Political and technological change are likely to transform London’s economy in coming years. Businesses are already responding to these changes, and the economy as a whole is well-positioned to respond. But policy makers will need to focus on skills and automation, to avoid lower-skilled workers being marginalised by change.

London has proved astonishingly resilient in recent decades: it has adapted well to deindustrialisation, has led the transformation of financial and business services, has undergone a cultural resurgence, and is a primary hub for the global city economy.

This report’s analysis indicates that London’s economy will face significant disruption in coming years, as political and technological change combine to accelerate automation in many London sectors. But it also indicates that the city has the resilience and adaptability to thrive in a transformed economy.

Some sectors in London face big challenges. Sectors such as construction and administrative services are both highly automatable and highly dependent on EU labour. Wholesale and retail are less reliant on overseas labour, but more likely to face rising wage costs in coming years. Other areas, like the fast-growing accommodation and food sector, face all three disruptive factors. London’s occupational and industrial structure means that it is slightly less prone to automation than the rest of the UK, which presents challenges in itself given the widespread concern about the UK economy being “unbalanced”.

From many perspectives, automation should be welcomed: it has the potential to improve productivity, create new economic opportunities and free workers from the drudgery of routine production.

London’s well-qualified workforce, its areas of economic specialisation and its global character should enable the city to take advantage of many of the opportunities that disruption may bring. Many employers are already seeking to adapt to the changing paradigms of work.

But we should not ignore the potentially negative impact, particularly on lower-skilled workers, who could see significant losses of employment and earning potential. Supporting these workers and equipping them with the resilience and adaptability to grasp new opportunities will be essential for both fairness and prosperity in the London of the future.

Implications for businesses

Changing business models are not new. Of the 500 companies listed in the Forbes Fortune 500 index in 1995, only around 230 remained in the index in 2010. ²⁵ In this respect, the impact of automation for incumbent businesses may not be significantly different from the impact of previous waves of change. But three factors suggest it could be different this time:

• First, the structure of sectors is changing. Many tech startups require high up-front investment in fixed costs (such as platform development and marketing), but then have very low marginal costs of scaling up the service: a new user to a ride-sharing app costs the company next to nothing, leading to significant returns to scale. Furthermore, many of these services require a large number of users to work effectively — think of Facebook, Uber and LinkedIn. A ride-sharing app with few users would not attract many drivers. These specific qualities of many digital services are often leading to concentration in one or a few firms, supported by the patient capital that will enable them to build critical mass.
• Second, this has locational implications. Much of the surplus value created by growth of such companies will accrue at their headquarters — which may be in Silicon Valley — rather than at a branch office. London has done well in developing its own thriving tech sector, and has proven an attractive location for regional head offices — but it will need to work to create and retain critical mass and to be aware of the potential impacts of regulatory changes.
• Third, while automation will create new jobs, there is a difference in scale from their industrial era predecessors. Digital businesses need fewer employees to generate a large turnover than traditional industry often required. In 1962, when their annual sales surpassed $1 billion, Kodak Eastman employed 75,000 people in production sites across the world. When Facebook passed $8 billion, today’s equivalent of this threshold, it employed only around 6,300 people. ²⁶

As part of the research for this project, we held two roundtable discussions with business leaders in transport, catering, business services, financial services, and recruitment. The paragraphs below set out some of the emerging responses to the challenges discussed.

Diversifying products

Many businesses are reacting to these challenges by increasing variety in their range of products and services. Consumers are more demanding, forming discrete “taste tribes” or lifestyle groups, and creating markets for bespoke products – from artisanal coffees and specialist exercise classes to new social networks. Firms are reacting to this by offering more product variety and personalisation. This diversification creates a degree of resilience to automation: instead of standardising products and services to be produced at scale by machines, high-specification products can be designed and tailored to meet the needs of a very diverse customer base, and are then produced using a range of artisanal and highly automated technologies.

Moving up the value chain

Firms are also seeking to confront the challenges that new entrants might bring to their business, and to shift their focus as they adopt new technologies. In our roundtables, participants referred to this as “moving up the value chain”. Routine brokerage, transactional or information services – such as property search, audit and legal research – can be replaced by more tailored consultancy support, responding to client needs more precisely and holistically, and adding more value as a result.

Smaller can be nimbler

Many businesses are benefiting from automation – even if they are not operating at scales where in-house or on-site automation would be economically or technically feasible. Restaurants are using more outsourced food preparation, enabling efficiencies in staffing and space requirements on-site. Off-site precision manufacture using a mix of automated and manual processes is already taking place in construction, enabling developers to buy more or less completed products rather than having to project-manage the range of contractors involved in traditional construction.

From deep knowledge to broad skills

With this increase in product and service differentiation, the need arises for a redesign of product, production methods, and the occupations involved. As many of the activities within traditional occupations are automated, employers will focus on abilities that are specific to humans, including social intelligence, creative intelligence and high manual dexterity in unstructured environments.

This may mean less focus on the traditional “deep” expertise of professional specialisations – detailed legal knowledge, or surveying and engineering skills – and more focus on broader transferable skills such as interpersonal relations, creative-problem solving, and project management. This in turn has implications for recruitment and professional development, and even for the traditional conception of “the professions”.

Implications for workers

Automation and other factors seem set to benefit educated workers — or those with specific dexterity and social skills. Three potential lessons can be drawn:

1. First, meta-learning abilities will be very important as they add resilience to people’s working life. They enable workers to develop an understanding of their own resources, skills, weaknesses, and external opportunities in the labour market. They also promote people’s ability to direct their own learning, take advantage of new opportunities, and adapt to changes in the labour market over time.
2. Secondly, social and creative intelligence will be in high demand. This is a result not only of how difficult these skills are to automate, but also of changes in business models — from sale of expertise and access to markets to value-adding consultancy and differentiation of products to satisfy diverse clients and consumers.
3. Third, it appears that routine cognitive work will be in lower demand: advances in artificial intelligence, especially around data mining, will render many of the activities automatable.

Career choices also matter. There is nothing wrong in training for a specific trade or profession, as long as there is also an expectation of change. The secretarial and administrative occupations that looked like solid middle-class employment 50 years ago are rapidly disappearing, and bookkeeping and accountancy jobs may follow them. At the same time, demand for personal fitness instructors, care workers and designers may grow. It would be rash to predict with any confidence how the labour market will change over a working lifetime, so we will all need to be ready to continue learning and adapting.

Implications for policy

Skills

While automation may affect more middle-class administrative and associate professional occupations, the workers likely to be most negatively affected are those in the lowest-paid, lowest-skilled and most precarious jobs. High qualification profiles in London should help ensure adaptability, but the previous discussion of skills levels indicates that further attention should be paid to cognitive skills and ways of learning, as well as to academic attainment.

As noted above, technological change does not just impact the level but also the type of skills needed. Frey and Osborne argue that

“as technology races ahead, low-skill workers will reallocate to tasks that are non-susceptible to computerisation — i.e., tasks requiring creative and social intelligence. For workers to win the race, however, they will have to acquire creative and social skills.” ²⁷

There also seems to be a greater role for more generic and transferable skills: some of the businesses we spoke to suggested that automation meant their skills needs were changing. Rather than needing specialist professionals with deep knowledge of their subject (from law to coding), their services required people with skills such as “project management” or “customer service”. These were often the skills they found were in shortest supply.

A new focus on cognitive skills, creative problem solving and social skills will be required to enable Londoners to benefit from the advantages offered as London’s economy changes. Improvements in the education and skills system will enable London to capture opportunities arising from automation and mitigate difficulties stemming from tighter controls on international migration.

As cognitive skills have been shown to be particularly associated with economic growth, the question remains: what enables a country or city to develop a high cognitive skills base? Research indicates that one factor distinguishing high-performing countries in international school education studies is the recruitment of top graduates into the teaching profession. In Singapore, Korea and Finland teachers are recruited from the top one-third of graduates measured by performance. ²⁸ In the UK, however, with a formidable teacher shortage looming, especially in outer London, recruiting top graduates into the profession appears to be a particular challenge.

Social inclusion

In the past, the fruits of the huge productivity increases experienced since the advent of the Industrial Revolution were shared between employers and workers — especially during the height of mass production before 1973. However, in the second machine age, Brynjolfsson and McAfee argue, the growth in productivity has been decoupled from jobs and income. And this divergence has its roots not in tax codes or labour law, but in the “very nature of the digital economy, in which a set of goods and services can be provided to an infinite number of additional customers, all at the same time, at a cost that is often close to zero”. ²⁹

Productivity may continue to grow, therefore, but its fruits may not be shared widely, particularly with workers who struggle to adapt to changing economic circumstances. Therefore, in the longer term, more radical solutions may need to be debated and considered. These might include rethinking the working week or providing a universal basic income for a world where automation leads to lower employment levels.

Immigration

As many economic sectors in London are highly dependent on immigration, positive immigration strategies will be critical in helping London attract and retain the skills necessary to capitalise on the opportunities unlocked by technological change.

Regulation

Besides labour costs and management practices, regulation is one of the major factors determining the scope and extent of adoption of technology by businesses. In sectors such as transport, debates about the extent to which public authorities should seek to constrain growth of new technology-enabled services are already intense.

Setting out a clear framework for regulation of innovative sectors that intelligently balances the interests of innovators, consumers and workers will be essential if London is to be at the forefront of innovation – and the economic and employment growth that this unlocks.