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Building shield

When people make the economic case for more housebuilding, they usually focus on the immediate boost to growth delivered through the construction sector. However, there’s a more important and long-lasting benefit to the economy.

In any sizeable country there are areas of low productivity and areas of high productivity. A shift in the population from the former to the latter not only means higher growth for the economy as a whole, but also higher wages for those who make the move.

So why don’t more people do so? This is an especially pressing issue for Britain, with its pronounced geographical differences in productivity, but it’s a problem for other countries too.

In an article for Vox, Timothy Lee takes a look at the American situation:

“People with similar skills and similar levels of education make a lot more money in New York and San Francisco than they do in St. Louis or Cleveland. You might expect these differences to even out over time, as workers relocate from low-income areas to high-income areas to take advantages of the opportunities there.

“But that hasn’t been happening. Over the last half-century, income differences between metropolitan areas have actually been increasing.”

The key impediment to job mobility is, of course, housing:

“While the wage difference between St. Louis and San Francisco is large, the difference in housing costs is even bigger… High housing costs make it hard for companies in high-cost areas to attract workers, stunting the growth of some of America’s most dynamic industries.”

How much is this costing the American economy? According to a study by the economists Chang-Tai Hsieh and Enrico Moretti, the answer is a lot:

“Hsieh and Moretti estimate that moving American workers to higher-productivity cities could increase the income of Americans by a stunning amount: more than $1 trillion. That amounts to a raise of several thousand dollars for every American worker.”

Given the impact of London property prices, this effect could be even stronger in Britain than it is in the US. Making space for affordable homes in the South East could make a big and enduring difference to our GDP.

However, there’s a catch. Realising the full economic potential of the most productive locations would require an unsustainable degree of expansion (and contraction in other parts of the country):

“Hsieh and Moretti envision the New York metropolitan area becoming 9 times its current size, meaning that more than half the country would live there. The Austin metropolitan area would quadruple in size, as would the San Francisco Bay Area. Half the cities in America would lose 80 percent or more of their population.”

Applying these calculations to this country produces an even more extreme scenario. If London were to get nine times bigger, then that would mean the entire British population living in the capital. Obviously, that’s not going to happen – for a long list of reasons that may begin with the Green Belt, but hardly end with it.

Timothy Lee is right in saying that “less dramatic population changes could still produce significant economic gains.” Yet there must come a point at which it’s easier to shift productivity to where the people are, rather than the other way round.

Northern powerhouse, anyone?

7 comments for: Can London ever be big enough?

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