Why home working might be damaging London’s economy

Londoners have been slower to return to the office after the pandemic than workers in many large cities around the world. This really matters, and not just for London.

Almost all of the UK’s economic problems can be traced back to sluggish productivity growth. Productivity, which measures output per hour, is the engine of economic growth.

As Paul Krugman once said: “Productivity isn’t everything, but, in the long run, it is almost everything.”

London has witnessed a sharp slowdown in productivity since the financial crisis, trailing international competitors and even falling behind the national average.

Since the pandemic, this trend has only got worse. According to official figures, output per hour in London was 2.7 per cent lower in 2022 than it was in 2019. This makes it the only part of England to have seen negative productivity growth over this period.

A new Centre for Cities report, released today, suggests that home-working might be part of the explanation for the most recent deterioration in productivity.

The report found that Londoners work an average of 2.7 days per week in the office, just ahead of Toronto but behind the four other surveyed cities. Paris came out on top, with 3.5 days spent in the office.

And while office work has picked up on last year, when Londoners spent 2.2 days in the office, it still significantly lags behind the pre-Covid average.

Rob Johnson, an analyst at the Centre for Cities told City A.M. that the direct impact of homeworking on productivity was a “big unknown”, but argued there was good reason to think it had made a difference.

London’s economy is dominated by the knowledge-intensive services sector in which face-to-face interactions are especially valuable for enabling transfers of information and knowledge.

“We know knowledge disseminates and innovation happens through face-to-face interactions,” Johnson said.

These so-called ‘spillover effects’ make a big impact on an economy. As the report notes, “less frequent face-to-face interaction between employees in central London would put the city at a productivity disadvantage relative to other global cities.”

“We just need to know what the impact is because London’s productivity slowdown is the UK’s productivity slowdown,” Johnson argued.

The concern is that London’s performance might suffer in the long term. Indeed, it is a problem that workers are aware of despite their short-term preference for hybrid working.

A third of workers think they are more productive at home day-to-day, and two-thirds feel more productive at home for at least some of their tasks, the report found.

At the same time, over two-thirds of workers thought that workers spending more time at home over the next five years would have negative impacts. Top of the list of concerns for employees was the potential effect on learning new skills.

So what should employers be doing about it? The report suggests that one of the most effective ways employees could be enticed back into the office is to subsidise the commute.

“London’s workers are by far more likely to cite that travel costs are a barrier to getting back to work than workers elsewhere,” Johnson said.

For example, 42 per cent of Londoners cited lower travel costs as a benefit of hybrid working compared to just 25 per cent of Parisians, the city where most workers have returned to the office.

One big difference is that employers in Paris are obliged to cover a minimum of 50 per cent of what employees spend commuting on public transport. Many cover the entire cost of commuting.

Perhaps London businesses could learn something from their Parisian counterparts.