No City Left Behind? The geography of the recovery and the implications for the coalition. Cities July 2010

Transcription

1 The geography of the recovery and the implications for the coalition Cities 2020 By Neil Lee with Katy Morris, Jonathan Wright, Naomi Clayton, Ian Brinkley and Alexandra Jones July 2010

2 Contents Executive summary 3 1. No city left behind? 7 2. The geography of recession Growth sectors to The geography of recovery Policies for growth 29 List of Figures and Tables Figure 1: Changes in the claimant count, May 2007 May Figure 2: Creative industries employment and city size 18 Figure 3: Employment in knowledge intensive high-technology services and selected consultancy, 19 Figure 4: Growth potential and impact of the recession 27 Table 1: Regional changes in the unemployment rate, Table 2: Employment in activities which contribute to a high quality environment, top cities 23 Table 3: Cities which are likely to do well in the recovery 26 Table 4: Cities which may struggle in the recovery 27 2

3 Executive summary The government faces the challenge of reducing public sector spending while stimulating growth in the private sector. As it does this, it needs to address the structural challenge of replacing the UK s overdependence on debt, financial services, the City and the public sector with a private sector driven, technology led recovery. Neither of these challenges can be met without taking action at a regional and local level: policymakers need to ensure they are supporting growth in the UK s cities. Yet many of the UK s cities currently face significant problems of their own. The recession has widened the gap between successful cities and those with weak economies. Those cities which were resilient to the recession were those which had been doing the best in the period beforehand. And those cities where unemployment has increased by the most were those which were doing badly before. In this report we argue that it is likely that the recovery will make this gap worse. Growth over the next ten years will be driven by knowledge-based industries and jobs will increasingly demand high level skills. This means universities and the further education sector will play a crucial role in the recovery. In addition, as the public sector shrinks, cities whose economies are dominated by the public sector will face challenges across all sectors, public and private. If cities are to support growth, they need to understand what the likely drivers of growth will be. We argue that four sectors are likely to be crucial for growth over the next decade. These are: The creative industries these will continue to grow, driven by the UK s international specialisation in these industries and the increasing importance of intangibles as factors of production. Manu-services where the manufacturing sector is increasingly linked into service based activities, with firms designing physical goods for niche markets and gaining long term revenue streams from the maintenance and servicing of these products. Low carbon industries driven by regulatory shifts to a low carbon economy, markets for carbon trading and consumer preferences for environmentally friendly goods. High-tech and high-value added networked services which act as intermediaries in the production process, adding value to other sectors. The geography of these industries is such that they are unlikely to provide employment in low skilled cities. But much of the gains in employment are likely to be in the cities which already have strengths in these industries. Because of this, the recovery is likely to be led by cities such as Cambridge, London and Reading. These cities have high levels of employment in growth sectors, highly skilled populations and strong private sectors. 3

4 Executive summary In contrast, there is a real danger that cities such as Grimsby, Barnsley and Hull will be bypassed by the recovery. These cities lack representation in growth sectors, their populations tend to have low skill levels and they tend to be reliant on the public sector as an employer of last resort. This represents an important challenge for policymakers: the government needs to ensure that no city is left behind by the recovery. They need to do this through interventions in three areas: economies, labour market and leadership. We outline a range of policy recommendations which will help them do this. To strengthen city economies, they should: Move from blanket policies which focus on all SMEs to targeted support for high-growth firms. Rather than expensive policies with a high deadweight cost, policymakers need to focus on identifying and supporting firms with the potential to create employment growth in the future. This means support for innovation, links with universities, access to growth finance, policies to address skills shortages and an improved digital infrastructure at both local and national level. Reform venture capital to ensure firms have the finances to grow. The coalition needs to urgently work to reform the banking system to ensure financial institutions support growing firms particularly those outside of London and the South East. Maximise the contribution of the public sector, particularly in less successful city economies. In a time of public spending retrenchment it is even more important that the contributions of publicly funded bodies such as local authorities, universities and museums to the economy of less successful cities are maximised. The public sector must focus on the ways in which intelligent procurement by individual organisations and groups of public sector bodies can help create and support innovative local economies. Links between firms and universities should not be victims of the cuts. Universities are a valuable source of knowledge and innovation which can benefit start-ups and existing local businesses, whilst close linkages with businesses are also very valuable to universities. Cities will rely on innovation to drive growth in the recovery, and this makes these reciprocally beneficial linkages particularly important. 1 Cities and the government need to ensure that the economic role of universities in local economies are maximised. Ensure anchor institutions are linked to Local Enterprise Partnerships (LEPs). The LEPs will rightly include universities as part of their remit, but they need to include a wider range of anchor institutions such as hospitals, museums and sports teams. This is particularly the case where the public sector is weak. There will be an important tension, however, as anchor institutions may have to deal with more than one LEPs. When forming LEPs, policymakers need to consider these implications. 1 HEFCE (2010) The Higher Education Knowledge Exchange System in the United States. Available from: 4

5 Executive summary To help promote successful urban labour markets, they should: Remove barriers to movement from less successful cities but consider the implications for those left behind. Reforming social housing to allow individuals to move is one way of reforming the system to allow movement, but we should not expect large population movements, in the short term at least. Policies such as this are a good idea, but more attention needs to be paid to those who may be left behind. Make connections between successful and less successful cities, recognising the roles that different places play in the economy. The LEPs will be smaller than regional bodies, but need to continue to have a focus above the local level, to reflect the realities of the economy, which does not respect administrative boundaries. LEPs must recognise that different places have different roles in the functional economy, and emphasis needs to be placed on strengthening the economic links between places and between local institutions. Ensure labour market policies are locally appropriate. There is a danger that simplification of labour market policies leads to excessive centralisation, stifling the ability to innovate at the local level. The coalition needs to ensure that DWP policy at a national level reflects the very different labour market situations of different cities. City leaders should also be given the flexibility to shape labour market policy and customise interventions in a way that responds to local circumstances, and effectively balances demand and supply side initiatives. Recognise that sustainable growth is about building up and not circulating talent. It is essential that educational attainment is driven up in failing cities to increase the share of high skilled labour within the local population. There is a clear positive relationship between high skills and economic prosperity within the UK. Cities need to work closely with local skills providers and continue to invest in education and skill provision at a local level. This is crucial to growth in the recovery in all cities. To ensure city leaders can respond to the economic challenges they face, they should: Ensure Local Enterprise Partnerships have clarity of purpose, strategies and powers. To be successful they need to be more than just a mechanism for making cuts locally. This means making sure they have a key role in driving enterprise, innovation and economic growth in the local area (although some of these functions are now conducted nationally). Even in a time of cuts, it is important some resources are found for this. Create local innovation panels integrated into the LEPs. Action needs to be taken to drive the economy through local leadership. One way to do this is to encourage universities and FE colleges to lead on the creation of innovation panels, running city based innovation funds which will support enterprise, knowledge diffusion and the growth of clusters. These innovation panels must recognise the diversity of approaches to innovation which firms can take. 5

6 Executive summary Ensure that weak cities do not have weak LEPs. There is a danger that business-led LEPs provide the worst services in exactly those cities which need them most, whereas cities with strong economies and private sectors create strong bodies. This may be exacerbated by competitive bidding for the Regional Growth Fund, if weaker LEPs are unable to put in bids which are as strong as LEPs in more successful areas. In this paper we have set out the problem of uneven growth in the recovery and provided some ideas for how the huge challenges facing both the national economy and the UK s cities can be addressed. The coalition has made it clear that it is committed to generating growth in all regions and that no region will be abandoned. But the big question is whether what has been done so far will be enough for those cities that are in danger of being left behind. We fear that without further action the coalition s ambition will remain unfulfilled. 6

7 1. No city left behind? The government faces a major macro-economic challenge: it needs to balance the necessary reduction in the public deficit with the need to encourage and strengthen the private sector recovery. But it also must simultaneously address a major structural problem. The past decade has seen growth over-dependent on debt, property booms, the City and the public sector. This must be replaced by private sector led growth with technology and knowledge based activities taking the lead advanced manufacturing, low carbon activities, high tech and business services, and the cultural and creative industries. Both of these challenges have powerful regional and local dimensions and neither can be fully solved by policies focused on the national level alone. In our statement Cut, Tax, Grow?, we argued that in determining the pace, scale and nature of cuts the government needed to take account of the fragility of the private sector, the inter-dependence between the public sector and parts of the private sector, and the ability of the private sector to absorb the likely run-down in public sector employment. 2 Getting these judgements right is even more acute in those areas where the public sector accounts for an above average share of activity and employment. Rising to the structural challenge means setting the right spending priorities, reforming institutions, getting the right frameworks in place, and refocusing the public sector on driving innovation forward. These changes must be driven through with even greater urgency at a local level. Much of the UK s private sector knowledge economy before the recession was concentrated in the Greater South East and a number of cities in the rest of the UK. The recession only reinforced this pattern. Former industrial cities with large manufacturing sectors those doing least well during the economic boom were hit hard. Cities with highly skilled populations those doing best during the boom were resilient. Those with low skilled populations experienced the largest increases in unemployment. Because of this, the impact was often worst in those cities which had seen the least growth in the preceding period: cities such as Birmingham lost jobs where there had been little gain the decade before. Alongside this, a few boom cities such as Milton Keynes and Swindon saw large increases in unemployment as a relatively small number of large firms closed. The coalition government has recognised the importance of having policies that can build on local strengths, as well as respond to the additional challenges facing weaker areas. Measures announced in the Emergency Budget have sought to address this through policies to encourage firms to create jobs outside London and the South East and a focus on Local Enterprise Partnerships business-led local economic partnerships with economic development remits as vehicles for economic growth. But, whilst we now understand the broad geography of recession that it was the usual suspects in the North, Midlands and Wales that were most affected we know little about the potential geography of the recovery. Understanding how the model for economic growth is changing and which areas are likely to thrive over the next ten years as well as where is likely to struggle will be critical for policymakers, 2 Available from: 7

8 No city left behind? forced to prioritise how they invest limited public money in order to generate the highest economic and social returns. Post recession, it is increasingly evident that the drivers of employment growth and an urban renaissance over the last decade will not be able to support growth in the next decade. The need to cut the deficit and the cuts announced in the Budget make it clear that the new jobs will not come from the public sector. And the changing market conditions mean that the old urban growth model, based on property development, consumption based city centre activity and public sector investment, no longer appears viable. While some recession-hit sectors, such as retail, may slowly return as consumer demand begins to rise in the longer term, others, such as some of the construction work associated with the property boom and significant public investment in regeneration, may not return for some time. So, which sectors will drive recovery? The Work Foundation s analysis of the drivers of economic and employment growth in previous recessions shows that the sectors that drove recovery after the recessions in the 1980s and 1990s were knowledge intensive sectors, including: business services, IT, telecoms, education and health. Our analysis of the sectors that are likely to experience the highest levels of employment growth over the next decade suggest that there are four sectors which will be particularly important: The creative industries; Manu-services where manufacturing and service activity become interlinked; Low carbon industries which will take advantage of the necessity to shift to low carbon growth; High tech and high-value added networked services. These sectors are particularly important to the economy at a time when employment in the public sector is likely to decline as spending cuts bite. Yet we know little about the impact of growth in these sectors and the factors driving their location choices. As the UK continues to move towards a more knowledgeintensive economy, skills will remain vital to successful economies. The recession has accelerated long term structural change and urban decline in parts of the country, and these spatial inequalities are likely to persist in the recovery. The areas with the greatest potential to grow in the recovery are those areas which have suffered least in the recession. Some compensatory processes, as firms move to cheaper areas, will operate. But our evidence suggests that a number of the cities such as Doncaster, Grimsby and Hull which did not prosper in the economic boom period and were worst affected in the recession are ill placed to prosper in the recovery. This means that policy makers at all levels must balance securing and enhancing the strengths we have with building new ones in places that lack them. To support policymakers in thinking through how they can do this, we investigate what the geography of recovery might look like over the next decade, and assess 8

9 No city left behind? which policies can best support and shape this recovery. We focus on three important questions for cities and local policymakers: 1. Which sectors are likely to drive growth in the recovery? 2. Which cities will see growth in these sectors and firms? 3. What are the implications of this for policymakers? The paper responds to each of these questions as follows: Section 2 outlines the geography of recession. Section 3 considers the four future growth sectors, their geography and likely growth. Section 4 discusses a composite measure of the likelihood of urban growth and establishes a set of recession hit but low growth cities policymakers need to focus on. Section 5 outlines the policy challenges which result from this. 9

10 2. The geography of recession As the government seeks to rise to the challenges of supporting private sector led economic growth across the UK, it is vital that it does this on the basis of a clear understanding about the geography of recession and the diverse impact this has had upon places already faring differently during the economic boom. National levels of unemployment As expected, the recession has led to large increases in unemployment. The UK unemployment rate went from 5.3 per cent in February to April 2008 to 7.9 per cent in the same period in The OBR s latest forecasts suggest that unemployment on the ILO measure will fall to 6.1 per cent by Some commentators have suggested that ILO unemployment will instead go higher and fall more slowly than the OBR thinks. Much of the concern has focused on the scale of job cuts in the public sector and job losses in private sector firms dependent on public sector orders. Others have also drawn attention to the additional impact of welfare to work measures designed to move large numbers of people from long term incapacity benefit to job seekers allowance at a time when the labour market is already struggling to absorb large numbers of current job seekers. Nonetheless, compared to some of the drastic predictions before the recession and the sharp fall in economic output, the labour market has avoided the worst case scenario at least for now. Employers have deployed measures such as shorter hours working, pay cuts and sabbaticals in order to retain staff for the longer term. Rising employer investment in human capital over the last decade and anticipated difficulty in re-recruiting staff may explain businesses reluctance to make staff redundant. 3 Regional variations The national picture hides important regional variations in unemployment increases, however, with different cities and regions affected to different degrees. At a regional level, the highest unemployment rates are now in Yorkshire and Humber and the North East. Over the course of the last three years (from the period February to April 2007 to the same period in 2010) Yorkshire and Humber, Scotland, Wales and the North West saw the largest increases in unemployment rates (ILO definition), with large increases in the North East, Northern Ireland and the West Midlands as well. 3 Brinkley, I. (2009) Recession and Recovery to 2020, The Work Foundation: London 10

11 The geography of recession Table 1: Regional changes in the unemployment rate, Unemployment Rate, February April 2007 Unemployment Rate, February April 2010 Increase Yorkshire & Humber Scotland Wales North West North East Northern Ireland West Midlands South West East South East East Midlands London Source: ONS These regional patterns hide considerable diversity at the local level. Figure 1 on the next page gives the increases in the claimant count from the period May 2007 to May Increases have been highest in those areas such as the central belt of Scotland, the north eastern cities and the North West, with the West Midlands and South Yorkshire doing worst. The evidence on increases in unemployment in the recession suggests that: Cities in and around the larger industrial conurbations experienced the largest increases in the shares of their unemployed. While medium sized cities did worst at first, larger cities eventually took the brunt of the job losses. 5 This includes places like Birmingham and Newcastle, but not London. 4 Note that while the most accurate measure at a local level, the claimant count may be biased by variations in the extent to which different groups tend to claim benefits when they are out of work 5 In this paper we use two different geographies. For cities, we use the travel to work areas of the 56 English cities defined in the State of the English Cities report, plus Dundee, Edinburgh, Aberdeen, Glasgow, Cardiff, Swansea and Colchester. We use the 2001 definition Travel to work areas for these cities as these reflect functional labour markets and so are most useful in the analysis of processes of employment change. Data comes from the ABI and the Annual Population Survey, but this means it may sometimes experience sampling error at the local level. In the maps, for completeness we show data defined according to Local Authority boundaries 11

12 The geography of recession Figure 1: Changes in the claimant count, May 2007 May 2010 Change in JSA claimant rate Great Britain average = to to to to to to to to 0.9 Source: Nomis Note: Percentage point change in the proportion of residents claiming Job Seekers Allowance 12

13 The geography of recession The recession exacerbated urban decline. The cities which were already doing worst (which had relatively high levels of claimant unemployment) experienced the largest increases in unemployment rates over the subsequent period although there were some exceptions to this, such as the boom towns of Swindon or Milton Keynes where a small number of large employers had difficulty. Manufacturing was affected. Cities with high levels of employment in manufacturing such as Scunthorpe and Grimbsy saw the largest increases in the proportion of their populations who were unemployed. Other sectors which were hit included real estate and construction. Sectors were worst affected when they tended to have low skill levels. The public sector acted as a shield. The public sector shielded some cities from the worst of the recessionary impact, but those areas most reliant on the public sector are now likely to be very vulnerable to the impact of public sector cuts on both public and private sector jobs. Skills were the key determinant of the impact. Linked to the types of jobs disappearing in the recession but regardless of size and location, the key determinant of the impact of the recession on urban unemployment was the skills of the population. Cities with large numbers of people with low skill levels such as Dudley and Sandwell, Dover, Ebbw Vale and Abergavenny did worse. Cities with highly skilled populations, such as Cambridge, did a lot better. This meant that the impact of the recession had an all too familiar geography one which matched earlier patterns of structural change in the economy. Whilst the recession has impacted on labour markets across the UK, the geography of unemployment remains fundamentally unaltered. Some boom towns did badly as a result of large employers either being forced to close or make mass redundancies, but generally the cities which were least resilient to the recession were those which had had the least economic success beforehand: manufacturing areas and areas with low levels of workforce skills. Just as the severity of the impact of recession varies across local labour markets, so too will the duration of high unemployment. At a national level, past experience tells us that the labour market can take up to eight to ten years from the start of a recession to recover to their pre-recession level. 6 At the local level, with many of the jobs disappearing in the recession unlikely to return, it may take some cities far longer to recover. This raises a series of important questions. What does this mean for future economic growth in the context of public spending cuts across the UK? And should we be pessimistic about future outcomes for those cities which the recession has just pushed yet further behind? 6 Brinkley, I. (2009) Recession and Recovery to 2020, The Work Foundation: London 13

14 3. Growth sectors to 2020 Although different areas start from different places as the economic recovery starts to take shape, all localities will face a series of common challenges. In the struggle to return to economic growth and drive employment back up, our analysis of the geography of recession and recovery highlights three key challenges for policymakers: 1. Adapting to long term structural economic change: Managing the UK s transition to a more diversified and innovative knowledge economy supporting key growth sectors; 2. Addressing low skill levels and high unemployment: Avoiding the prospects of a decade of jobless growth ; and 3. Managing public expenditure cuts and maximising the contribution of the public sector: Devising new instruments to fund essential investments. These challenges have been underlined by the commitments in the Emergency Budget of 22 June 2010 to eliminate the structural deficit over the five year period to The bulk (77 per cent) of the fiscal consolidation will be coming from spending reductions rather than tax rises. The Budget has ring fenced the NHS and international aid budgets, meaning that substantial reductions in all other areas of public spending will be required. Analysis by the Institute for Fiscal Studies (IFS) indicates that spending in unprotected departments will need to be cut by 25 per cent by the end of parliament. 7 This is because the impact of these unprecedented public spending cuts will not be confined to the public sector. Over the next five years the Office for Budget Responsibility forecasts that, at the national level, the creation of 2.5 million new jobs in the private sector will more than compensate for the loss of 490,000 jobs in the public sector by and by 601,000 by (and, leaked Treasury figures indicate, 700,000 jobs in the private sector) as a direct result of the reductions in public spending. As The Work Foundation has stated, these figures look encouraging but remain untested. 9 At local level public money and public sector organisations play multiple roles so the spending reductions will have direct, indirect and induced impacts on urban economies in the short and medium term. Direct impacts: Public spending cuts will inevitably lead to job losses in the public sector. Unemployment will rise unless the private sector expands at a comparable rate, allowing former public sector workers find new employment in the private sector. Indirect impacts: The procurement of goods and services including public services like waste collection and recycling; corporate services such as HR and IT support, consultancy and construction work by public sector bodies is a vital source of revenue for many private sector 7 Institute for Fiscal Studies 8 OBR 9 Brinkley, I., Levy, C. and Morris, K. (2010) The Budget: An assessment from The Work Foundation, available from: 14

15 Growth sectors to 2020 businesses. Lower levels of public spending will therefore have indirect effects on levels of employment in private sector businesses that are commissioned mainly by the public sector. Induced impacts: The money that public sector employees and individuals supported by the state spend on housing, food, entertainment and so on in their local areas supports employment in a wide range of sectors such as manufacturing, retail and leisure services. Reductions in public sector pay and employment and to the welfare bill will lead to reductions in consumption spending that will have a range of induced effects on local economies. The Work Foundation has previously highlighted that employment growth over the last decade was driven primarily by the expansion of the public sector, and that private sector growth in many places was weak or non-existent despite the benign macroeconomic conditions. 10 In the worst affected region by this measure, the West Midlands, between 1998 and 2008 the private sector lost employment employment in the region was only positive because of increases in the public sector. 11 Spending cuts will have greater direct, indirect and induced impacts on: Cities with weak private sectors that did not thrive during the economic boom and remain dependent on revenues from the private sector; Cities that are heavily dependent on particular types of public sector employment; and Cities with higher proportions of welfare dependents. We highlighted this problem in 2008, when we warned that a set of cities were characterised by their dependence on public sector employment and the low productivity of their private sectors. 12 The situation now is even more critical improving our understanding of how to grow private sector jobs is vital if the UK is to thrive in the years ahead. Where will the private sector jobs come from? For policymakers at all levels seeking to respond to these challenges, one of the key tasks is to understand more about where new private sector jobs are most likely to emerge from. Whilst this will always be an inexact science, it is possible to make some educated guesses. In Innovation, Creativity and Entrepreneurship in 2020, Ian Brinkley set out the industries which are likely to drive innovation, exports and employment growth in the recovery. These are the creative industries, manu-services, low carbon industries and knowledge intensive services. Each of these sectors has their own spatial dimensions and implications for cities, which are discussed below. 10 Morris, K. and Jones, A. (2010) Managing Change: The Work Foundation: London 11 The West Midlands lost 60,000 net jobs in the private sector and gained 120,000 net jobs in the public sector. Morris (2010) ibid 12 Clayton, N (2008) Enterprise Priorities to Enterprise Powerhouses: The Public Sector in the Knowledge Economy, available from: 15

16 Growth sectors to Creative industries The creative industries 13 industries based on individual creativity, skill and talent that have the potential to create wealth and jobs through developing intellectual property 14 already comprise an important part of the UK economy, contributing 7.3 per cent of GDP, producing 17 billion of exports and employing a workforce of 1.8 million in The UK has the largest creative industries sector in Europe 16 and between 1997 and 2004 output in the sector grew by an average of 5 per cent per annum, far above the national rate of growth. 17 The creative industries are named as a future growth sector in many city development strategies. This is due in large part to their economic impact and their role in driving business and job creation over the last decade, but there are also other factors in play. First, the creative industries have the potential to drive innovation and increase productivity in other sectors of the economy. 18 This may happen through spillovers, where location near creative industries provides benefits for other nearby sectors, such as access to creative ideas, but where these benefits are not traded in the market. More prosaically, it might be through the integration of the creative industries as part of the wider production chains of other industries. Design agencies may be commissioned to add value to the products of manufacturers, for example. These two processes may mean that non-creative firms that are located near creative firms are more productive and more successful. Second, the creative industries may make cities more attractive to other businesses and highly skilled individuals. The focus of research in this area has been on the role of creativity or creative industries in attracting highly skilled members of the creative class, but there is a more general point around the importance of attractive locations in attracting the highly skilled. 19 Moreover, the creative industries may make cities more attractive to tourists (one example might be Manchester s music scene) although this may only be restricted to sub-sectors. This attraction may be another reason cities invest in the creative industries. In addition, some argue that particular aspects of the creative industries such as art, music or performance have an intrinsic value in themselves. This has made strategies based on the creative industries a very popular part of urban policy. It is hard to oppose creativity Creative industries include advertising, architecture; art and antiques; designer fashion; video, film and photography; computer and video games; music; visual and performing arts; literature and publishing; television and radio 14 DCMS (2010) Creative Industries Economic Estimates, London: DCMS 15 The Work Foundation (2007) Staying Ahead: The economic performance of the UK s creative industries, London: The Work Foundation 16 ibid 17 Employment and productivity growth in the creative industries has been driven by a range of economic factors, including increased affluence, the complementarities between new technology and electronic content and increasingly educated and sophisticated consumers 18 Miles, I. and Green, L. (2008) Hidden Innovation in the Creative Industries, London: NESTA. 19 Pratt, A (2008) Creative Cities: The Cultural Industries and the Creative Class, Geografiska Annaler: Series B, Human Geography, 90 (2), Pages ibid 16

17 Growth sectors to 2020 This does not mean that the evidence is unambiguous. Despite the popularity of the creative industries with policymakers, there is only limited evidence for the wider growth effects in the sector, such as spillovers or making places more attractive. While some studies have suggested that the creative industries can lead to growth in other firms, this is principally through traded production networks where the value of creative content is traded between firms. There is less direct evidence on the existence of creative spillovers where value is created in one firm through simple spillovers of knowledge with other firms, without any exchange of knowledge in the past. However, there is a strong likelihood that growth in the creative industries will continue in the future and this makes them an important sector for urban growth. This means that the sort of cities where the creative industries tend to locate, and to create jobs, is of some importance. Evidence from NESTA suggests that the creative industries tend to make their location decisions based on co-location with other sectors, often those they do business with. 21 For example, advertising, designer fashion and software, computer games and electronic publishing tend to co-locate. To a lesser extent so do music and the performing arts, video, film and photography, publishing, and radio and TV. These complementarities between sectors have important consequences for firm growth as they imply that the location of the sector now may be determined by factors which affect the location of the sector in the past. We also know that the creative industries prefer to locate in particular cities. The creative industries are relatively concentrated spatially in large cities, and work by Dan Graham has found that some creative industries, such as media services, benefit significantly from locating near one another. 22 As these industries tend to employ the highly skilled, they tend to locate in cities with highly skilled populations. Cities with strong creative industries also tend to be economically successful there is a strong negative correlation between employment in the creative industries and current unemployment rate. Moreover, if it is true that the creative industries can increase productivity in other sectors in the same city, this may create virtuous circles with more affluent cities benefiting from the productivity improvements from this effect. The implication of this is that we should not expect the creative industries to spring into being in cities which have weak economies. Indeed, it might be that the opposite occurs, with the creative industries instead tending to follow affluent consumers and the firms who may provide clients for their products. 23 So, while the creative industries may have strong potential for productivity growth in the future, with some growth in employment too, it cannot be expected to begin to address the high levels of unemployment in those cities which have done worst in the recession, particularly given the mismatch between the supply of unemployed individuals (tending to have lower skills), and demand for higher skilled workers in creative industries. 21 De Propis et al., Graham, D. (2008) Identifying urbanisation and localisation externalities in manufacturing and service industries, Papers in Regional Science, 88 (1), Potts, J. and Cunningham, S. (2010) Four models of the creative industries International Journal of Cultural Policy, 14 (3),

18 Growth sectors to 2020 Figure 2: Creative industries employment and city size Source: APS via Nomis, Annual Business Inquiry 3.2 High-tech and high value added networked and intermediary services The second key industry for the recovery is high-tech and high value added networked and intermediary services. Technology has in many cases led to the breaking up of established production chains. These have been replaced by collaborative business models, with networks of SMEs providing services to large firms and a wide spectrum of employment in consultancies, market research firms, computer support providers and labour supply agencies. 24 These services can become an important aspect of production networks. Howells 25 argues that firms in these areas can become parts of wider innovation systems, both in terms of helping in the commercialization of ideas created in other parts of the economy, and through their role in helping to create a dynamic environment through information sharing. 24 Brinkley, I. (2010) Innovation, Creativity and Entrepreneurship in 2020, The Work Foundation: London. 25 Howells, J. (2006) Intermediation and the role of intermediaries in innovation, Research Policy, 35,

19 Growth sectors to 2020 Figure 3: Employment in knowledge intensive high-technology services and selected consultancy, May 2007 May Percentage of employment in knowledge intensive high technology services and consultancy, to to to to to to to to 7.3 Source: ABI, figures for 2008 (latest data) 26 The definition used here is the Eurostat definition of knowledge intensive high-technology services, but in addition we use Market research and public opinion polling (74.13), Business and management consultancy activities (74.14), labour recruitment and provision of personnel (74.5). Advertising is excluded as this is part of the creative industries 19

20 Growth sectors to 2020 Figure 3 shows the geography of these industries, using an indicator of high-technology services, augmented with employment in a number of consultancy fields and labour recruitment. They tend to be focused in urban areas London and the South East, Manchester, Newcastle and Glasgow. Locating in major urban areas gives these firms access to clusters of highly-skilled labour, knowledge sharing with other firms and probably most importantly simply access to clients. It means that the location of these industries can often be subject to considerable path dependence. Firms which are located within the cluster are more productive and more profitable than firms which are not creating an incentive for each firm to locate close to others. In contrast, larger firms can often be more flexible with their locations as they often rely more on internal economies of scale, with the knowledge and specialised labour more likely to be internal to the firm. 3.3 Manu-services The third growth sector is likely to be manu-services, understood as the integration of technologically advanced manufacturing with high value services. There has been widespread discussion about the importance of rebalancing the economy, based on the idea that the economy needs to focus on manufacturing growth as a counterpoint to the previous reliance on financial services as a growth sector. This re-balancing is likely to be expressed through increased output from manu-services businesses in which the boundaries between a manufacturing and service sector are blurred. For example, aircraft engine manufacturers also operate contracts to service aircraft engines, or firms which make speed cameras also generate revenue from management of their installation and maintenance. Unfortunately, there is no standard definition of manu-services which maps easily onto SIC codes. This makes it difficult to map them or estimate the location patterns of the sector. We can proxy for it, using high-technology manufacturing and high-technology knowledge intensive services. While this is not the clearest measure possible, it does at least give us some indication of where these industries are likely to be based. There is a big caveat about this data. We don t actually know these industries are manu-services, rather than more traditional high-technology manufacturing. And lower tech manufacturing may also be manuservices. But it is more likely that high-technology services will be manu-services relative to lower tech manufacturing. While this indicator is far from perfect, it is perhaps the best available indicator of the sector. High technology manufacturing has a more dispersed geography than the other growth sectors. It also appears to be less reliant on locating in a highly skilled city, meaning that it is more dispersed than some other knowledge based sectors. Two cities have particularly high levels of employment: Derby, as the home of Rolls Royce, and Preston, where BAE systems is a major employer. 20

21 Growth sectors to 2020 If manufacturing was to see large scale resurgence, it might play some role in addressing the entrenched north-south divide. Whereas most knowledge intensive industries are dominated by London, the South East and a few metropolitan centres, the geography of manufacturing lends hope to less economically successful regions: Modern manufacturing has a different and more balanced geography. A resurgent manufacturing sector could provide new centres of growth and regeneration for those areas that so far have struggled to participate in the wider economic benefits of the knowledge economy. Brinkley (2009: 34) The idea that there may be a large scale shift to manufacturing is appealing, in particular as the north is seen as being stronger in manufacturing than the south, meaning this may help reverse the north south divide. However, it is not clear how likely this is. Using a model of the UK economy, NESTA has shown that it would require growth rates of around 3.7 per cent annually for manufacturing to make a meaningful contribution to employment growth. 27 Much of these newer manu-services jobs will be focused on cities with relatively high skill levels. And the sector will also be subject to productivity gains through automation and economies of scale, and so increases in productivity may not lead directly to increases in employment. This means that, as with the creative industries, it is not clear that new forms of manufacturing will be able to address the problems of particular cities. 3.4 Low carbon industries We need to use a wide range of levers to cut carbon emissions, decarbonise the economy and support the creation of new green jobs and technologies Coalition Programme for Government The fourth key sector that is likely to play a vital role in driving innovation, exports and employment growth for the recovery is low carbon industries. There has been considerable focus on the potential of green industries as a potential source of growth. Regulation will be a driver of growth as the UK aims to meet emissions targets and government seeks to reduce consumption. The cost of carbon will rise, providing a further incentive to abate emissions. And consumers are becoming increasingly environmentally friendly and on some occasions may prefer environmentally friendly goods. 28 Despite the optimism that the sector will grow, it is hard to define the jobs which will be created in this sector. There is no agreed definition of low carbon industries and it is hard to define sectors or occupations as low carbon. Instead, it will pervade economic activity, with aspects of sectors as diverse as energy, manufacturing and financial services forming part of an emerging low carbon sector. It is not clear where the low carbon sector overlaps with the environmental sector, and how the two are distinct. 27 NESTA (2010) Rebalancing Act, London: NESTA 28 Levy, C. (2010) A 2020 Low Carbon Economy, The Work Foundation: London 21

22 Growth sectors to 2020 The caveats regarding definition notwithstanding, the current value of low carbon employment is large. BIS estimate that around 106 billion of low carbon and environmental goods and services were produced in 2007/8, supporting around 880,000 jobs. Growth is expected to be in the region of 4 per cent over the next ten years. 29 The geography of an amorphous sector such as this is also unclear. Low carbon jobs are likely to fall into three overlapping categories and the growth of each has implications for the geography of the sector s growth overall: 1. Dispersed construction activities. Many of the jobs would be in construction as there is demand for retrofitting of buildings in particular areas. These jobs would be relatively dispersed, following roughly the patterns of population in the UK. These jobs have been seen as important in providing employment for those who gained jobs in construction in the housing boom but lost them in the recession. 2. Concentrated knowledge-based activities. Alongside this there will be employment in specialised, knowledge based low carbon sectors. These might include employment in financial markets which trade carbon, or research and development activities which are closely tied to particular universities. These locations will not be dispersed around the country, but are likely to follow existing regional path dependencies. This is crucial for regional development if, as some evidence suggests, firms in these sectors have a role in increasing productivity in other sectors. These knowledge services associated with the low carbon agenda are likely to be particularly important sources of employment growth. 3. Natural resource dependent activities. The third type of activity will be closely linked to particular places, such as coastal locations for tidal power or the location of transport infrastructure. These industries will be concentrated across space, but this concentration is not likely to be governed by existing patterns of economic activity and agglomeration factors. It is also important to note that labour demand will vary across the stages of project cycles. For example, within the wind energy sector the construction phase is often far more labour-intensive than the longer term operational phase. There is no satisfactory way of mapping low-carbon industries: existing SIC codes cannot distinguish between the low-carbon aspects of industries, and those which are not involved in low-carbon activity. It will be difficult to distinguish between construction activity in the retro-fitting of buildings, for example, and construction of a more general nature. We resort to a methodology developed by Cambridge Econometrics and SEEDA where they demarcate the sector of activities contributing to a high quality 29 BIS (2010) Meeting the low carbon skills challenge, London: HMSO 22

23 Growth sectors to 2020 environment, which gives the percentage of each SIC code likely to be engaged in environmental activity (around 90 per cent for Recycling, but 3 per cent for relevant aspects of manufacturing). 30 Table 2: Employment in activities which contribute to a high quality environment, top cities City Percentage employment in activities contributing to a high quality environment 1. Aberdeen Cambridge Swansea Bay Edinburgh Newcastle & Durham Swindon Huddersfield Plymouth Southampton Bolton 2.29 Source: ABI, figures for 2008 (latest data) Aberdeen has the highest proportion of employment in the sector; with its high levels of employment in the extractive industries, it may have concentrations of environmental technology sectors and a strong research base in natural sciences. Other cities which perform well in this area often have strong research universities such as Cambridge, Newcastle or Southampton. They may also have high levels of employment in sustainable transport sectors such as water transport. But it is notable how low the proportion of employment in the sector is, with less than 2 per cent of employment in environmental activities in the average city. This will change as the industry develops, depending on the balance of employment in these sectors. And there is no relationship between employment in the sector and levels of unemployment. Overall, these four sectors are likely to be crucial growth sectors in the economy over the next decade. They will not be the only sectors which will drive growth, but they are likely to be amongst the leaders in this respect. Given the continued importance of large cities and agglomeration to their geography, and the likely path dependency this results in, this suggests that the geography of these sectors will not change substantially. This has important implications for the geography of the recovery. 30 They divide employment into different aspects of agriculture, hunting, forestry, quarrying, manufacturing of environmental technologies, waste processing, energy, capitalising on a high quality environment, sustainable transport and environmental advice. We ignore their categories of employment at different levels of education as these are a very large category which may skew the results 23