Last week I took a look at whether government policy to support regional economies could divert growth away from Auckland. Based on the historical evidence, the answer seems to be no – people want to live in Auckland and start businesses here, and it’s senseless to try and stop that.

Today, I want to look at this issue from a different angle, and ask: If we somehow succeeded in stifling Auckland’s growth, would we be better off as a result? Would New Zealand be richer if it cancelled the City Rail Link, banned any new dwelling construction in Auckland, and told newcomers to bugger off to Timaru (or, more likely, Melbourne)?

Once again, we don’t have to speculate, as we can examine the results of previous “natural experiments”. Paul Krugman suggests that we could learn from recent population growth in the United States. (In between gaining academic renown for his work in new trade theory and public notoriety as a harsh critic of the second Bush administration, Krugman helped develop the new economic geography literature, which explains why cities form and grow.) He takes a look at the rapid growth of the “sunbelt” states, including Arizona and Texas, and finds that it has probably reduced economic growth in the US:

It turns out, however, that wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from, suggesting that the places Americans are leaving actually have higher productivity and more job opportunities than the places they’re going. The average job in greater Houston pays 12 percent less than the average job in greater New York; the average job in greater Atlanta pays 22 percent less.

So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. According to the Bureau of Economic Analysis, rents (including the equivalent rent involved in buying a house) in metropolitan New York are about 60 percent higher than in Houston, 70 percent higher than in Atlanta.

In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt.

But why are housing prices in New York or California so high? Population density and geography are part of the answer. For example, Los Angeles, which pioneered the kind of sprawl now epitomized by Atlanta, has run out of room and become a surprisingly dense metropolis. However, as Harvard’s Edward Glaeser and others have emphasized, high housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.

In short, restrictions on population growth in productive places – i.e. large, relatively dense cities – force people to move to less productive places, and earn less. A recent working paper by American economists Chang-Tai Hsieh and Enrico Moretti put a figure on the economic cost of these restrictions: housing supply restrictions in high-productivity cities like New York and San Francisco over the last three decades has lowered the US’s GDP by an estimated 10-14%. That’s absolutely huge.

This is agglomeration at work – or rather, “deglomeration”. The economic literature has identified a strong relationship between the scale and density of cities and the productivity of firms that locate within them. But rather than recognising and taking advantage of this phenomenon – for example, by allowing more office space to be built in San Francisco for the expanding tech industry and more apartments to be built in Silicon Valley for urbanophile tech workers – some American cities have chosen to reject it.

So could the same thing happen in New Zealand? In a word, yes. It’s definitely a risk and one that we should be careful to avoid.

First, the facts. Firms based in Auckland are more productive than firms elsewhere in New Zealand, after controlling for industry and firm characteristics. And firms in the Auckland city centre are even more productive. The table below, compiled from data in Dave Mare’s great 2008 paper on the topic (“Labour productivity in Auckland firms”), shows that there is a substantial “productivity premium” in Auckland:

AreaEmployment density (2006 jobs/sq km)Value added per worker (2006)Productivity relative to non-Auckland
New Zealand excl. Auckland6.7$45,550
Auckland urbanised area518$68,435+51%
Auckland city centre13,584$106,873+139%

I just want to say a brief word about the “productivity premium” of the city centre. A lot of people say that New Zealand’s an agricultural exporter, earning its way off the sheep’s back (or, more recently, the cow’s teats), and that downtown jobs are just an unproductive drain on farm revenues. However, service exports from urban businesses play an underappreciated role in NZ’s international trade picture. The two companies I’ve worked for in the Auckland city centre are both exporters of professional services. I’ve personally exported to Hong Kong, Australia, Fiji, and Papua New Guinea; my colleagues have also worked in Indonesia, Uganda, Canada, Saudi Arabia, the UK, and a whole host of other places. If we want to grow our exports in a smarter way, we need to encourage this sort of thing rather than deny that it’s happening.

As a result of the urban productivity premium, policies that stifle the growth of Auckland are likely to put a drag on New Zealand’s economy. In the US, a reluctance to let productive cities grow caused people to move to lower-wage cities like Phoenix, Houston, and Atlanta. Down here, the results are likely to be even worse, as New Zealanders are much more internationally mobile than Americans. If we put a lid on Auckland’s growth, some people will go to Hamilton or Tauranga instead, but many others will head to Australia or the UK.

Fortunately, we’ve got a much better option: Improve New Zealand’s cities rather than trying to smother them. Moreover, we’ve got some great opportunities to do just that. In Auckland, that means:

  • Making cost-effective investments in more transport choices, including better walking and cycling
  • Building the City Rail Link to unlock access to the city centre and allow firms to grow and benefit from the knowledge spillovers floating around
  • Preserving and improving our parks and public spaces – Waterfront Auckland is a truly world-class waterfront development agency and we should build on its success
  • And, as Krugman and Glaeser point out, it’s absolutely vital that we allow dwellings to be built in the places where people want to live – which increasingly means building more in places like Ponsonby and Mount Eden that are close to jobs and amenities.

We shouldn’t limit our vision to Auckland, either. While Auckland’s larger and faster-growing than Christchurch or Wellington, those cities also support agglomeration economies and interesting urban lifestyles. Investments in better cities will pay off there as well. Some of the same policies can also make small cities more liveable – although Hamilton will probably never need a CRL, look at the difference that NZTA’s Model Cycling Communities programme has made to Hastings and New Plymouth.

Why don’t we get on with it then?

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  1. “…Hamilton will probably never need a CRL…”

    Actually already has one, albeit single track abandoned underground station in the heart of the city. As in so many towns, an unused resource with huge potential.

  2. Great post and so clearly true. Auckland is on the cusp of being able to benefit from its size by being able to afford amenities like the CRL that will really make the place hum.

  3. Well I am finally on-board with you guys. The Greens are going to built light rail in Wellington and as a rental property owner in Newtown I stood up and cheered when I heard. If they are prepared to spend taxes so I can lift my rent then the least I can do is give them my party vote. (Shame they keep banging on about all those green issues though but no party is perfect.)

      1. Except with light rail I can throw out the low income strugglers and let it to dinkies. My rental income goes up but someone elses goes down.

    1. I’d look that gift horse in the mouth if I was you.

      With the Greens come Labour, and with that Capital Gains Taxes, so suddenly that “rental” uplift you think you’ll get will be taxed away upon property sale.
      If you never sell then you’re think probably going to all right?
      Except all those exemptions you currently claim back from the IRD against the (pittance, officially anyway, of a) rental income will disappear too.

      And don’t forget those “Extra” taxes you’ll pay on the top dollars you earn, all to pay for the Greens largesse.

      But if that is all that it takes to get a sensible Minister of Transport in this country, who won’t simply say “The answer is: more roads, now whats the question?” to any problem, then its going be a real bargain.
      So I’ll vote for that.

      1. Not necessarily. If the landlord is operating the rentals as a business, which is the logical way of doing things, then CGT is not applied. Normal company tax is however (less expenses etc of course).

  4. How does the “value added per worker” compare to the “value added per hour worked”? i.e. how much of the higher productivity is due to city centres attracting career focused people prepared to work longer hours for no extra pay? (sort of “factory farmed” vs “free range”)?

    It would be interesting to know a few more details about the US comparison.

    Were the higher incomes per annum or per hour? That could indicate whether people moved for lifestyle or financial reasons – to a similar job with lower hourly wages in a more “affordable” area, or to a job with similar hourly wages but shorter hours in a more “family friendly” location?

    Was the internal migration in the US of high(er) income earners, or was it mainly low income earners moving to more affordable cities? If it was mainly low income earners migrating, then it would have the effect of raising the average income in the city they left and lowering it in the city they moved to. If was higher income earners moving, then it might have the opposite effect.

    Presumably companies that export services need to be near an international airport, which restricts where they can be located. Technology companies could be located virtually anywhere in NZ, but would potentially miss out on the agglomeration benefits.

    1. I will check, but I think that the paper may have adjusted for differences in hours worked. Even if it hasn’t, the other available data on the topic (e.g. personal income data from the Census adjusted for full- and part-time status) suggests a similar overall pattern of agglomeration. That being said, it’s also quite difficult to control for unobserved differences in labour quality (e.g. worker motivation).

      My reading of the empirical evidence is that agglomeration effects still exist after controlling for self-selection by firms and workers – e.g. by looking at what happens to wages and labour productivity as new businesses move into an area. It does seem that increases in density are associated with increases in productivity for existing firms.

      Either way, interesting question!

    2. There are a number of factors at play in the US population movement from the Northeast and Midwest to the south and west. First, the employers moved. They were attracted by the non-union workforce, loose regulation, and low taxes, and still are. People had to move to keep or get a job. Old industries like knitting mills were early movers. Later, in the 80s, the steel industry collapse meant that many thousands of workers were unemployed in a very short time. It wasn’t so bad since the weather was better and new cities are “nicer” than old cities. (The widespread use of air conditioning made this possible.) Military bases tend to be in the south and west, spawning aerospace investment which creates really good jobs. It seemed like everybody could have their own home and 1/4 acre lot, “the American dream.” (The political, social and economic conditions of the southern states is a topic for a different blog.)

      Another little-recognised factor is that moving to another city for a job is risky. High growth areas, though, offer the potential of another job if the first one doesn’t work out. Low- or no-growth places don’t have that kind of dynamism.

  5. Peter I generally agree with. Auckland has agglomeration benefits and as a country we should be making the most of it by allowing more ‘up’ development in the Auckland isthmus. I am from Canterbury so I’m glad you mentioned the agglomeration benefits of medium sized cities like Wellington and Christchurch. I think in Christchurch ‘out’ development has more potential while in Auckland and Wellington due to size and geography the issues are more about ‘up’ development.

    I am not so convinced about Krugman’s argument that high wages indicate higher productivity when he goes onto saying those cities have higher costs -in particular rents. It could be workers demand higher pay for higher living costs.

    1. You’re onto something here. If we build up, without growing the population, we will open up more public space – think towers surrounded by sports fields, parks, even forests. We could create something quite spectacular – concentrated vertical population AND natural amenity.

      But if our vertical development is just more people, we aren’t benefitting.

  6. I am beginning to think this issue has similarities to the campaign against ‘Corn Laws’ in 1840’s Britain. Corn meant ground grains so basically bread. In those days food was the major cost of living for the working class. The new British manufacturers were keen to get lower priced ‘corn’ from overseas in particular the new colonies of North America so that workers cost of living would fall. This benefit being shared by the new manufacturers because it allowed them to lower wages, increase sales (to workers) and increase employment. The British aristocracy i.e. the land owner class opposed this. What was being demanded by the Corn Law campaigners was a transfer of wealth and income to the newly productive manufacturing capitalists and workers from old unproductive land owners. While the old ‘establishment’ attempted to gain the rump of new economic development for themselves.

    So this issue was more than Riccardo free trade. It was a battle between newly productive labour and capital and an older unproductive rentier class. New won and it started a tidal wave of democratic and economic reforms for the ordinary man.

    For NZ originally we were more interested in providing lower priced ‘corn’ to Britain and then others. Now we are beginning to think about the other side of the equation. How to support new capital and labour. The modern day equivalents of 1840s British manufacturers.

  7. To me it seems obvious that New Zealand needs to attract and retain as many young skilled professionals as possible, especially in the fields of IT, engineering and technology. These people will get paid well wherever they go; the best way to attract them is to provide a city that is vibrant, exciting, has good public transport, etc.
    Personally I know many skilled New Zealanders that went overseas and will never come back because New Zealand is too boring. Some of them will come back when they have families; by this time a lot of their best years are behind them. Innovation, creativity and risk taking are a lot more natural when you are young.
    Auckland can be a city that attracts both the young and older professionals; it just needs better public transport and more housing options close to the city. As a country these are fairly cheap to provide considering the economic benefits that could be realised.

    1. Fully agree: NZ has great natural amenity but poor urban amenity. We’re never going to have a large, incredibly diverse labour market to attract skilled people in, so we have to be bloody good in other areas. Fortunately, people make cities, so people can make them better!

  8. So if I make the crazy extrapolation that we should get rid of the RMA and any planning/zoning restrictions, and allow people to do what they want with their property, and allow business to locate where they want, then the magic free market will turn Auckland into an economic powerhouse where everyone wants to live? At least until the Greens come and tax everyone to death and put the RMA back lol.

    The problem I have with this sort of “research” is that it is interpretation of the data that can be subjective.

    What we know is that US cities that are cheaper to live in, pay lower wages. This is hardly suprising. Employers need to pay more to attract employees. That is indisputable. But Krugman appears to have the opinion that expensive housing is pushing people out. That is a fair assumption, but I don’t see any evidence presented to support that opinion. But you have provided links which I am too lazy to follow. Krugman and others also have the opinion that all these people being pushed out by housing costs result in lower GDP. This assumes that everyone is automatically more productive in high productivity cities. Maybe that is a valid assumption, I don’t know. But maybe HP cities are like that because they attract HP people. Reducing house prices so you can attract more cleaners, waiters and retail assistants is not exactly going to increase average productivity.

    I think it is probably a balance between the two.

    1. “At least until the Greens come and tax everyone to death and put the RMA back lol.”

      Read up a bit on places where the Greens are / have been in government for longer periods, such as Germany. You’ll either find some of your prejudices evaporating – or your brain will need some extra fuel to keep making up “Yes, but…” explain-away arguments.

      1. Max, the Greens haven’t run Germany. Ever. Maybe been in government, but they only ever made up a small part of German politics. No more than here. IIRC germany has a tax rate of ~40% for roughly any income above the average wage. So they do support higher taxes and Germany can afford to do lots of expensive socialist interventions. Is it because of Green policies or not? I don’t know, maybe.

        The Greens in NZ have communist roots and basically want to tax the rich more than currently to help the poor. Nothing wrong with helping the poor but generally they want to hike up taxes with the assumption that the rich wont just restructure their income to avoid those taxes. Or just leave NZ and go to Australia and make NZ all the more poorer. The Greens will find that their planned increases will not net the income they estimate. Their own auditors said as much. This has happened all over the world. ramping up taxes doesnt give linear returns. Note that they want a 40% tax rate for anyone with a trust even if they arent very rich, plus a capital gains tax which I don’t know if they havent even specified. So yes, the Greens are a party that wants much higher taxes than what we have now. The only mention of lower taxes is the corporate rate and a tax free band of 2k. But on the whole balance of things, the Greens want higher taxes over all.

        I totally agree that transport spending needs to be refocused towards PT, but that doesnt mean I agree with the rest of Green policy or their ability to manage the indirect impacts of their policies.

        1. The Greens won’t be governing alone, nor will they be the dominant coalition partner should that happen with Labour.
          So I don’t think we need worry too much about the red menace.
          Let’s enjoy their presence in parliament as a moderating force that has some very well thought out policies on transport.

        2. Yeah I mean with high taxes we might end up being as economically successful as Northern Europe instead of low tax countries like Romania, Czech Republic and Poland.

          Man, that would be awful.

        3. See my comment below. I’m not sure how proposing a sane, market-based carbon policy that taxes something bad (pollution) and uses the revenues to lower personal and business taxes is either (a) evidence of “communist roots” or (b) evidence that they will be imprudent with tax policy in government.

        4. Yes, the Greens would hopefully have limited influence, but it depends how good they are at negotiating.

          Sure, the nordic countries have high taxes and are benefiting from freemarket reforms from the 1900s which they killed in the 1970s and are now trying to put right again. Look at Norway with it’s high taxes and generous welfare system has 5% of the workforce on sick leave at any one time and 10% of the eligible workforce are on sickness benefits. Not good for the long term when oil revenues run out. And you are trying to compare these countries with countries that spent 50 years in a communist system. Crazy.

        5. Yes they are ex-Communist countries. And they are using low taxes to try and desperately attract capital. It is a race to the bottom for taxes and wages – so why is a country like NZ which is a mature developed economy adopting the same strategy? It seems to me to be just aping the US without any discussion on if that is where we want to go as a society.

          These are tax rates in Europe:

          Almost all the low tax countries are ex-Communist (except Lichtenstein) and mostly struggling. Why are we not aiming to be in with the successful, high tax economies?

          Notice too that Slovenia, arguably the most successful ex-Communist country, has very high tax rates. Hasn’t hurt its economy.

          Maybe high tax isn’t the way to go – so let’s discuss why not. But there seems to be an almost religious belief in NZ that tax cuts will miraculously deliver economic performance. Where is the evidence for this? Why is raising tax seen as “crazy” when some very successful countries with similar demographics are famous for just that? It is just ideology, not real arguments or evidence.

          I agree Norway is not a great comparison – its oil revenue makes it almost unique. So why not look at Finland or Denmark? Countries with high performing economies, great health systems and world renowned education.

        6. The whole debate over tax levels seems pretty inane to me. What’s lost in the discussion is the question of what the taxes will be used for.

          For example, if NZ was raising taxes to provide generous (and economically wasteful) subsidies to farmers, as the US does, I would oppose it on the grounds that it would reduce welfare.

          Conversely, if NZ was raising taxes to improve its education system, raise health outcomes for children, or build useful long-term infrastructure, I’d probably support it on the grounds that we’d be better off as a result.

          It does seem to me – and this is an empirical observation rather than a philosophical position – that as countries get wealthier they tend to value public good provision (and environmental protection) more highly. For example, in a complex economy the returns from education are quite high, so there’s a real economic value to universal education. And providing those public goods requires higher taxes.

        7. Peter – I agree 100%. If we use tax revenue to pay for R&D (where NZ investment is pathetic) or education, that is not wasted money.

          As I say, maybe high tax is not the right approach for NZ. But I see no intelligent debate around it.

          It is just accepted that low tax is desirable while high taxes destroy economies – where is the evidence of that? It is a faith based argument.

        8. I agree about taxes, it’s not just about the level of tax, or who pays the tax, but about how well the taxes are being spent, ie like on PT, not on motorways.

          Again, it is hard to compare apples with oranges. Nordic countries are in a different situation to Eastern Europe and again to NZ. What worked there may not work here or vice versa.

          I think there is enough evidence that relates higher taxes to lower economic performance, but it comes back to how well that money is being spent and who exactly is paying the taxes. Can the government spent my money more effectively than I can?

          Personally I am happy to pay more tax if I see benefits from it. I also agree, if we spent less tax on roads and superannuation and spent more tax on R&D and education we would probably much better off in the long term. Our future is high value exports (other than our university graduates) but we need to do the research and training first.

        9. “I think there is enough evidence that relates higher taxes to lower economic performance” – Ari you may well be right – can you point me to that evidence?

          When I was younger I voted ACT and was convinced by low tax policies. Over time I have questioned that as I lived in low and high tax countries and saw which gave the best standard of living (hint: not low tax countries).

          I recently read “23 Things They Don’t Tell You About Capitalism” ( and have become convinced that the whole neoliberal, low tax approach is founded on myths. There keeps being this catch cry that it delivers better economic performance – where is the proof? NZ doesn’t seem to have leaped ahead economically as we lowered taxes. I don’t see the average NZer as better off – so what is our yardstick of success?

          I looked everywhere for some refutation of Ha Joon Chang’s (professor of economics at Cambridge) points and compelling evidence. I am still looking. I encourage you to read the book.

          I look forward to being convinced – not least so I won’t constantly feel that my country is heading in the wrong direction. BTW, I do pay the top tax rate in NZ – so I would suffer from higher taxes.

  9. Another way to look at this is, high population density allows areas in the city to serve more people or select more workers.

    That means a single work place can hire a larger pool of skillful, specialized workers. This enables an economic of scale to make the company more scalable, efficient and niche.

    Also shops/cafes/entertainment can serve a higher customer base, which means they can start selling/providing niche items/services and also allow them to scale. Which increase diversity and profit. Customer can select a more diversity of goods/service and more shops are competitive with each other as well.

    1. That map doesn’t show density, it only shows resident population. Since electorates all have nearly the same number of people on the electoral roll then those with higher resident populations are going to be those which a) have a large number of people under the age of 18 or b) a large new immigrant population.

  10. I really don’t understand comments such as “. .Greens largesse. .”, and “. .Greens come and tax everyone to death. .”. Where are these fallacious sentiments coming from?

    Green policy is to LOWER taxes across the board by allowing every earner to earn a tax-free sum. Only those on exceptionally high incomes will receive a tax increase and a pretty small one at that. And lest we forget, despite all its posturing over tax cuts, it was National that raised GST by a bigger percentage than any tax cuts they have granted or are promising.

    And as for largesse, the top-spending, highest-borrowing wastrels have to be the Nats with their Roads of National Extravagance programme. Not only are these projects misguided investments with massive lost-opportunity costs, they also commit future generations to decades of on-going liability and are being part-funded through a FUEL TAX INCREASE, Why the media have not latched onto this and rightly branded National the party of “Tax, Borrow and Spend”‘, I do not know. All the Greens are proposing to do is re-direct some of this largesse, not increase it.

    1. Yup, that’s a weird idea isn’t it, as the Greens are a bunch of fiscal conservatives [a word with the same root as conservation], especially compared with the crazy tax-and-spend wasters the current government has been in the transport sector…. people seem to rely on their opponents attacks to define them rather than actually looking at the policies.

      1. Perhaps their opponents are better image builders than they are. I had an old uncle telling me about all the great tax cuts National have done (GST? Petrol?) before telling me the only reason anyone votes for the Greens is their policy to sell cannabis in dairies. Totally devoid from reality.

        1. I think National ARE better image builders. Ask average people (such as my dad), (a) who runs up debt, (b) who pays down debt, they will tell you (a) Labour (b) National, when the actual facts from Treasury point otherwise, they still want to vote Nats because they are more “financially responsible”.

    2. Dave B lighten up.

      I’m simply taking the devils advocate position on the Greens stumping for Wellington Public Transport.
      And imagining, what if the Greens really did get in to Government, despite some perceived drawbacks, well it wouldn’t be so bad after all, like I said at the end:

      “But if that is all that it takes to get a sensible Minister of Transport in this country, who won’t simply say “The answer is: more roads, now whats the question?” to any problem, then its going be a real bargain.
      So I’ll vote for that.”

      Compared to the current lot, The Greens look positively conservative and sensible in their fiscal outlook and transport spending, its a real shame when the “left of left of centre” party outdoes the “Right of Centre” the self-titled “Fiscal Conservative” party for Fiscal Responsibility isn’t it?

      My what Topsy-Turvy election times we find ourselves in.

      1. As an economist, I think that the Greens’ carbon tax policy is an excellent bit of environmental and economic policy. It’s classic Pigouvian taxation – tax the bads (pollution) and use the revenues to lower taxes on the goods (businesses, personal incomes). It gets the incentives right and then gets out of the way while people figure out how best to achieve reductions.

        I’m not sure why more people haven’t noticed that the Greens are going into the election with a major policy that works with the market and actually solves a real problem. It’s the same policy that a Conservative British Columbia government implemented to cut their carbon emissions while growing their economy.

        None of the other parties have proposed anything even half as sane.

  11. Well, there’s a couple of shortcomings with this analysis
    1. Wealth is not purely monetary, and
    2. It’s not merely the total amount of utility generated, it’s also the distribution that matters (thus progressive taxation etc.)

    An “Auckland-centric” NZ might generate more money (and perhaps even more utility) for a given population, thus leading to a seemingly high GDP per capita, but it’s akin to a room with 9 unemployed people and 1 millionaire… average income is 100k/p.a

    1. While I agree with (1) and (2), I’m not sure whether your last sentence follows. For one, Auckland is home to a third of the country’s population, so making the city better and wealthier will benefit a large number of New Zealanders. For another, I’m not aware of any economic model that predicts that improving Auckland will make other regions poorer. Given the fact that there are positive spillovers from growth in Auckland (e.g. bigger domestic markets for regional firms, better supply-chain linkages for services and logistics, etc), I’d actually expect the opposite to happen.

  12. How does the economics of that argument work out exactly?

    Aren’t some people who move to the sunbelt actually better off even with the lower wages?
    I mean if they had equity in their California / NE USA house and prices are 60% above where they are moving to couldn’t they then either own outright or refinance with a much lower mortgage in say Houston?

    So aren’t you then paying a lot less in debt and so in a net sense potentially better off?

    i.e. is it better to have say a 300k mortgage and earn 88k in Houston or
    have a 480k mortgage where house prices are 60% higher and earn 100k in New York?

    I feel like I misread this post… like the people moving to the sunbelt have affected the country’s GDP negatively but personally they could well be in a better financial position??

      1. This national productivity loss is just Krugman’s opinion. He does not prove it. I gave another sensible argument to explain the differences in cities comparable wages that was unrelated to productivity above.

        1. Brendon: It’s relatively hard to find an economic analysis of wages that doesn’t relate them to underlying productivity levels. To put it simply, if a firm is paying its workers more than they’re producing in revenue, it’s going to go out of business. The same thing holds true for cities as a whole. If wages in Auckland are relatively high, it must mean that productivity levels are also higher – if not, businesses would exit Auckland and set up in more profitable locations.

          In short, we can’t explain Auckland’s high productivity as a function of its high housing costs, as factors of production are mobile.

        2. Peter as an economist you know it is absolute figures that matter. Real incomes are a measure of what you can buy. Lots of economic data is given in purchasing power parity terms.

          A productive worker will go (all other things being equal) where he/she can purchase the most with their income. If the biggest purchase they make -housing is significantly cheaper in some cities compared to others then that will affect the decision on where productive workers and businesses choose to locate themselves.

          170 years ago the new high productivity businesses and workers, the manufacturers and trade unions understood this. They campaigned against the Corn Laws so that the major cost of that day -food was contained. So that incomes would be retained by those that generated the productivity. We are in a similar situation now, but it is housing not food that is the issue.

        3. Sorry I meant it is relative figures that matter. Absolute figures by themselves are not significant. Income is only important if you know what you can buy with it. Once you get a correct figures for income then you can work out relative productivity and so on.

        4. Brendon: Your policy analysis seems to agree with Krugman’s article and the Hsieh and Moretti paper that I also linked to, which was the source of the 10-14% figure.

          However, I don’t think your analysis of productivity and wages is equally robust. While households’ real income levels depend upon local city price levels, including prices for housing, businesses’ real revenues are a function of _national_ price levels as they often have to sell into national/global markets or compete with firms from outside the city.

          Once again, businesses have no incentive to pay wages that are higher than underlying productivity. Rather than putting up wages to uneconomic levels to compensate workers for higher housing costs, they will move. This is likely to contribute to the redistribution of population that Krugman (etc) observe.

        5. I see now. It is not the loss to the whole economy caused by people moving to cheaper housing cities. It is the loss caused by people who do not move to the highest paying/productivity cities due to the high cost of housing eating up all the productivity/income gains. So my above analysis was kind of right. Thanks Peter for helping me work it through.

        6. No problem Brendon… thanks for sticking around to discuss. And yes, I have been thinking about Alain Bertaud – watch this space!

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