The lifestyle economy – great for employees but not so good for public finances
This is a short Cebr research note about an important change in preferences towards work that is affecting the level of productivity, GDP and ultimately public finances.
The thesis is that people are increasingly taking on jobs that offer less remuneration than those that their predecessors might have accepted but that offer a more attractive lifestyle or more opportunities for helping others. I was particularly exposed to this concept when writing my last book ‘The Flat White Economy’ which explains the growth in London’s digital economy and also digresses into a discussion of the ‘Flat White Lifestyle’.
But the growth in the lifestyle economy goes well beyond the digital economy and is now a key element in around a third of the UK economy besides affecting the attitude to and the nature of work in the other two thirds.
My preliminary estimate is that this change in job preferences, which I call ‘the lifestyle economy’, has reduced GDP growth since 2008 by an amount adding up to 4% of GDP or £80 billion this year and that this could explain slightly under a quarter of the measured productivity shortfall. The shortfall in public finances from this reduced growth is one of the main reasons for the persistent public sector deficit – without it the deficit of £46 billion last year would have been only £10 billion.
Looking forward, if the lifestyle economy continues to grow then productivity growth will continue to be held back. This in turn will affect the pace at which the deficit can be reduced without tax rises or cuts in public spending growth. The calculation in this paper suggests that if the trend over the past 9 years continues at the same pace, GDP growth could be slowed by nearly 0.4% per annum while the deficit (without tax or spending changes) would be £45 billion higher than it otherwise would be in 10 years’ time.
I should make it clear that this change in attitudes to work is essentially benign. It is much better for people to be doing what they want to do, if the opportunities are available, than doing jobs they don’t like even if those jobs might have been better remunerated. But it is not all gain – there are implications for public finances, because income and earnings are taxed while lifestyle and caring cannot be. If the lifestyle economy continues to grow, either taxes will have to rise or the growth in public spending will have to be further constrained.
The productivity shortfall
Weak productivity growth has been a feature of the UK economy since the financial crash in 2007/08. Since then productivity has hardly grown at all and is roughly 20% short of its trend level whether measured as output per person hour or output per person.
Roughly 5 years ago I wrote:
‘one should be rather more pessimistic about future productivity growth in a new world where GDP growth could easily be sluggish’ but that ‘this is probably less bad news for the future of employment and unemployment in the UK. Employment will be higher, given sluggish GDP growth, than might have been expected. And as a result unemployment will not rise as quickly’ so that ‘we should not rely on some sort of automatic bounce back to the pre-2008 circumstances to make us better off.’ This analysis was quoted by the ONS.
In the 5 years since I wrote that, UK productivity has risen by 0.6% per annum, consistent with my prediction.
One of the points I made in 2012 was that the 2007/08 base was probably an unfortunate base for comparison. Not only was it the top of the economic cycle but even more dangerously it was also the peak of the financial cycle before the crash. The statistical treatment of finance in the national accounts is essentially based on the normal accounting treatment. So if a bank makes a loan, the profit is partly accounted for at the time at which the loan is made. If the loan subsequently has to be written off, the ensuing loss is written off as a negative profit at the time of the writeoff. This distorts the official data for both GDP and productivity which is distorted upwards when the loan is made and the profits are first accounted for and downwards when the losses are written off. For more accurate statistical accounting the impact on GDP (and productivity) should have been written back to the point when the bad loan was made. But the convention is not to do this. I suggested in my note 5 years ago that UK productivity had been artificially boosted by 2.8% in 2007/08 as a result of this distortion and is probably still being artificially depressed today by the writing off of bad loans made at the peak of the cycle.
There is a second measurement issue, more obvious today than in 2012, which is that the UK’s most dynamic sector, the so-called Flat White Economy, which now accounts for about 10% of GDP, is almost certainly undermeasured for reasons I explain in my book of the same name. This might also account for another 3% of GDP and productivity understatement.
But even if all the possible measurement issues are added together, they explain a maximum of 8% of the productivity shortfall compared with the 20% shortfall from trend that has been observed.
There are various competing explanations for the productivity shortfall. One that has gained prominence is that low interest rates have permitted the survival of so called ‘zombie companies’. But a good analysis by the Chris Giles and Emma Tetlow of the FT based on ONS research has focussed attention on 5 sectors: ‘banking, telecoms, the supply of electricity and gas, management consultancy, and legal and accounting services’ which appear to account for the bulk of the productivity shortfall. The authors point out that ‘these are among the UK’s most prestigious and go-getting sectors, suggesting that mediocre companies just bumbling along are not the root of the problem’.
Another potential explanation is that immigration has made labour cheap and easily available, encouraging employers not to make much effort to improve productivity. But my own analysis in the Flat White Economy suggested that, in that sector at least, immigration had boosted productivity (though this may not be fully picked up in the statistics for the reasons mentioned in the book).
It is probably also true that many parts of the UK economy have underinvested in technology for a range of reasons but the tech hubs in London and elsewhere suggest that this is not the only experience.
So it is possible that we need to look beyond the zombie company and cheap labour theories to find other (and possibly additional) explanations.
The impact of the Lifestyle Economy
This paper investigates two separate questions:
- has there a change in work preferences towards ‘lifestyle activities’ which has affected the economic data for the UK (including that for productivity)? and
- what are the implications of this shift for the prospects for the UK economy looking forward?
What is the Lifestyle Economy?
Although most of us have an idea of what we mean by the lifestyle economy, there is no agreed definition. Let me propose one:
The lifestyle economy is that part of the economy where the choice of work is partly or wholly driven by the worker’s desire for enjoyment rather than remuneration.
It is not a new phenomenon – many types of traditional work have been lifestyle related. Most of the creative economy is part of the lifestyle economy. Arts and sports are also, though they can also be lucrative.
What is new is the extent of this phenomenon. Partly driven by the spread of education and partly by the revulsion towards the excesses of the financial service economy of the 1980s, both young and old are turning to lifestyle jobs on a scale which seems unprecedented (though there is of course no decent historical data to prove this).
I came across many examples when writing my last book ‘The Flat White Economy’ about the merge between the tech economy and the creative economy that started in East London that seemed to be associated with a changed attitude to work with more mixing of work and leisure and offices designed to encourage this.
I am also including in my analysis ‘the caring economy’. This has similar economic characteristics and some overlap. The caring economy is that part of the economy where the choice of work is wholly or partly driven by the worker’s desire to care for other people rather than remuneration. Again this has always existed – parenting, care for relatives and much work in the religious, medical and charity sectors. You could even include politics, though, like charities, the work seems to be increasingly professionalised and lucrative.
Attitudes to work
There is consistent time series data on attitudes to work from the British Social Attitudes Survey. The most recent report on attitudes to work is contained in Report 33 and is based on an analysis of the data to 2015. The most interesting finding is that the proportion thinking that they have a ‘good’ job has risen sharply and especially in the period from 2005-15:
‘71% of workers [in 2015] have a ‘good’ job (one with at least 4 positive attributes such as being interesting, helping others and/or society, and offering chances for advancement), compared with 62% in 2005 and 57% in 1989’.
This might seem surprising given other data suggesting some decline in job quality – eg exploitation in the gig economy or zero hours contracts or evidence showing increased stress (there is also evidence of increased stress at work in the British Social Attitudes Survey). It is possible that the labour market is splitting with more ‘good’ jobs and at the same time more ‘bad’ jobs.
But the data is very consistent with a view that employees, if they have the choice, are placing more emphasis on job content other than remuneration. From the report:
‘62% of respondents [in 2015] say they would enjoy having a job even if they didn’t need the money, up from 49% in 2005.’
The changing nature of jobs is relevant here:
‘ Social class and education make a difference to financial motivations to work; 63% of those in professional or managerial occupations disagree a job is solely about the money earned, while the same is true for only 34% of those in routine or semi-routine occupations’.
How big is the lifestyle economy?
We have investigated the occupational employment data for 2017 to make a rough estimate of the size of the lifestyle economy. Obviously this has depended on some fairly bold assumptions and the numbers emerging from the calculation need to be treated as orders of magnitude rather than precise estimates, but it looks as though nearly 30% of the economy in 2017 is essentially lifestyle based.
How fast has it grown?
It is difficult to compare with pre 2010 data at the macro level because of definitional changes that were incorporated in SOC 2010. We have used some of the micro data where the definitions have not changed or have scarcely changed however and our calculation suggests an equivalent figure of just over 20% in 2008. The rise in the share of lifestyle jobs over the 9 year period has been 8.3% of all jobs.
It is not possible to map in detail all the changes in jobs done between the two periods because the details of subcategories released differ between the periods. But comparing like with like, some stark changes emerge:
There has been a dramatic fall in the numbers employed as managers – down from 3.9 million in 2008 to 2.6 million in 2017, slightly offset by an increase in the number of self employed managers from 680,000 to 830,000. Some of this change is definitional;
The number working (both employed and self employed) as ‘professionals’ has jumped from 3.7 million to 6.4 million. Again some of this change is definitional;
The numbers working in ‘Care and Leisure’ has risen from 2.4 million to 3.0 million (slight changes in definition).
Meanwhile, looking at smaller categories largely but not entirely unaffected by changed definitions:
Most striking is that the numbers working in ‘artistic and literary occupations’ has more than doubled from 190,000 to 416,000;
But also interesting is that the number working as ‘scientific professionals’ is up from 141,000 to 195,000;
While the number in ‘sports and fitness’ is up from 120,000 to 188,000.
Rather less surprising is the huge jump from 444,000 to 922,000 in the number of ‘information technology and telecommunications professionals’ who of course are part of the booming Flat White Economy (though there has also been some recategorisation here).
Moreover, the number of business and statistics professionals (which includes economists) is up from 377,000 to 729,000 (again likely to have been affected by recategorisation).
And given the claims of government spending austerity over the period, it is quite striking that the numbers working in health and education have also risen fairly sharply:Teaching professionals up from 1,298,000 to 1,556,000;
Health professionals up from 334,000 to 563,000 (with some recategorisation affecting this).
The occupational analysis is backed up by a more cursory study of the input output data. Unfortunately the most recent data is for 2013 but this also seems to show an increase in the proportion of GDP accounted for by lifestyle sectors. Using the input output based analysis, it would appear that loss of GDP per capita from increased lifestyle work over this period is around 5% of GDP compared with the level of GDP that might have existed had people continued to wish to take jobs of the same kind as in 2008 with a similar ‘lifestyle content’.
One needs to be a little careful about a calculation of this kind because it assumes that, had people been willing to do the more productive jobs that they might have done with their previous lifestyle preferences, such jobs would have been available. It is probably sensible therefore to treat the 5% figure as a top end estimate. For the calculations below I have aimed off the 5% figure and used 4% as a more reasonable estimate of the negative GDP and productivity impact of the growth in the lifestyle economy since 2008.
This is an estimate both of the loss of GDP and the loss of productivity. As GDP is currently running at roughly £2 trillion, this implies a loss of GDP of £80 billion.
Because lifestyle isn’t taxed while earnings and spending are, the loss of GDP also implies a loss of tax. My calculation using UKMOD, the Cebr UK macroeconomic model is that the loss of tax revenue is around £36 billion. Since public net borrowing in 2016/17 was £46 billion, had the scale of the lifestyle economy remained as in 2008 and everything else remained the same, there would have been a deficit of only £10 billion.
What does it mean for the economic future?
If the lifestyle economy continues to expand it is likely to hold back productivity growth and hence GDP growth. At one level this does not matter too much and in reality is probably a good thing, particularly if an increasing proportion of people are enjoying their jobs.
But there is a fiscal impact. The OBR’s latest comment on economic developments included the following statement ‘other things being equal a downward revision to prospective productivity growth would weaken the medium-term outlook for the public finances’.
If the lifestyle economy continues to expand as fast in the next 10 years as it did from 2008-17, annual GDP and productivity growth will be reduced by up to 0.4%. As a result, by the end of the 10 year period in 2027 there is likely to be an additional annual fiscal shortfall of around £45 billions in today’s money.
Even without this analysis the Chancellor was going to need to revise his estimates for his annual Budget on 22 November. But this analysis suggests that the extent to which he is boxed in over the longer term is even greater than has been assumed.
Executive Deputy Chairman
1 Nov 2017
 The book, first published by Duckworth in 2015 and revised for the paperback edition in 2016 describes how the tech sector and the creative sector in London have merged together to produce this dynamic new economy that now accounts for approxinately 10% of UK GDP. The sector is particularly prominent in East London but is spreading to other parts of London, the rest of the UK and also many other international locations
articles/ukproductivityintroduction/aprtojune2017#labour-productivity Data for growth from Q2 2012 to Q2 2017 (latest data)
 The Flat White Economy, Douglas McWilliams, Duckworth 2015 reprinted in an updated form in paperback 2016.
 This is based on an analysis of EMP04 Employment by status, occupation and sex Q2 2017 (released August 2017)
 A useful description of the changes and what they mean is given in https://www2.warwick.ac.uk/fac/soc/ier/publications/2010/elias_birch_soc2010_revision
 Based on a similar analysis of EMP04 for Q2 2008.
 All occupational data comes from ONS report EMP04 and compares the latest data for Q2 2017 with Q2 2008