Labour is working: the new jobs that changed the face of Britain

As the German Chancellor wrestles with unemployment running above 10 per cent, the Blair Government can boast of record growth. In our latest feature bringing you the best of 'BusinessWeek', Kerry Capell in Leeds and Laura Cohn in London ask if the good times are too good to last

Aysen Broadfield was thrilled when GE Capital 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. As a PhD student in neighbouring Bradford a decade earlier, Broadfield remembered Leeds as dreary, dirty and depressed.

Aysen Broadfield was thrilled when GE Capital 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. As a PhD student in neighbouring 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 £5bn 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 the upmarket retailer Harvey Nichols. There's even a Leeds lifestyle magazine modelled 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 around 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. Unemployment is the lowest of any G7 country at 4.8 per cent, compared with 5.6 per cent in the United States and an average of 8 per cent within the European Union. With an election looming as early as next year, Labour is taking every opportunity to highlight its economic success story. Unveiling his 2004 Budget earlier this month, the Chancellor of the Exchequer, Gordon Brown, crowed that Britain "is enjoying the longest period of sustained economic growth for more than 200 years".

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 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 past seven years, public sector employment throughout Britain has risen by 7 per cent to 5.3 million.

But the real success story is the explosive growth of Leeds' financial services industry, which contributes 25 per cent of the city's £10bn gross domestic product. The city offers cheaper property prices 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-centre 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' success - and that of Britain as a whole - stands in stark contrast to Europe's largest economy, Germany. The strength of German unions, combined with more rigid labour laws and the higher cost of labour, makes the nation less attractive to international business and investment, and the jobless rate remains stubbornly over 10 per cent. 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 labour, low taxation, limited regulation and open markets.

Those advantages have kept Britain's economy on track despite a prolonged global downturn. So while US economists fret about a "jobless recovery", and other Europeans ponder the likelihood of any recovery at all, Britain just keeps chugging along, achieving 2.3 per cent growth in 2003, compared with 0.4 per cent for the eurozone. Britain's 2.5 per cent average annual economic growth over the past four years is nearly twice that of continental Europe and even higher than that of the US. At 1.3 per cent, British inflation is among the lowest in the European Union. Economists reckon Britain's economy will grow by more than 3 per cent 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 and 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 people already employed 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 fuelling job creation in the retail and construction industries. Tesco, the country's largest supermarket, added 9,000 full-time workers last year alone. And despite soaring property prices throughout Britain, unprecedented low interest rates continue to encourage home buyers.

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 per cent a year, its productivity growth lags the US, Germany and France, according to a study by consultants McKinsey & Co.

Economists blame years of underinvestment in technology and in research and development, a trend Prime Minister Tony Blair claims Labour is now trying to reverse. "In Britain, firms have to hire to keep up with demand, whereas in the US, productivity gains are doing the job for them," says Alan Castle, an economist at the investment bank Lehman Brothers.

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 US is now beginning to roll into Britain. British unions are up in arms over recent announcements that major banks such as HSBC and Lloyds TSB, and the insurance firm Aviva, are planning to move thousands of low-skilled call-centre jobs to cheaper markets in India and Asia.

The CEBR estimates that as many as 500,000 British call-centre jobs are at risk from outsourcing but believes many of those workers are likely to find other employment. And not all such jobs are at risk, in any case: under British tax rules, GE is required to keep its collection unit, one of its largest call-centre 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.

Meanwhile in Germany, the economy has Schröder on the rack

By Jack Ewing in Frankfurt

Germany's next national elections aren't scheduled until 2006, but Chancellor Gerhard Schröder already looks like a lame duck. Only 26 per cent of German voters support his Social Democratic Party (SPD), according to the latest polls. Dissidents are threatening to form a splinter party, claiming Schröder has betrayed socialist principles by cutting taxes for the well-to-do and easing job-protection laws. On the right, the opposition Christian Democratic Union (CDU) controls the upper house of Parliament, allowing it to force changes in many of the Chancellor's initiatives. "These have been damned difficult times," Schröder grumbled to party officials last week.

So difficult, in fact, there is speculation that Schröder is tired of being the nation's punching bag and could even resign. "In the pressure cooker that is Berlin, rumours are swirling that the Chancellor just doesn't feel like it any more,'' wrote the Berlin daily Die Welt earlier this month. Most analysts still consider a Schröder resignation unlikely, and the official line is that he plans to run for a third term in 2006. "He's a fighter," says Siegmar Mosdorf, a former deputy economics minister. A spokesman for Schröder called speculation about resignation "absurd". But in the past Schröder has threatened to quit as a way of silencing critics, and one day he may make good on that threat.

How might a Schröder departure play out? The German constitution makes it tough for him to be removed against his will. But his political fatigue could increase as Germany's economic crunch becomes even more acute. The workforce is shrinking, the number of retirees is growing, and unemployment remains at 10.3 per cent. Schröder is trapped between economic necessity and disgruntled voters. "He doesn't have much breathing room," says Michael Greven, a University of Hamburg political science professor. A major blow to Schröder's prestige is likely on 13 June, when there will be elections for the European Parliament, the state parliament in Thüringen, and municipal offices in seven German regions. Polls suggest an SPD debacle.

If Schröder were to throw in the towel, his move would touch off a political scramble. Theoretically, the SPD's Green Party partners could bolt and form a government with the CDU. But it's improbable that the environmentalist Greens and socially conservative CDU could find enough common ground to team up.

Instead, the SPD and Greens would try to agree on a replacement for Schröder. The problem is who. The reform-oriented economics and labour minister Wolfgang Clement is one candidate, but he is even more unpopular among the left than Schröder. The party lacks other figures with broad appeal. That and divisions inside the ruling coalition would make for a messy power struggle.

To avoid such an outcome - sooner or later - Schröder has beaten a tactical retreat. Last week he handed leadership of the SPD to Franz Münterfering, a party veteran who leads the SPD delegation in Parliament. He is also proposing reforms designed to soothe rather than annoy voters, such as more money for child care.

Half-measures can only work for so long, however. Someday, Mr Schröder will face a day of reckoning. As Germany's budget pressures grow, he will simply have to seek more unpopular cuts in social services - or quit and let someone else do the dirty work.

This article was sourced from BusinessWeek's latest European edition. For further information, go to www.businessweek.com

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