Embedded Rents (2)

As I showed this morning, there are three types of goods and services:
i. goods which can be easily transported, and for which the retail price is the same anywhere in the UK, any difference in price would be competed away, so the price consists of [cost] only.
ii. goods and services which have to be consumed at or near the point of sale, the stronger the link between the consumption and the point of sale, the wider the variation in prices will be across the UK (or the closer the correlation between the price and local rent levels), so the price consists of [cost] + [embedded rent].
iii. pure land rents (or house prices above and beyond build costs) where consumption is by definition 100% linked to the location, there is no alternative and the price differences cannot be competed away. The price consists of [rent].

Handily enough, The Daily Mail published further stat's this afternoon on the correlation between average net wages and average rents in eleven regions of England & Wales.

They express rents as a % of net-of-tax wages; we can sort the regions be ascending average wage and it gives us a chart like this. As we see, rents as a share of 'GDP' increase as 'GDP' increases, so this is exactly the same picture as we had showing the increasing share of GDP taken up by rents over the last sixty years (GDP having increased significantly over that period): So far so good. It is of course just as interesting to plot wages net of rents and rents in absolute terms, to see whether Ricardo's Law Of Rent applies, i.e. that rents soak up extra wages in higher wage regions.

Oh, what a surprise, they do. However, Excel's wonderful TREND function tells us that rents only soak up 67.8% of the extra wages. Does that mean the law requires modification? No, not really, because once we deduct 'embedded rents' (calculated, for sake of argument as another 20% of pure rents*) and apply the TREND function again, we see that wages after pure rent and after embedded rent are as flat as a pancake.

I've left London off this one and as you can see, the only two regions where net wages buck the trend and are 'above the line' are the East Midlands and East (presumably because the landscape is a bit dull) and the South West is 'below the line' (because it has the nicest landscape and weather): * If I had tons more data and could be bothered to crunch the numbers, the more sophisticated approach would be to work out how much of his wages after rent somebody in the North East spends on Type i. goods and on Type ii. goods; then we would work out how much extra somebody in the South East would have to pay on the same basket of Type ii. goods and services. The extra cost in the South East represents the extra embedded rent, to give us a true figure for wages net of pure rents and net of embedded rents. But simply assuming that embedded rents are one-fifth as much as pure rents in any region is probably close enough.