Monday, November 23rd, 2009

Migration: Geographies in Conflict

My latest post is up over at New Geography. It is called “Geographies in Conflict“. I examine the curious case of why there is so much net domestic out-migration from supposedly booming “world cities”. Some attribute this to high taxes driving people out. I have a different take. Yes, taxes are higher there, but generally higher costs and the public policy choices they make result from macroeconomic changes. Notably, bifurcation of the city into two economic geographies and labor markets and the resulting two-tier wage structures. Cost structures and public policy clearly follow the more economically high value group, resulting in an outflow of those losing out in this new world. There’s a lot more to it than this simplified summary, so please check it out.

I am increasingly taking a much more negative view of the rising income gap in America. I think the focus on the “top 1%” is a red herring. We’ve long had a handful of plutocrats in almost any city. What we see now is what we might think of as the development of an “overclass”. I’m not sure how big it is. Maybe 5-10% of the people, perhaps more in elite core cities. There are so many of these people that their mere purchasing power drives up real estate and other costs significantly, displacing others – not just new immigrants, but also the traditional middle class – from large areas of cities.

Thinking about this in terms of the Midwest, clearly we see that Chicago is experiencing this effect and other places aren’t. When I started work at my first job out of university at Andersen Consulting in Chicago in 1992, I made less than the median income. Today, brand new employees at Accenture (the Firm’s current name), make more than the median income. I noted before the widening gap between new law firm associate salaries in Chicago and Indianapolis. Once the gap was 30%. Now a partner at a top tier Indianapolis firm tells me it is 100%. When I previously gave that stat, someone else said it was really closer to 60%, but that is still a doubling of the gap in recent years. That shows the salary inflation that has taken place in Chicago.

Think about this in terms of housing costs. A $100,000 annual salary is not uncommon for Chicago professionals. Couple with another $100K professional and you’ve got a $200,000 annual household income. Using a rule of being able to buy a house 3x your gross annual income, that means this couple can buy a $600,000 home without any gimmicks at all. And there are thousands and thousands of people with approximately that purchasing power. Unlike in places like California, the run-up in home prices in Chicago, at least in upscale urban neighborhoods, is fully supportable by incomes. This is why housing is unaffordable there for so many and will remain so.

They dynamic unleashed by this large upper-middle overclass creates a two-tier economy and unbalances public policy in its favor, leading to the exodus of the traditional middle class from the city and region. That doesn’t mean top talent can’t still be coming in. There’s just fewer of them. This dynamic features a positive feedback loop whereby more top talent raises overclass wages even higher, more squeeze on the middle class, more migration, etc.

Still, Chicago remains among the cheapest if not as the cheapest Tier One type city in America. I attribute this to the fact that, while a powerful business services center and secondary financial hub, it is not the epicenter of any major 21st century macro-industry the way Silicon Valley is for technology, LA for entertainment, NYC for finance and media, DC for government, Miami as a Latin American gateway, or even Boston with its educational complex. And I’d argue that partially a result, Chicago is notably more pro-growth and pro-business than many other Tier One cities. I will have more to say on this topic at a future date. For now, let us just note that while the problem of a two-tier economy are present in Chicago, a lot of the symptoms of unaffordability are moderated in comparison with say NYC or California. Can Chicago figure out have the best of both worlds?

As for other Midwest cities, rather than moaning about not being Chicago, they should look on the plus side and take comfort that they don’t share this problem of a two-tier economy and major wage gap between an overclass and everyone else. Of course, the downside is that most of them also don’t have as much economic dynamism as they want. The challenge is to ramp up the economic engine without leaving a good chunk of the region behind. Since their economies are much more dependent on industries and competitive positions that aren’t subject to clustering economics, these places do need to keep an eye on the bottom line as they look to upgrade themselves.

That’s the challenge for them. How can they become more attractive to talent needed to power 21st century cities while not undermining their broad based economic attractiveness to the middle class? It’s not an easy path to walk. Again, more on that in a future post.

18 Comments
Topics: Demographic Analysis, Globalization, Public Policy
Cities: Chicago

18 Responses to “Migration: Geographies in Conflict”

  1. pete-rock says:

    Aaron, another excellent piece on the state of our cities.

    I clearly see in the Chicago region how the upper-middle overclass is putting the squeeze on traditional middle class residents. This Talented Tenth (to use W.E.B. DuBois’ term) has been pushing up the costs of living in global cities like Chicago for nearly two decades.

    Honestly I don’t think much of the traditional middle class is consciously aware of the push they’re getting from the Talented Tenth group. The middle class has been moving out of cities and into middle class suburban utopias for more than 50 years now, and I think the two or three generations of suburban dwellers are accustomed to moving where they must to find those utopias. While at first the middle class was prodded by affordable homes and a desire to distance themselves from urban problems, now they are confronted with the high-cost lifestyle of global cities.

    Two points I wanted to make. I think Chicago has tried to address this bifurcation with the remaking of its school system. It’s become clear to many that Chicago has developed a three-tiered school system — a Tier One magnet school system that attracts the children of the Talented Tenth; a Tier Two charter school system that provides educational alternatives to middle class and working class families; and a Tier Three community school system that tries to provide the basics to its largely impoverished students.

    Also, I wonder if there has ever been an era in America where the gap between who we think we are and who we really are has been greater. The Talented Tenth has succeeded in persuading itself that it is indeed the “middle” of America, economically and socially. The software engineers and financial analysts of America are NOT the “middle”.

  2. George says:

    I think that one of the reasons that Chicago is the “cheapest Tier 1 city” so to speak is geography. Look at every city mentioned in the narrative above. They are all constrained by geography, except for Chicago. The availability of land makes a huge difference in the cost of living in an area. In a place like New York, as demand goes up, so does cost. In Chicago, they can increase supply, at least in the overall metro region, which tends to moderate price increases.

    Growing up in Connecticut, there were several smaller, non-Tier 1 cities that were more expensive than almost any Midwest city precisely because they were squeezed in between New York and Boston. These cities had some of the most impoverished urban centers in America, but were still quite expensive because there was no room to grow.

    Compare that to many Midwestern cities, where there is ample land to grow. Also compare this to cities like Houston, Dallas and Atlanta, cities that are on the Tier 1 cusp, if not there already, and which have much cheaper real estate.

    I think the concept of a dominant industry driving up costs is very valid, but it’s not the only reason for land prices in a metro area.

  3. pete – love the “talented tenth” analogy.

    George, Chicago is an “unbalanced” metro because it is on a lake. Boston doesn’t really have constraints, nor doe LA or even the Bay Area as regions. There are certainly elements of a more constrained core, but regionally there is plenty of room for growth. California has some of the strictest development rules in America, making it very difficult to build there.

    There’s probably a geographical element, but from what I’ve seen Chicago is very pro-development and very pro-growth. This is especially true on the fringes. There is effectively no real constituency against sprawl, which is why Kendall County is the fastest growing the United States.

  4. Pete, I’d like to follow on to another point you made about software engineers and such not being middle America. True enough, but it is easy to understand why they feel that way.

    1. In their neighborhoods, they are. In Chicago, even a $300,000/year household is not near the top of the block. There are an insane number of people with lots and lots of money.

    2. A lot of people in these Tier One cities came from modest or even poor backgrounds. A lot of the professionals in Chicago grew up literally on farms and in small towns all over the Midwest. Their heritage is Middle America and they still think of themselves this way.

  5. Alon Levy says:

    Aaron, I think this article focuses on New York, Los Angeles, and Chicago too much. For example, Tokyo is the fastest-growing metro area in Japan – and the city proper is growing faster than the suburbs. Paris has the fastest-growing urban area in France; its metro area performs worse, but still breaks even with the other large metro areas. The EU-defined metro areas of Frankfurt and Munich are the fastest growing in Germany, while less global cities like Berlin and the Ruhr area are stagnating or growing slowly.

    In addition, what you say about the Talented Tenth raising prices for everyone is not true in all cities with high inequality. Texas may brand itself as a middle-class mecca, but the South Central region has the highest economic inequality of all US regions, narrowly beating the Mid-Atlantic. The difference between Houston and Chicago or New York is that in Houston the cheap exurbs are close to the city, whereas in Chicago and New York they’re tens of miles away. Similarly, Hong Kong and Singapore both have high and rising inequality rates, but because of their subsidized housing programs, which cover 50% of the population in Hong Kong and 85% in Singapore, they can retain their middle classes.

  6. Raymond Garrigan says:

    Aaron, interesting post but it misses another dynamic. I moved from some of the most expensive tier 1 cities (NY and DC) to a tier 2 or 3 city … Fort Lauderdale. Third year salaries for lawyers here in FTL ($60,000 midsize firm) are LESS than secretaries make in NY firms. So yes, the top 10% pushed up costs and the cost of housing in the best city neighborhoods but I have seen even just high school grads in NY benefit from the top dollar economy and crazy real estate appreciation and then use that to start businesses elsewhere, or stay in NY and enjoy its lifetstyle. Even back office and menial jobs benefit from much higher wages than they can make elsewhere.
    Another point, I know of a number of real estate sales agents who have left South Florida after the real estate crash, even though the cost of living is lower here and head back to DC and NY for work because salaries are higher for almost every position, (and even though the cost of housing and living has been driven up, as you suggest, by the top 10%).
    I also note that Long Island has dealt with this situation since the 1970’s and yet, police, firefighters, teachers, etc continue to live in and buy house in Nassau County with some of the highest median house values in the country. The reason is that their salaries are higher than their compatriots elsewhere in the country, and there is the belief that once they can buy a piece of real estate, its price appreciation over time will fund their retirement later in life (by moving to a lower cost area in the South for example). This belief has kept the demand for housing high, even given the problems of cost of living escalation that you describe. There is a general sense that these high costs can lead to a youth drain as people look for opportunities in lower cost areas, and yet people continue to come.

  7. Alon Levy says:

    Raymond, the reason suburbs in Long Island pay very high salaries to cops and teachers is that those suburbs have a large tax base, and little poverty to spend money on. The areas of Greater New York that do have entrenched poverty, like New York itself, have to pay lower salaries. One of the ways Long Island gets firefighters and cops is by offering attractive packages to sworn officers at FDNY and NYPD; even Upstate cities have gotten cops this way, since the salaries are the same as in New York but the living costs are lower.

  8. Jim Russell says:

    On the whole, domestic (and international) migrants don’t engage in geographic arbitrage. The poorest bracket is typically stuck. The wealthiest (and most mobile) often ignore location costs. The middle class does seem to be more price sensitive, but school district reputation as relocation indicator suggests to the contrary.

    The idea that everyone is leaving Chicago for a Sun Belt destination such as Dallas isn’t true. Most people, including the middle class, don’t move all that far from the previous residence. Besides, what’s the difference between out-migration rates? Are less people really leaving Dallas than Chicago? Is there any positive correlation between out-migration rates and cost of living?

    As you know, I’m very wary of using net migration data to evaluate push factors.

  9. Alon Levy says:

    Jim, when you ask about the correlation, do you mean “Is there any positive correlation in the US?” or “is there any positive correlation?”? Globally, there’s almost certainly no positive correlation – not in a world where Tokyo outgrows all other Japanese cities. In the US, there may be a correlation, dominated by outliers like New York and Dallas; on the other hand, there are Detroit and Cleveland, with negative population growth and rock bottom housing prices.

    In some cities, you do see some emigration if prices rise too much, but population rebounds as prices fall. It happened in Tokyo in the 1980s and 90s, and it’s happened in Los Angeles this decade. But this effect is small compared to the difference between the growth rate of e.g. Tokyo and Osaka, or Los Angeles and Atlanta.

  10. Jim Russell says:

    Alon,

    I was referring to US domestic migration. I’d bet most people would be surprised by the out-migration rates (not to be confused with net out-migration rates) of most US cities. Rust Belt cities tend to have relatively low out-migration rates.

    For the middle class, the push factor tends to be fear (e.g. crime). The pull factor tends to be school district reputation and jobs.

  11. AmericanDirt says:

    Pete-Rock raises some interesting additional concerns with Chicago; I too like the reference to the Talented Tenth. however, is the three-tiered school system in Chicago particularly different from what other major cities have achieved (either deliberately or unconsciously)? A few weeks ago, a forum topic on Skyscraper City-Midwest featured a question “Why is Chicago so affordable?” with some very thoughtful responses, no doubt focusing much of their effort on the “Tolerable Twenty” who fall one stratum lower.

    Not sure how Boston doesn’t have geographic constraints–would be interesting to hear how you’ve come to this conclusion. The original city rests on a peninsula. This phenomenon you describe applies more intensely in in Boston as well. I was amazed when I learned recently that, for such a wealthy city, the median household income in Cambridge MA is only exactly on par with that of the country, if not a bit lower. All the students could account for this, as well as the significant amounts of subsidized housing, but even those fail to account for how profoundly wealthy the Talented Tenth is there. Median home prices in Cambridge do a much better job, something like $700,000 from the last I heard. The wage/home cost gap is so great that, from what I’ve heard, starting Harvard professors qualify for workforce housing; otherwise they cannot afford to live there.

  12. Wad says:

    Boston doesn’t really have constraints, nor doe LA or even the Bay Area as regions.

    No constraints?

    Both Southern California and the Bay Area have the constraint of an ocean on the west, plus both areas are marked by hills.

    (Yes, even the hills are densely developed with housing for hills, but along with the high prices, homeowners have to worry about the burden of slides and — especially in Southern California — brush fires.)

    There are certainly elements of a more constrained core, but regionally there is plenty of room for growth. California has some of the strictest development rules in America, making it very difficult to build there.

    Except that California encourages promiscuous creation of municipalities and specialized districts. That’s one of the proudest traditions of the Midwesterners who moved west.

    The development rules are frustrating, but savvy developers never have an empty dance card. The consequence of having so many small entities is that developers can get denied in one area then find a pliant municipality to “break the back” of the denying entity.

    Southern California was able to suburbanize the Inland Empire (western San Bernardino and Riverside counties outside of the desert) and exurbanize the Antelope Valley with the help of tract home builders.

    Developers in Northern California developed the Delta region and the northern San Joaquin Valley, effectively connecting the Bay Area mega-region with Sacramento as a single commute and labor shed area.

    It’s the homeowners in the really wealthy areas such as Marin County and the southern Peninsula that have exaggerated the de facto ban on development. It’s a positive feedback loop. The desire of suburban cities to stop sprawl has created an artificial land shortage that further inflates real estate prices. This in turn has made homeowners extremely wealthy, and they seek to constrain development further.

    There’s no countervailing force apart from bypassing the jurisdiction entirely into either a growth-hungry exurb or a poor city looking for any economic boost it can get.

    Effectively, land use policies have turned homeowners into a landed gentry. Also, there is no countervailing force that can be used to break this anti-development vise grip. There is no plenary hierarchy for development and laws generally favor restrictive growth. Laws are intended to stop sprawl, yet end up enabling it.

  13. Alon Levy says:

    AmericanDirt: Cambridge, MA has a slightly lower household size than the rest of the country, at 2.03 compared with 2.59 nationwide. That would partly explain why it’s perceived as wealthy despite having a relatively low median household income.

  14. Here in Silicon Valley everyone knows that San Francisco is a shell that has been loosing people and jobs for decades. It is just a tourist destination now with some banks and law offices left. Chevron, Bechtel, Bank of America – and anybody else who gets tired of the anti-business climate leaves – and leaves California also for the same reason many times. The financial engine for the region surpassed San Francisco proper decades ago.

    The same applies to Los Angeles in many ways. There are more than 200 cities that call “Los Angeles” home.

    The “wealth gap” you talk about is a very real problem for a nation like the US where the myth that “anybody can become president” persists. Without wealth generating industries that can compete on a global stage and have a place for low education entry level workers who can work up through them to middle class and up I fear that your examples will get worse and worse.

  15. Alex Brown says:

    While all of the issues of development constrains, schools, pricing, etc. are valid I believe they are all on the margins of this discussion, which is (IMHO) a discussion about the effects of globalization. Increasingly labor markets are driven by global dynamics. Workers in Des Moines are competing with workers in India/China/etc. Wages are continually moving to a global equilibrium as trade, transport, and information barriers. For the Top Tier this likely means rising wages as they gain access to and leverage across a global market. Likewise, for a typical US worker they now compete globally, which exerts downward pressure on US wages. I think those dynamics are fairly well established.

    Now for my potentially controversial hypothesis. The Top Tier will continue to flock to Global cities in order to gain access to the global market and therefore keep their wages moving up. This will continue to drive prices up in global tier cities (and therefore continue to grow the equality gap with those who aren’t able to access the top tier global wage scale). I would take this one step farther – the top tier will continue to move to global cities (and avoid second tier) in order access the escalating wages available in a global city. The wage gap between global and non-global cities will continue to widen as a result.

  16. Alex is correct in the short term.

    However, the value that the top tier bring to the global table is their ability to influence access to the wealth generating industries “under” them in the general economy. If that wealth generating engine erodes and is relocated to other nations their value evaporates.

    The other countervailing trend is globalization itself. Other nations who want access to the US national wealth do not have to go through top tier middlemen in Global Cities – they connect directly to the wealth at the wellhead as it were and the brokers loose influence and the ability to tax the transactions.

    The hopeful answer to globalization is, in many ways, right here in these columns and others like them. The resurgence of economic vitality in the “rest of the country” along with the new interest in local farming, manufacturing, thrift, etc.

  17. Alon Levy says:

    Likewise, for a typical US worker they now compete globally, which exerts downward pressure on US wages. I think those dynamics are fairly well established.

    No, those dynamics aren’t established at all. In fact, American incomes were rising at their normal rate until 2000, and American labor productivity has actually grown faster in the last 15 years than in the previous 20 years.

    What is established is that trade causes a small but measurable rise in inequality – about 10-15% of the total rise in US inequality over the last 40 years can be attributed to trade. But there’s a long way from there to “downward pressure on US wages.”

  18. Jon says:

    Aaron, as always I appreciate your insights. At the moment, I’m particularly interested in this idea that Chicago is the most affordable of America’s Tier One’ cities because it is not the epicenter of any major industry or sector. I think there is an element of truth to this – with such a highly diversified economy, we are above-average in seemingly every industry, but not the unquestioned leader in anything. I don’t think people from around the world view Chicago as the place they MUST be, in the same way you argued for Paris, Silicon Valley, Cambridge, and New York. In turn, competition for both talent and real estate are probably lower.

    In the long run, I actually see this as a negative. Despite all their other problems and inconveniences, people flock to the aforementioned cities because they each embody a certain mythology. Silicon Valley is the place to do a startup and disrupt the world through high-tech. Paris is the place to push the boundaries of style in food, fashion, and art. It’s almost as if these self-perpetuating mythologies alone can continue to draw people year after year, ensuring their continued relevance. I have to wonder if any global city can really attain a sustainable niche for decades and even centuries without such a powerful core idea. (Something more powerful than just ‘branding’ which almost has the connotation of a simple marketing campaign…)

    This is why I question whether Chicago’s image as a great place for global business, and a great place to enjoy life is really enough of a draw to keep attracting people over the next several decades. Many cities can make the same claim. It’s kind of vanilla.

    Therefore, does Chicago have any such mythology, grounded in its own history, on which to build? One thing to consider – each of the aforementioned cities embodies a certain idea around which industries grew, and I have to wonder whether Chicago’s is not the abstract ideal of cities themselves. In other words, should Chicago be making a greater push as THE place to be for people who want to define (from all angles) what the ideal 21st century should look like. One can argue that it did so for the 20th century. Will it continue to do so in the 22nd century, 23rd, etc. ? If this is truly a self-perpetuating idea that continues drawing new generations of architects, planners, artists, engineers, business leaders, etc. , then yes. In this sense, Chicago’s diverse and balanced economy becomes an even greater strength, since such a multifaceted idea – the pursuit of perfection in a city – requires the participation of all industries.

    Chicago is a place where Daniel Burnham and architecture are revered, civic pride is enormous, and there is such a historically-demonstrated desire to continually reinvent and redefine what the ideal city should be. My two cents.

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