High-skilled jobs and the people who get paid handsomely to hold them are increasingly clustered in coastal cities where, not surprisingly, it now costs an insane amount of money to live. Take, as evidence, the astronomical rent in places like New York City and San Francisco: It costs more to sleep at night in these cities because more people want to be there in proximity to opportunity, and that high price also means that anyone other than the high-income can't afford to get in.
A curious thing happens, though, when the rent goes up (alongside it the barriers for other people to move in). As Catherine Rampell writes today in the New York Times, when when high-skilled, high-wage professionals congregate in cities, some of their other expenses actually go down, while – and here's the rub – it gets more expensive for low-income people to buy consumer goods like their groceries.
Rampell’s point of departure is a research paper by Wharton School assistant professor Jessie Handbury. She looked at Nielsen purchase data from 40,000 households in 52 markets across the country between 2003 and 2005. Her conclusion: A low-income household in a wealthy city faces grocery bills that are 20 percent higher than they’d pay in a relatively poor city. Meanwhile, high-income households have grocery costs that are actually 20 percent lower in expensive cities like San Francisco and New York than they’d pay in cities with half the per-capita income like New Orleans.
This happens not necessarily because grocery prices vary from city to city, but because the products themselves do. Why might that happen? When a city becomes affordable to only a wealthy minority, retail outlets, salons and grocery stores chase after those people, too. Whole Foods moves in, and Key Food leaves the neighborhood. As the market of wealthy consumers in the area grows even larger, now Zabar’s, Eataly and Dean & DeLuca want into the neighborhood, too. And that competition to sell an investment banker his apricot-glazed turkey dinner drives down the cost of it.
As Rampell writes:
Professional-class workers who like to moan about the cost of living in New York — and I’m including myself in this group — don’t realize how spoiled we are by both variety and competitive pricing. Truthfully, things seem more expensive here because there’s just way more high-end stuff around to tempt us, and we don’t do the mental accounting to adjust sticker prices for the higher quality.
As Rampell and Handbury both point out, cost-of-living measures tend to assume that we all have homogenous shopping habits, that each of us is fairly similar to the median American in the check-out line. But consumer preferences vary with income. And they vary dramatically in the outlier cities like New York or San Francisco where "median" means a six-figure job and a taste for artisanal cheese.
Cities like New York and San Francisco are attractive to highly educated, high-skilled workers because, as Handbury writes, when these people cluster together, "they enjoy greater productivity spillovers than low-skill workers." But it also makes sense that they’d benefit by clustering together as consumers.
Handbury’s paper focused on grocery data. But it’s easy to image a similar dynamic pushing down the price of a blow-out or a Bellini, while driving up the cost of products and services that cater to the dwindling pool of low-income residents who still remain in the city. On the whole, this phenomenon can only exacerbate the problem of rising rent, creating just one more way it’s becoming ever more expensive to be low-income in a high-cost city.