Whither white collar services?

The Sydney-Mumbai connection
My son-in-law is visiting from Sydney, back in Auckland for Christmas and New Year celebrations.  He is a middle manager in one of Australia’s biggest IT testing teams (in financial services). The group’s growth over the past seven years has been phenomenal, from less than ten people to 700.  Of these, 400 are based in Sydney and 300 in India. 
That’s a substantial investment in Indian IT by an Australian business, an investment in high tech jobs that has strengthened the Australian operation even as it has boosted the economy in Mumbai.

From what I gather, growing expertise and experience mean that the bulk of investment in expanding capacity will take place in India, not Sydney.  As they acquire greater technical expertise and better management skills, expect offshore contractors there to play an increasing role in this sector, and others, and begin displace their home-based counterparts.

A farewell to footloose services?
This got me thinking – where is white collar employment headed?  What does it mean for the future of New Zealand (and Australian) IT?  And, of interest to me, what does this mean for our cities? 

Are we looking at a repeat of what happened to manufacturing – where producers have migrated to the lower cost, increasingly skilled labour forces of China and Thailand, for example?  Sure, locally oriented production (building materials and the like) has remained in New Zealand, but little high value manufacturing other than that associated with primary production and a few exceptional entrepreneurial producers survives.  From 2000 to 2011 New Zealand manufacturing lost 25,000 jobs (down 10%).  46% of these went gone from Auckland (down 14%).

Are we now looking at something similar in the white collar sector, especially among producer services?[1]  

Take one of our biggest, Telecom New Zealand. The company retained some call centre capacity in New Zealand when it restructured in 2009, but the expansion plan favours new investment in Manila. Keeping a New Zealand presence looks like a strategic move, about the consumer interface and brand management, not about reversing the tendency to invest in services offshore. 

And it was acknowledged by Telecom that while knowledge of products and services was usefully served from New Zealand in areas “where specific, technical knowledge was particularly important, offshore staff have delivered strong results ... [and] ... the offshore operation recorded our highest ever level of customer satisfaction for broadband support in December”.

Falling behind in the IT employment stakes?
Incidentally, the bias this example in favour of greater technical knowledge offshore differs from the findings of a US study[2].  This suggested that off-shoring impacted mostly on medium and low level skill occupations, creating a higher skill bias among those remaining.

If we want to limit New Zealand’s loss overseas to lower skill jobs, extra investment will be needed in building the quantity and quality of investment in technical education and training.  But with the collapse of many financial institutions, and ownership of our major players offshore, it may be too late: perhaps we already lack the depth of IT smarts, for example, needed to hold our place in the world’s financial and producer service sectors.

Of course, off-shoring among the upper echelons of the white collar sector has been going on for a long time as New Zealand companies have been absorbed by overseas principals.  The result is generally that senior management, IT control, and high tech jobs end up elsewhere, even if some production or distribution remains here. 

In terms of economic theory, increasing trade based on specialisation and comparative advantage should increase net welfare in both exporting and importing nations as each plays to its specialisations and its strengths.  It should be no different for services. 

Unfortunately theory is not enough.  The necessary assumption that comparative advantage is static does not hold.  In fact the gains in skills and experience to the service exporting country as experience accumulates may be reinforced by selective migration depleting the skills and experience of the importing country. 

The impact on our cities – time for a rethink?

Either way, the loss of high or low skill capacity to overseas suppliers, through loss of control of our companies or outmigration, raises important questions.  The one I am interested in is how we can plan for the future of our cities if we cannot assume a strong, growing white collar sector?

Perhaps we should qualify our plans for Auckland by contemplating the impact of a ground-shift in white collar employment as a result of the migration of current and future professionals and managers to Sydney and beyond, and of mid-level skilled technical tasks to lower cost Asian suppliers.   

Ambitious plans for a burgeoning Auckland CBD, the land use transformation and infrastructure investment required to shape it do not reflect the possible impact of a white collar slow down.  Quite the opposite: business and technical services are picked as the big performers necessary to meet Draft Plan goals according to the background papers, with no discussion of where the threats to such optimistic growth forecasts are coming from. [3]

So what has been happening?

I looked at recent white collar employment growth.  According to Statistics New Zealand Auckland gained 88,000 jobs from February 2000 to February 2010 (20% growth) with 84% in white collar sectors.  The rest of New Zealand gained 211,000 jobs at the same rate (also 20% gain), but only 47% of these were in the white collar sector.

So white collar employment was the big driver in of New Zealand’s economy over the decade, and accounted almost entirely for Auckland’s job growth. 

A decade of two halves
Solid growth came to an end in 2008 (Figure 1).  Around 85% of the decade’s new jobs were in place by 2005: employment grew by 261,000 between 2000 and 2005 but by only 46,000 between 2005 and 2010.  The figures for Auckland were 81,000 and 15,000 respectively. 

There was a decline in non-white collar jobs between 2005 and 2010, reinforcing dependence on services for growth. Nationally 84,000 new white collar jobs were partly offset by a loss of 38,000 elsewhere.  Auckland gained 32,000 white collar jobs but lost 17,000 non-white collar jobs.

Figure 1: Employment Growth in Auckland and the Rest of New Zealand, 2000-2011

Clearly we cannot afford to take the future of white collar employment for granted.

Is this decade going to be different?
It got a more interesting last year, and a little more promising.  Auckland staged a recovery between February 2010 and 2011, driven by 8,600 new white collar jobs out of a 9,000 gain overall.  White collar employment stalled in the rest of New Zealand, which recorded a decline of 3,100 jobs.  

Does this represent a recovery, a turning point perhaps?  With Auckland starting to grow ahead of the rest of New Aealand, and white collar servcies resuming their pre-2008 growth trajectory? 

It’s probably too soon to say.  These are small numbers coming in the course of what could be a drawn-out downturn.  I like to think that we are looking at accelerating growth founded on a strong producer services sector.  But I fear we may not be.

So what jobs are growing and what are their prospects?
When we look closer at the composition of white collar job growth (Figure 2) we see:

• It depended heavily on community services (education, health, and government) especially outside Auckland.  These jobs will not migrate offshore, so that’s good.  Unfortunately, economic conditions mean they will have minimal medium-term growth.
• Personal services (arts, recreation and others) have been slow growers.  So much for economic salvation by the creative sector.  Unfortunately, these activities depend on discretionary spending; they follow rather than lead growth.   So don’t expect too much from them as incomes stall and discretionary spending falls.
• Commercial services (finance, real estate, information and media, professional and scientific services, and administrative support to business) held up longer outside Auckland than inside, but the rate of growth fell sharply.  Herein lies the biggest long-term threat: these services are most vulnerable to offshore supply and lack of investment, especially in human resources.  On the plus side, the bulk of Auckland’s 2011 gain was in this category.

Figure 2: Employment Growth by Service Sector and Period, Auckland and the Rest of New Zealand

Thinking about the future
I wish I could feel as confident about Auckland’s growth as the authors of the city's Draft Spatial Plan.  But in light of the vulnerability of our white collar sector, I can’t, despite a better employment performance in the commercial service sector last year.  And I certainly would not be relying on strong long-term growth in that sector to underpin heroic land use assumptions and big spending commitments.

I am not sure how we might respond to the threat to white collar employment in Auckland.  I guess I would start by addressing our education and training capacities, and maybe continue to explore ways of boosting innovation and development appropriate to our capacity and our setting (and not built simply around comparisons with other post-industrial, western cities!) 

And I would certainly address the relative cost of investing in IT and other producer services here, considering issues around infrastructure and public spending, local and central government regulation, and appropriate land use strategies for modern producer services. 

As I see it, though, it will be a long time before Paul might bring his family home permanently, if at all, and enjoy the sort of challenging, high tech (and well-rewarded) job he has at the moment. 

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[1]           By producer services I mean those that primarily service the needs of other businesses and perhaps government rather than households.  Of course, there is some cross-over between markets and categories.

[2]          Crin R (2009) “Service Offshoring and White Collar Employment” Institut d.Analisi Economica, CSIC, Barcelona

[3]                 Despite positioning Auckland as an innovation hub in Asia Pacific, all the international indicators considered are about relativity with cities in Europe, North America, or Australia.  See Auckland Council (2011) Background Paper: Auckland Economic Development Strategy, especially p.103

Rethink the Link - Does Auckland really need to pour money into a hole in the ground?

Anchoring the CBD, or Sinking it?

A cornerstone of the Draft Auckland Plan is implementing an underground inner city rail link.  At an estimated $2.3bn this is the single most expensive new commitment in the plan, and accounts for around 15% of capital spending identified. This seems a big price to pay to transform what is already a perfectly functional CBD with adequate and improving public transport (PT) arrangements. And unless it makes a substantial difference, it could become a major fiscal anchor on Auckland’s development.  This posting considers the prospects.

Why?
So why do we need the inner city rail link?  The plan says:

·     It will contribute to “a transformational shift towards greater use of public transport”, reducing congestion “that has become increasingly intolerable” (p27)

·    It will improve the timeliness of public transport for inner city workers and by improving access to the CBD “catalyse related urban and business development and growth” (p35).  Oddly enough, the Plan also states that “existing rail and motorway connections to the city centre make it highly accessible and an efficient location for business” (p127).

·     It will support an additional 55,000 to 70,000 jobs projected for the CBD.  In a hint of circularity, 5,000 of these are attributed to the rail link itself (p165).

The Background Document, Towards Preferred Urban Form, says:

·    The link will raise service levels across the network, cut travel time on the western line by 10 minutes or more, and create a higher “accessibility profile” for CBD fringe areas (p25).

The Business Case
I looked at the business case supporting the rail link, but struggled with it.  For a start, while it claims to consider alternatives, it departs from convention by looking only at different transport responses to fixed assumptions about land use.  Normally, transport evaluation for urban development starts with land use options, and considers their differing transport needs to decide which combination is favoured economically.  It also considers differing land uses so it can highlight the social and environmental tradeoffs being made. It might then vary the best options further to take into account fiscal risk.  

Rather than go into the detail of the business case here I concentrate on whether building the City Rail Link the best way to reduce congestion.

Commuting - the Data
To get some idea of this I looked at the distribution of commuting trips across Auckland.  I first divided the city into five sectors:

–    The North, locations north of the Waitemata Harbour and dependent mainly on the Harbour Bridge for access to the CBD and points south, including the rest of the Auckland Isthmus;

–    The West, former Waitakere City, mainly dependent on the Western Motorway for access to the CBD and points south;

–    The CBD, as defined by the plan to cover areas within the motorway ring (Auckland Central East and West and Harbourside), but extended for this exercise to include fringe areas likely to be impacted by the rail link (Freemans Bay, Newton, Grafton East and West);

–    The balance of the Auckland Isthmus, through to Panmure in the southeast; and

–    The South, the former Manukau, Papakura and Franklin council areas, and Waikato Region

An origin-destination matrix of work trip was sourced from Statistics New Zealand for the 2006 Census at Area Unit level.  Motorised trips were divided between those using private vehicles (company or individual owned) and those involving bus or rail [1] and allocated among the five sectors.  Pedestrian and bicycle trips were set aside as they are mainly local.

(The source data rounds small numbers for confidentiality reasons. This means flows between areas with few trips are slightly exaggerated or under-counted, although this should not affect this general analysis.  [2])

Getting to the nub – getting past the CBD
Let’s compare trip numbers to the CBD with those bypassing it:

–    14% of trips originating in the North are destined for the CBD.  But 19% go past to points south. (62% remain within the north);

–    15% of trips originating in the West end up in the CBD, but 37% end up elsewhere on the Isthmus or further south (not all of these need go near the CBD, though).  Only 38% of trips originating in the West terminate in the West - a low level of employment self-sufficiency.

–    Only 32% of trips originating in the CBD terminate there; 53% go elsewhere on the Isthmus or and further south;

–    64% of trips originating in the South end up in the South, just 7% are destined for the CBD, 26% for other parts of the Isthmus, and 3% for the North or West.

 Origins (Place of Residence) and Destinations (Workplace)
Auckland Journey to Work, 2006

Source: Census of Population 2006, Statistics new Zealand

Around 21,000 trips a day from the West and the North of the region went to the CBD in 2006.  But 38,000 had to get past it (although some from the west would have gone near it at all). 

Significantly fewer north- or west-bound trips indicate more limited employment opportunities in those areas.  But there were still 15,000 from south of the CBD to the north or west.

So, 54,000 trips went past the CBD, nearly as many as destined for it (58,000). And 127,000 went to other parts of the Isthmus.  While the CBD is the largest single destination (around 14% of the city’s total jobs using our definition) the real congestion issue is how to cater for – or reduce -- cross-city commuting, and especially north-south trips that must use the motorway system to drive round it.

Is pouring money into a CBD-rail link really the answer?
Will the proposed city rail link meet the Plan's expectations?  No.  Not just because it does not address cross-city congestion.  But also because in 2006 30% of trips from elsewhere on the Isthmus into the CBD already used PT. In some nearby Isthmus areas the figure was much higher e.g., 50% for Mt Eden North, 40% Newmarket, 42% Sandringham, 41% Newmarket, and 40% Surrey Crescent. And a substantial 26% of commuters from the North and 27% from the South to the CBD also used PT in 2006.  (These figures do not include ferries, which accounted for 7% of PT boardings in the year ending October 2011 – all to the CBD).

And this penetration will have grown with expanding PT patronage.  Look at the past few years: 

Source: October 2011 Statistics Report, Auckland Transport, p.4

We can take heart from this, and the prospect of more of the same, especially as the cost of motoring seems set to increase, and as existing transport services are upgraded and fine tuned.

Contrast this, though, with the fact that only 4% of trips passing the CBD  in 2006 used PT, and 7% of trips destined for locations on the Isthmus other than the CBD.  And rail, even with its planned city link, is not going to make much difference to these figures. 

It must be asked: how we can justify over $2bn in capital spending to raise rail’s share of CBD-focused travel in which PT already plays a large part?  Because we face the prospect of diminishing returns by way the high cost of each additional unit of demand that might be satisfied by spending up large on the rail link, especially because this does not really address where the problem really lies: with cross regional travel. 

There may be more cost effective and enduring measures we can take.

Reducing Congestion:  (1) the Role of Bus Services
Buses account for the bulk of the growth in public transport patronage to date, and will continue to do so whether or not a city rail link is built.

Bus services offer relatively low marginal costs for expansion, route and service flexibility, capacity for continuous improvement to rolling stock, and a better ability to cope with disruption than rail.  They offer wider network capacity and greater passenger convenience and responsiveness.  They are less prone to system-wide disruption.

Given a long-standing legacy of rail transport to a few suburbs it may make sense to incorporate what we already have into a multi-modal system, but putting a lot more money on the line to “benefit” from sunk costs in a system that is inferior to the alternative is not good economics.

Reducing Congestion: (2) Rebalancing Land Use
There has been much analysis, reporting, deliberating, and dithering for over decade about how much and where more employment land might go to allow investment outside the CBD and the Isthmus, to bring down the high costs of industrial land, and to facilitate business investment close to the labour force.  Action is long overdue. 

The Draft Plan falls into much the same trap as the Regional Growth Strategy did 12 years ago, doing little to reassure us that increasing the region’s employment capacity has the priority it needs.  There is passing comment about where it might happen in the Discussion Document People and Economy (p83) ,generalised commitments to development in the northwestern and southern priority areas in the Spatial Plan itself,  and continuing reference to 20 years notional industrial land supply (which we haven't had for some time now) and increasing employment densities to accommodate growth  (Draft Economic Development Strategy, p42).  But there is no discussion of how current imbalances might be acted on or how the relationship between where people might live and work will be addressed other than by building more road and rail capacity.

In any case, the 55,000-70,000 additional jobs proposed for the CBD and a commitment to triple the CBD population which appear to be the land use assumptions underlying the Business Case for the rail link will generate far more demand for travel than can ever be met by PT.  The National Transport Survey, for example, demonstrates that journeys to work accounts for well under 30% of national travel demand (at least on a time basis).

The balance includes travel for personal business, recreation and socialising, shopping, and travel in the course of work favours, all generating dispersed trips at less predictable times than commuting.  These are trips that inevitably lean on private rather than public transport.  No amount of money poured into a rail tunnel will prevent the planned level of intensification from creating a real CBD congestion problem. 

Reducing Congestion: (3) Fine Tuning the Road Network
Already initiatives are being taken that will do a lot to reduce current congestion, though.  One is the completion of the western motorway, connecting west and south Auckland directly.  And the new Victoria Park tunnel recognises that the problem is one of getting past the CBD rather than getting into it.  A further harbour crossing could eventually build much-needed redundancy into the network, reducing the disruptive potential of occasional traffic incidents (although we might question the wisdom of integrating it into the same feeder and distributor roads as the existing Harbour Bridge).

There are other initiatives that might be taken.  The motorway system itself could be reviewed to see just how far it might serve better the arterial needs of Auckland through such measures as relocating on and off ramps to cater for local and intra-city movement.

Reducing Congestion: (4) Road Pricing
The idea of tolling roads to pay for the rail link has been floated.  This acknowledges the uneconomic nature of the latter.  But the benefits to motorists of the rail link by way of lower congestion on roads are likely to be far less than implied by such a tax, if they exist at all. The suggestion does raises important constitutional issues, though, over who can levy a tax in new Zealand, and why.

If the intention is to better reflect the costs of private motoring – in other words charging users – the solution is likely to revolve more sensitive pricing of access to and use of roads than this thinking suggests.  For example, in the foreseeable future vehicle positioning and on-line user charging technologies will enable motorists to pay directly for the costs that they impose on the network.  Adopting this approach to countering congestion, rationalising the use of transport resources, and encouraging sensible land use makes more sense than taxing motorists to fund the capital for expanding the rail system. 

We also know from experience with petrol prices how responsive motorists can be to real increases in the cost of motoring.  And that as the population ages, there is a tendency to rationalise and reduce vehicle use.  Let’s work towards changes around these tendencies rather than impose an expensive and potentially unnecessary element of infrastructure on the city.

Plan for Improvement
By committing to continuous improvement in a bus-based system, completing and refining the road network, and fostering a land use pattern that better matches where people might live and work we can reduce congestion and lower the environmental costs of transport in the short to medium term.. And this will leave us well placed to take advantage of improving technology in vehicle transport (bus and car) and user charging in the medium to long term.

A high cost rail system will reduce this flexibility, and instead lock us into a set of costs and structures that will be more of burden to the city, its residents and businesses, than a benefit.  Continuing to push it at all costs could well be the game breaker for Auckland's Draft Plan.

[1]       Travel by ferry comprises only a very small share of the total and is not identified in the statistics

[2]     Comparing the sum of trips across cells compared with the overall figures provided by Statistics New Zealand suggests that this leads to between a deviation of 5% undercounting (for car based trips) and 7% undercounting (for public transport-based trips).  This is acceptable for the level of generalisation dealt with here.

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