’s very little we can do about it,” says Overman.

“Instead we could choose to focus expenditure on areas that have some potential to do well and not focus on those that are going to do badly. This is hugely controversial, of course. But for struggling places, the most effective thing may well be to focus on helping the people, not the place."

Posted Febraury 2013 

Useful links

Professor Henry Overman is Director of the Spatial Economics Research Centre|

This article is based on Professor Henry Overman’s LSE Works lecture The economic future of British cities: what should urban policy do? See the podcast|

See Professor Overman’s blog posts| on the content his lecture