So how do you fix Employment in London, Ontario?

A few weeks ago, I was somewhat critical of a London, ON State of Employment report released by the city. Of course, it’s easy to criticize, it’s harder to be constructive, so I thought I should post some ideas of my own. This builds on the short follow-up piece I wrote, but we need to temper our expectations; one man is not going to identify the solutions by himself, no matter how handsome he is.

The first step in addressing the problem is identifying what the problem is.

Understanding the Problem: Midsized Cities are getting squeezed across the Globe.

I cannot recommend highly enough the book The New Geography of Jobs by Berkeley Economist Enrico Moretti. The Federal Reserve Bank of Richmond released a must-read interview with Prof. Moretti, where he highlights some of his research findings. This long passage describes why we are seeing a migration of jobs and opportunities to larger cities:

The microeconomic foundations of agglomeration economies represent an area of active research right now. We have a general sense of the magnitude of the economic benefits of agglomeration. We are still trying to empirically assess the relative importance of the microeconomic channels that may generate those benefits. There are three that have been identified in the literature and are likely to play a significant role in practice. The first one is the existence of knowledge spillovers, also known as human capital spillovers: the fact that our human capital depends not only on where we go to school and how much schooling we get, but also on the people who surround us and from whom we learn.

The second one is the matching advantage offered by thick labor markets. In the case of specialized workers, who often have idiosyncratic skills, thick labor markets allow for a better match with firms. For example, if you are a biotech engineer specialized in, say, biofuel and you work in Silicon Valley, where at any moment in time there are a thousand biotech firms looking for biotech engineers, you are more likely to find the one that studies biofuels than if you are the same biotech engineer located, say, in Chicago, where at any moment in time there are fewer biotech firms looking for engineers. A better match means a better career for the workers. At the same time, it is advantageous for firms because it results in higher productivity.

The third channel is the thickness of the market for specialized services. Again, if you are in an area where there are many other firms like yours and they all need a very specialized type of vendor, you are more likely to find it in an area where there’s a big agglomeration of firms in the same sector.

All three factors exist in manufacturing, of course. But they are much stronger for firms and workers that engage in innovation.

This passage on two-earner couples is particularly important. This, I believe, is the biggest economic isssue that London has (and I speak from experience, it is why I spend more time in Ottawa than in London these days):

There is good research that shows that larger labor markets have an advantage over medium-sized and smaller labor markets because larger labor markets offer more job opportunities for both members of a couple — and this is increasingly valuable as assortative mating increases.

In a world in which only one member of a couple works, a larger city offers some advantages, but in a world in which both members of the couple work and both members are looking for professional jobs, a larger labor market is particularly attractive.

The more specialized the skills of the two members of the couple, the more city size matters. If they are not very specialized, size matters but not as much; if they are both very specialized, the empirical evidence suggests that larger cities are significantly better for their careers. It’s not impossible for such couples to locate in small- or middle-sized cities, but it may be costly in terms of wages and earnings.

Other academic economists and think-tanks have also been researching the issue, along with coming up with potential solutions. Some of my work at SPI examines this phenomenon. Here’s an interview I gave with TVO: How Ontario’s two-speed economy is making inequality worse

Another such example is this Brookings piece out of the U.S. on why midsized metro areas deserve our attention. It shows how large metro areas are pulling away economically from midsized and smaller ones.

London needs to understand the magnitude of the challenge — it is getting hit by large economic forces largely outside of its control, forces which are affecting mid-sized metro areas all across the globe. Compounding the problem, municipal governments have very few policy levers to address those challenges. But all is not lost, there are things that can be done. Here are just three ideas (and if you like these, I have more).

1. London needs to move closer to Toronto

One thing we know about Ontario’s two-speed economy is that the variable that has the biggest predictive power on the economic growth rate of a mid-sized CMA is proximity to Toronto. Those that are close to Toronto grew quite quickly, and those that are not (London, Windsor, St. Catharines-Niagara), did not. (We will be releasing a fair bit of data on this as part of our summer project.)

This finding makes a great deal of sense, based on Moretti’s work. Consider a couple moving to Guelph. They become part of a thick labour market that includes Toronto. Both of the couple may end up working in Guelph, but if either one needs to find a new job for whatever reason, they have a lot of options because they can always commute to Barrie, Guelph, Brampton, etc. (this is known as “option value”, and it’s vitally important). Finally, the couple can still move to Guelph even if one of the couple has skills that are so specialized that there are no jobs in Guelph for her, due to that ability to commute.

London cannot move physically closer to the GTA, we need to recognize that when it comes to commuting, distance is measured in minutes, not kilometers (see Marchetti’s constant). If London is going to succeed economically, it needs affordable and frequent (aka high-frequency) transportation options to the GTA. This could come in a variety of different forms; at a minimum, our municipal leaders need to make sure they are not excluded in future VIA expansions. As well, they also need to ensure that transportation hubs, such as the train station and the airport are easily accessible.

2. The Airport is a key driver of Foreign Direct Investment

Speaking of the aiport, an Italian study by Bannò and Redondi found that foreign direct investment into a city increased substantially when new airline routes (with direct flights) are introduced between a city and a major economic hub.

The results showed that FDIs increased overall by 33.7% in the two years after opening of the new routes while FDIs in the control group decreased by 16.6%. Similar results were obtained using different measures of FDI (i.e. the number of generated employees) and by weighting the routes by their frequencies.

London would see a surge in investment if it were better connected with direct flights to business centres such as New York and Boston, as well as Toronto Island. The federal government can play a significant role through how infrastructure investments and how they structure airport security fees, to make such flights financially viable for airline companies.

The key here is direct flights. Londoners often think of the city as an ideal place for regional offices, particularly for white-collar industries. There is truth to that, in that London has a large, well-educated workforce and relatively low land costs. But a company isn’t going to put a regional office in a place that is difficult to get to, where workers have to take multiple flights to go from the regional office to the head office (and vice-versa). Remember, for travel, distance is measured in minutes, not kilometers. Direct flights to key business centres shrinks the distance to London, and makes travel more reliable, since you do not need to worry about missing a connecting flight.

If there is one thing Londoners should be asking of the federal parties during the election campaign, it is what their plans are to bring more direct flights to London. Other than hiring people directly, it would do more per federal dollar spent than anything else Ottawa could do for London.

London also needs to help itself here, by making the airport more easily accessible. It’s disappointing, though understandable, that the new BRT route does not go all the way to the airport. There isn’t the ridership right now to justify it. The city needs to “induce demand” by increasing development in the section of Oxford St. between Fanshawe College and the Airport. Make this a gateway to the city with housing and retail. This would increase traffic in the area, making a BRT stop viable, which would then make it easier for travelers to get from the airport to the rest of the city.

3. Governments do create jobs by hiring people… London needs to ensure that federal/provincial investments come to London.

This is a simple one. Londoners, rightfully, spend a great deal of time figuring out how to attract private sector investment to the city, in order to create jobs. However, the public sector, particularly the province, hire a great number of people as well. One of the results of our summer project has shown that London has considerably lagged behind the rest of the province when it comes to public sector job creation. It’s not that we haven’t seen any; the Fanshawe expansion downtown is a terrific example. But the city is getting fewer of these than communities of similar size.

Here’s some data from my piece The State of Employment in London Ontario, comparing London CMA to 4 other mid-sized Ontario CMAs (St. Catharines-Niagara, Kitchener-Cambridge-Waterloo, Guelph and Windsor), examining employment growth from 2001–18:

In 2001, London CMA and Kitchener-Cambridge-Waterloo CMA were almost identically sized. Since then:

• K-C-W has gained 2,700 more jobs in Health care and social assistance than London
• K-C-W has gained 4,200 more jobs in Educational services than London
• K-C-W has gained 3,900 more jobs in Public administration than London (K-C-W has gained 1,900 whereas London lost 2,200).

Our municipal leaders (politicians, higher education, business leaders) need to come together and come up with a handful of “big asks” of the federal and provincial governments. Don’t ask for 100 different things — get behind a few game-changing projects and work together on a solid pitch. In my time in Ottawa, I’ve seen other communities do this very well. There’s no reason why London can’t.