by Peter Franklin
Monday, 17
January 2022
Seen Elsewhere
10:00

Why the poor don’t move to richer cities

The economic rewards of big city life have not been shared equally
by Peter Franklin
Credit: Getty

This may come as some surprise, but there’s more in the Government’s in-tray than an empty bottle of wine. For instance, there’s the housing crisis — which remains very firmly unsolved. 

To be fair, this isn’t just a British problem. Even in countries with liberal planning policies and a lot more space to build new homes, there is still the issue of affordability in prime locations — meaning the global cities where millions of people live and work. 

For a lucky few, the inflation of urban land prices has brought massive profits — but what sort of impact has it had on the rest of society? By way of an answer, Noah Smith draws attention to a brilliant piece of research by the economists Rebecca Diamond and Enrico Moretti. 

What this does is to compare the standard of living across different US cities and commuting zones. While it’s relatively easy to measure income levels in different geographical locations, estimating consumption levels is much trickier. And yet household consumption is what we need to assess what the affordability of a city does to its residents’ economic well-being. Painstakingly, Diamond and Moretti produce such a measure by pulling together data from bank and credit card transactions. 

Obviously, we don’t need an economist to tell us that the high rents of expensive cities leave less over for other purchases. We might also guess that the higher wages available in the richest cities compensate for their lack of affordability. 

However, this compensating effect doesn’t apply to everyone. Diamond and Moretti find that:

Low-income families who live in the most affordable commuting zone enjoy a level of market-based consumption measured in real terms that is 74% higher that of families with the same income who live in the least affordable commuting zone.
- Rebecca Diamond and Enrico Moretti

That’s a comparison of extremes, of course — but overall the authors conclude that “college graduates living in cities with high costs of living enjoy a standard of living generally similar to college graduates living in cities with low cost of living”. However, the same is not true for “high school graduates” and “high school drop-outs” — who suffer lower living standards in more expensive cities. The “differences are quantitatively large.”

So when we ask why the workforce isn’t as mobile as it could be, we shouldn’t just ‘blame’ ties of family and community. The fact is that the economic rewards of big city life have not been shared equally: something that the ‘knowledge class’ might like to remember the next time they think of themselves as more dynamic than their fellow citizens. 

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Jon Redman
Jon Redman
6 months ago

For a lucky few, the inflation of urban land prices has brought massive profits

Sigh.
This again.
No it hasn’t. Inflation is not profit. It’s inflation. How you can tell that it’s inflation and not profit is that when you sell up and buy again, the price of what you buy has gone up by just as much as the price of what you are selling. If it were profit, your house would have gone up in price but nobody else’s would have.
The reason why houses, and all assets however dubious their value – including classic cars, art, and crypto currencies – have inflated is because, as interest rates on money are negative, you’d be stupid to hold money. We have inflation of about 6% but interest rates of 1% so in a year’s time your money buys 5% less. It is thus rational for people to put money instead into the things money buys, rather than into the bank where their money simply erodes, because money’s becoming worthless.

Billy Bob
Billy Bob
6 months ago
Reply to  Jon Redman

It is a profit if you own multiple properties i.e. the already wealthy. For those that own just a single home prices are largely irrelevant, and for those youngsters who haven’t bought yet rising house prices are a menace