London's Bankers Are an Unproductive Bunch

(Bloomberg Opinion) -- Being a banker in London is probably the very definition of belonging to “the 1 percent.” Yet only one in three is satisfied with his or her pay, according to one survey. Considering the stagnant productivity in the city's finance sector, perhaps they should be more grateful.

Britain as a whole has been a productivity laggard since the financial crisis, posting the biggest slowdown in output per hour worked among the G7 countries. Policymakers have pointed the blame at mediocre companies that haven't kept pace with new technology and management trends, as well as “zombie” firms kept alive by rock-bottom interest rates. FTSE 100 giants from the wealthy south of England have been asked to pitch in to help their northern counterparts.

But London has no reason to be smug. The city's productivity growth has lagged the rest of the country since 2010, according to a new report by the Resolution Foundation think tank. It says all of the capital's increase in economic output for much of the last decade came from hiring more people to work longer hours. The result has been a squeeze on pay and a rise in the cost of living, which even bankers are fed up about.

What makes their grumbles ring hollow isn't just that they earn much more than most people. It's that the financial industry is actually a drag on the capital's productivity. Finance was the only sector where gross value added shrank between 2009 and 2016. Over the period, hours worked went up, as did employee numbers. So whereas between 1997 and 2010 the finance sector's productivity soared almost 6 percent on average every year, between 2010 and 2015 it was barely above zero. That's worse than retail.

It's puzzling why this is happening, as one would expect capitalism's foot soldiers to be paragons of efficiency. Some question whether the data are being looked at properly, but the sharp decline in growth suggests there is a problem here regardless of what measurements are being used. 

Maybe this is all down to external factors. Pre-crisis productivity might have been exaggerated by high leverage and what Adair Turner, the former head of the Financial Services Authority, called “socially useless” activity . The combination of risk-taking, low regulation and a big influx of capital were no doubt factors behind the pre-crisis output boom in the City of London.

Post-crisis efficiency might therefore be weighed down by a reversal of these factors, as well as the swelling of the ranks of compliance officers, who are socially more useful but pretty unlikely to bring in fat revenues.

When a smaller pot of money is shared around a bigger group of people, pleasing everyone becomes impossible — hence those banker complaints about pay. Technology might help banks shed some compliance officers, but there's unlikely to be a return to the City of London's post-Big Bang heyday. Brits are still hostile to deregulation.

If bankers really wanted to show they're worthy of their special status, maybe they'd prove they can be engines of growth — even without the dice being loaded in their favor.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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