Median housing cost v service class wage after housing in US cities (chart by Richard Florida)

Richard Florida is best known for his 2002 book The rise of the creative class. He argues that cities with talented and diverse populations are more successful economically than other cities.

By developing and fostering the sorts of urban amenities, culture and moral climate that appeal to the creative class, cities can generate a competitive advantage.

It’s now well established that the creative class in the US increasingly live in a limited number of (mainly) dense, high-amenity places, like Manhattan, Washington DC and San Francisco. In Australian cities, the equivalent is the inner suburbs of our capital cities.

These places exemplify the power of agglomeration. Drawing on the work of Enrico Moretti, David Brooks writes in the New York Times that these “magnet places have positive ecologies that multiply innovation, creativity and wealth”.

Writers frequently cite the attraction of density and urban amenities. Of course these matter, but the main game is networks – being near other talented, well-connected and influential people.

Silicon Valley isn’t dense or even particularly amenity-rich, but it has lots of similar people living within easy (car-based) access to each other.

The wonderful thing about these talent-intensive cities is they create “trickle-down” benefits for all residents. Wages are high not only for talented residents, but also for the less skilled.

Or so it’s often assumed. This is where the story gets really interesting – Richard Florida himself is now arguing that all might not be as rosy as it seems in creative cities.

In an article published on Atlantic Cities last month summarising a new research project, Professor Florida says there are more losers than winners in America’s new economic geography.

He and colleague Charlotta Mellander examined wages and housing costs in a large sample of US cities for three classes of workers: knowledge, professional and creative workers; service workers; and blue-collar workers.

They found workers of all three classes who live in bigger, high-skill cities earn significantly more than their peers in other cities.

Bigger metros bring powerful clustering and agglomeration effects; they have faster metabolisms and greater rates of innovation.

But once housing costs are taken into account the advantage evaporates for all but the knowledge workers. It seems talent-clustering provides little in the way of trickle-down benefits.

Its benefits flow disproportionately to more highly-skilled knowledge, professional and creative workers whose higher wages and salaries are more than sufficient to cover more expensive housing in these locations. While less-skilled service and blue-collar workers also earn more money in knowledge-based metros, those gains disappear once their higher housing costs are taken into account.

There’s a “rising tide of sorts” but it only benefits the most skilled third of the workforce. It leaves “the other 66 percent much further behind.”

It’s important to bear in mind that these correlations relate to the US and the customary caution is required in applying them to Australia. Also, Professor Florida doesn’t provide a lot of detail in his summary article – it’s not possible, for example, to unpick the effect of city size from the effect of skill.

But if the authors’ theory is right, it highlights the importance of high housing prices.

That’s been explained in the US context by observers like Ryan Avent and Matt Yglesias. High-talent cities are especially good at restricting the supply of development sites for new dwellings, leading to significant increases in the price of housing.

In broad terms, the themes are similar for Australian cities. Residents in established areas, particularly in the inner and up-market middle suburbs, seek ways to enhance and protect their residential amenity.

They have no formal “right” to that amenity, but it’s very valuable and was capitalised into the price they paid for their properties.

Limits on the supply of additional dwellings increase prices in inner city and inner suburban areas (e.g. see hereherehere and here). But they also raise prices across the metropolitan area generally. Arguably, elites have used their influence to limit supply in fringe areas too.

In order to increase the chances that those on lower incomes will benefit from the wealth being generated in the higher amenity parts of our cities, ways need to be found to lower the price of housing (it’s not only supply – there are other issues like how residential infrastructure is financed).

I’ve discussed some possible options for increasing supply before (e.g. here, here, here, here and here).

There’s also a bigger story here about the nature of inequality in the US and its geographic dimension – it’s been explored by a number of writers e.g. Charles MurrayChristopher Hayes,David Brooks. And there’s a debate about whose purposes “urbanism” serves e.g. Aaron Renn.

I’ve touched on some of these themes before (e.g. herehere and here) and will again.