Britain's Amazing Jobs Machine

How does it keep creating so much employment? And can the boom last?

Aysen Broadfield was thrilled when GE Capital (GE ) offered her the job as head of human resources for GE Consumer Finance in Britain and Ireland 18 months ago. There was just one hitch: It was based in Leeds, a Yorkshire town more than two hours north of London. As a PhD student in neighboring Bradford a decade earlier, Broadfield remembered Leeds as dreary, dirty, and depressed.

That was then. Now cranes surround the city, which has attracted more than $9 billion in real estate investment in recent years. Towering steel and glass office blocks house new businesses, luxury waterfront apartments, restaurants, and trendy stores such as upmarket retailer Harvey Nichols Group Ltd. There's even a Leeds lifestyle magazine modeled on London's Time Out. "The transformation is amazing; it's much more vibrant and cosmopolitan," Broadfield says.

Travel to Manchester, Birmingham, Liverpool, and other formerly downtrodden cities in Britain, and you'll see similar transformations. National employment is at record levels, with 1.8 million new jobs, mainly in the private sector, created since the Labour Party came to power in 1997. British unemployment is the lowest of any Group of Seven country at 4.8%, vs. 5.6% in the U.S. and an average of 8% within the European Union. With an election looming as early as next year, the government is taking every opportunity to highlight its economic success story. Unveiling his 2004 budget on Mar. 17, Chancellor of the Exchequer Gordon Brown crowed that Britain "is enjoying the longest period of sustained economic growth for more than 200 years."

HIRING BINGE. The question, of course, is how long that growth will last -- especially the kind of growth that generates jobs. Britain's success has been remarkable, especially in northern cities such as Leeds, which were hit hard by the near collapse of the country's manufacturing industry. Leeds has successfully reinvented itself as a thriving service-based economy, creating more jobs than any other British city outside London over the past 20 years. Leeds also has benefited from the government's recent hiring binge to improve the country's ailing public services. Over the last seven years, public sector employment across Britain has risen by 7% to 5.3 million.

But the real success story is the explosive growth of Leeds's financial-services industry, which contributes 25% of the city's $18 billion gross domestic product. The city offers cheaper real estate than London, good transportation links, a broad array of business services, and access to an educated but lower-cost pool of workers. GE Capital, whose call-center and credit- and store-card services units employ 3,600 full- and part-time workers in Leeds, has created more than 1,000 jobs in fewer than two years and is still expanding.

Leeds's success -- and Britain's as a whole -- stand in stark contrast to Europe's largest economy, Germany. The strength of German unions, combined with more rigid labor laws and the higher cost of labor, makes the nation less attractive to international business and investment, and the jobless rate remains stubbornly over 10%. For German politicians searching for solutions, Britain offers some key lessons. The buoyancy of the British job market is the result of a decades-long economic policy built on flexible labor, low taxation, limited regulation, and open markets.

Those advantages have kept Britain's economy on track despite a prolonged global downturn. So while U.S. economists fret about a "jobless recovery," and Europeans ponder the likelihood of any recovery at all, Britain just keeps chugging along, achieving 2.3% growth in 2003, vs. 0.4% for the euro zone. Britain's 2.5% average annual economic growth over the past four years is nearly twice that of Europe's and even higher than that of the U.S. At 1.3%, British inflation is among the lowest in the EU. Economists reckon Britain's economy will grow by more than 3% in 2004.

With financial markets starting to pick up once again, the City of London is now in full recruitment mode. The Centre for Economic & Business Research (CEBR), a London-based consultancy, predicts that over the next three years as many as 24,000 new financial service jobs will be created in the City, on top of the 311,000 employed there at the end of 2003. Indeed, even when markets were tanking between 2001 and 2002 and the City shed 15,000 workers, new financial service jobs were created as laid off bankers and brokers took their hefty severance packages and set up shop on their own.

Record employment has encouraged British consumers to go on a spending spree, which in turn is fueling job creation in the retail and construction industries. Tesco PLC, the country's largest grocer, added 9,000 full-time workers last year alone. And despite soaring property prices throughout Britain, unprecedented low interest rates continue to spur home buyers.

WORRISOME PRODUCTIVITY. What could spoil the picture -- and blunt Labour's drive to stay in power? Some economists worry that Britain's white-hot housing market poses risks to the economy. The concern is that the market could fall back to earth, dragging consumer spending with it, if the Bank of England were to suddenly raise interest rates sharply. But most economists expect rates to rise gradually.

A bigger threat to Britain's long-term competitiveness is low productivity. At 1.5% a year, its productivity growth lags the U.S., Germany, and France, according to a McKinsey & Co. study. Economists blame years of underinvestment in technology and research and development, a trend Prime Minister Tony Blair claims Labour now is trying to reverse. "In Britain, firms have to hire to keep up with demand, whereas in the U.S., productivity gains are doing the job for them," says Lehman Brothers Inc.'s (LEH ) Britain economist Alan Castle.

But it's a double-edged sword. If Britain raises productivity rates, it could lead to a pause in new hiring. And a switch to outsourcing could lower the number of new jobs created. The wave of outsourcing that has hit the U.S. is now beginning to roll into Britain. British unions are up in arms over recent announcements that major banks such as HSBC Holdings (HBC ) and Lloyds TSB Group (LYG ) and insurance firm Aviva (AV ) are planning to move thousands of low-skilled call-center jobs to cheaper markets in India and Asia.

CEBR estimates that as many as 500,000 British call-center jobs are at risk from outsourcing but believes many of those workers are likely to find other jobs. Not all call-center jobs are at risk: Under British tax rules, GE is required to keep its collection unit, one of its largest call-center businesses, in Britain, says GE's Broadfield. She also points out that it is much easier to recruit temporary staff in Britain than in lower cost countries such as India. Part-time work is now a huge source of employment in Britain.

The Blair government says the threat of outsourcing is exaggerated -- and points out that despite the shift of many manufacturing jobs to China, British exports to China have soared, too, creating new jobs in place of the old ones. In other words, Blair is betting that one way or another, free trade and low regulation will deliver the goods. The newly prosperous workers of Leeds, the City, and elsewhere hope he's right.

By Kerry Capell in Leeds and Laura Cohn in London

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