Thursday, 5 September 2019

"Why is the "Cost of Living" in Cities so High?"

Spotted by Lola at

Most of the article is the author discussing the correct interpretation of The Gospel according to St Mises, the interesting bit is near the end:

This raises the question, then, of why do workers move to a big city where the rent is so high? As I’ve exhaustively argued above, this isn’t a mere matter of units. Dollars are the same in San Francisco, but most of the prices are higher. Why do people put up with this?

The obvious answer is, “Because wages and salaries tend to be higher.”

... The brief explanation is that the productivity of many types of labor is much higher in urban areas than elsewhere. Historically the development of the big cities in the United States was tied to water transport: New York, Los Angeles, and Houston are still major port cities, while Chicago’s access to the Great Lakes and key rivers played an important role in its growth.

So it wasn’t a coincidence that America’s largest cities developed where they did. However, once people start living in close proximity because of some external factor (such as access to the water), there is a separate effect: Their productivity is amplified in other areas too, simply because of their proximity. The “economic approach to cities” is an entire subfield, so I won’t dwell on it here. Suffice it to say, people don’t spread out uniformly across the land, the way electrons repel each other on the surface of an object to distribute the electric charge uniformly.

Rather, more than half of the people in the world currently live in urban areas or cities, with projections that that figure will rise to two-thirds by 2050. There must be some reason for this attraction. On the consumer side, it might be the ability to eat at the finest restaurants and go to a Broadway show (if we’re talking about Manhattan). On the producer side, it might be because cities offer the highest salaries, and are worth moving to, despite the higher price for an apartment of a certain size.

Yet contrary to Cochrane, these high wages aren’t due to a difference in currency; they are supported by the fact that the productivity of workers is genuinely higher. The worker who is paid $100,000 in San Francisco is producing twice as much for his employer as the worker who is paid $50,000 in Cleveland. This isn’t because the units are different, it’s because the first worker is genuinely more productive.

Yes and amen to all that, that's Von ThĂĽnen's-Ricardo's law of Rent. The author does not just trot out the Faux Lib argument about lack of supply. Whether he draws the obvious conclusion on what should and what shouldn't be taxed is unknown.


L fairfax said...

Also rent is not the only cost. If you live in many parts of London you don't the cost of a car which helps negate the rent.

Saying that in the US there is evidence that the cost of housing means that people in democrat voting areas who earn more than republican voters - are poorer after housing costs are taken into account.
Also money is not the only motivation there are probably retired people in London who would be richer if they sold and moved to somewhere cheaper - and would be miserable being away from their families.

Mark Wadsworth said...

LF, wrong way round. No need for car and good/cheap public transport = higher rents.

As to old folk not moving, the same applies to other areas, so largely cancels out.

Lola said...

Murphy (no, not THAT one that Timmy is always ragging on) is usually pretty sound.