The economic rewards of big city life have not been shared equally
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.
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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:
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.