23 June 2014

The Future of British Cities

and the Role of Urban Policy

Professor Henry G Overman, LSE

Venue : Ashurst

With divergences in the UK’s regional property markets having widened sharply during the post-recession recovery, the timing could not be more perfect for Professor Henry G Overman’s talk to The Society on the issue of “The Future of British Cities and the Role of Urban Policy”.
Professor Overman - an expert in the economics of cities at the LSE- began by explaining where we had come from. In the 1980s cities were shedding population. But London began the turnaround in the following decade, the resurgence filtering out to cities in other parts of the country, including Manchester and (to a lesser extent) Birmingham.

Population growth since then has not just been a north-south story; rather, growth has proved to be non-uniform with sizable inter-regional differences. The transition from manufacturing production to services industries over recent decades has also been important. Overman argues that most industries benefit - in that they become more productive - when they move to areas more densely populated; in other words, they benefit from agglomeration. But, crucially, services appear to benefit more.

Moreover, the working age qualified population is highly spatially concentrated, which sets up a self-reinforcing cycle for those cities where they reside and work. What Overman finds is that the most productive people get paid more in the most productive areas. But he argues that it is WHO you are not WHERE you are that remains the most important issue in terms of pay.

When it comes to regional wages, one of Overman’s most interesting findings is that, at the 25% vs. 75% percentiles, the difference in regional wages is not so large (it is, of course, when you take it to the extremes, e.g. London versus, say, Cornwall). And we have not seen much change in the relative positioning of wage levels between various cities over time. It doesn’t seem to matter what you throw (in terms of government policy) at regional cities, relative wage disparities are quite static.

Professor Henry G Overman
Professor Henry G Overman

Professor Overman provides some examples of what he believes are misdirected government schemes. First, the Single Regeneration Budget (SRB), it is claimed, may have funded a lot of “shiny commercial buildings” but in simply moving people around has had little impact on unemployment rates. Second, the Local Enterprise Growth Initiative (LEGI), via its impact on encouraging business start-ups, looks to have raised employment within the boundaries it operates - but only at the expense of lower employment outside of those areas. And third, while the policy of Regional Selective Assistance (RSA) targeted low productivity firms, Overman argues that these tend to be the firms that benefit the least in terms of raising productivity.

Wages rise with city size, but costs of living might increase even more sharply. Professor Overman points out that given it has proved difficult to shift the regional wage curve via government policy, a far better strategy would be to focus instead on influencing the relative cost of living. In this respect he shows that, between 1970 and 2006, annual average real house price growth in London was 4.5% - higher than that of a large selection of comparison countries, some of which were crowded and others which have seen dramatic population growth in the recent past. His suggestion? To relax planning laws, which could cut house prices by between a quarter and a third depending on how aggressively this is undertaken (precisely the reason he argues that governments may not have done it thus far!).

Nor is it only residential housing that commands a sizable premium in London - that for office space is also exceptionally high. According to Professor Overman’s calculations, the mark-up of office pricing over construction costs is around 500% in the City of London and as much as 800% in the West End. Compare this to Paris (300%), Birmingham (250%) and New York (just 50%). Shockingly. relative to construction costs, the price of office space is cheaper in San Francisco than it is in Birmingham.

Professor Overman concluded that while some places were doing well, it could prove difficult to turn around those cities with low productivity using government policy - and that focus on lowering costs would therefore be a more appropriate strategy. He argued that, as the UK’s second largest city, Birmingham is too small relative to the capital - which is itself an outlier in the other direction in terms of size. When deciding where to live and work people have to balance a number of key issues - in particular incomes, the cost of living and the quality of life. The fact that so many people are choosing to live in London - in the spirit of revealed preference - suggests that it must be doing something right.

The Society of Business Economists would like to express its thanks to Ashurst for hosting the event.