The Clustering of Financial Services in London*



tendency for banks to rate these labor market advantages more highly than insurers or legal
firms.

The strength of the London labor market was consistently stressed in the interview
survey. Many respondents in all sectors remarked that the depth of expertise across the
range of the professions is vastly superior to anywhere else in Europe. Several pointed out
that the size of the labor force in financial services in London far exceeded the entire
population of Frankfurt. Here is a typical response:

One is there is a skills base, people both front and back office, that exists in London
that you’d probably have difficulty finding elsewhere in the volumes you need it to
support the industry. So because the industry’s grown up and evolved in the City then
around it you have a large pool of skilled resource in the areas you need it and some of
those areas are quite specific. So that’s the major point.

The existence of a large labor market in a cluster gives rise to two key advantages.
Firstly, labor is attracted into the market, because the size of the market provides a better
chance of continuity of employment. Secondly, the sheer size of the market provides an
incentive for people to invest in highly specific skills. As Adam Smith so penetratingly
observed over 200 years ago, the division of labor is limited by the extent of the market.
Size coupled with the status and prestige of London and the fact that the most interesting
and most well-rewarded work is to be found there acts as a magnet for talent.

London offers a wide array of career opportunities both within large firms and through
the ability to move easily between employers. Several firms spoke of the problems of
attracting top talent if they were in the regions. This is part of a classic self-sustaining
process in clusters. The advantages of the cluster, including the size of the labor pool and
other spillovers between firms, mean that the cluster is unusually productive and so more
resources flow to the cluster and these re-enforce its advantages. What also emerges as
being important about this process in London is that it acts as a magnet not only for
national but also international talent. This and the rich ethnic mix which exists in London
anyway means that there is access not only to a pool of talent, but one which collectively
speaks a vast range of languages. One respondent of a major global non-UK firm rated
London’s labor market as having the greatest ethnic diversity of any of the locations in
which they operated, at least as far as the relevant labor market went. The prestige of the
capital, the quality of the experience that can be gained there, the ability to perfect their

14



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