Bigger cities benefit the rich, harm the poor

By Leith van Onselen

New research has been released showing that Australia’s major cities are benefiting the rich more than the poor and are becoming breeding grounds for inequality in the process. From 9News:

Lead researcher Somwrita Sarkar said the findings suggest cities like Sydney and Melbourne have a disproportionate accumulation of the highest income earners who have the advantage of affording the best services and infrastructure while poorer people face being pushed out.

“If we think of income and population distribution as a pyramid what is true is big cities drive a lot of the innovation and economic growth for the whole nation, but what is unappreciated is that the pyramid needs a stable base of a large number of people doing normal jobs to support that innovation,” she told AAP on Thursday.

“If richer and richer people agglomerate in bigger and bigger cities, you push up the prices and you push out that large pyramid base.

“Either you are pushing them out of the city or you are forcing them to live with conditions that are not very sensitive to their wellbeing.”

The findings by Dr Sarkar and her team of researchers at the University of Sydney’s Urban Lab were based on the 2011 census and income data from the Australian Bureau of Statistics…

Sydney and Melbourne had the highest numbers of people earning $2000 or more a week, while Hobart and Cairns had fairly even income distributions

…the poor spend a substantially high proportion of their income in housing and travel costs, whereas the rich spend, comparatively, a much lower proportion of their income for the same goods and services… certainly concentrating all the development on the big cities is not the way forward if we want this trend to decline.”

I am not surprised by this result. Sydney and Melbourne are home to most of the headquarters of Australia’s large oligopolistic companies (e.g. the big four banks, the managed funds/superannuation industry, large retailers, media companies, etc), which effectively collect economic rents from the rest of the nation. Accordingly, the workers in these companies earn a disproportionately higher income, thus widening the gap between rich and poor.

Both major cities are also built-out and have growth control measures in place to prevent urban sprawl. Accordingly, affordable land/housing is next to non-existent, whereas infrastructure access outside the inner areas is poor. In both cases, it is the poor in both Sydney and Melbourne that bear the burden, whereas the wealthy elite gain from both higher housing values as well as better amenity. There’s a reason why the numbers of homeless people in Australia’s major cities are expanding as the rich get richer!

It is the above dynamics that makes the wealthy elite – the ‘growth lobby’ – such strong supporters of high immigration and a Big Australia. A bigger population provides the growth lobby with a larger domestic market to sell to, thus providing them with lazy profits. At the same time, their property holdings inflate in value from all the added demand (and debt), making them substantially wealthier.

To the growth lobby, high immigration provides a way of privatising the gains from a bigger population while the rest of society – and the poor in particular – socialise the costs.

But don’t just take my word for it. The Productivity Commission’s modelling on the Economic Impacts of Immigration, conducted in 2006, considered the distributional impacts of immigration (unlike their latest modelling). The PC’s 2006 report found that boosting skilled migration by 50% over the years 2005 to 2025 would actually lower the incomes of incumbent workers, while wealthy capital owners (and the migrants themselves) reap the gains:

The increase in labour supply causes the labour / capita ratio to rise and the terms of trade to fall. This generates a negative deviation in the average real wage. By 2025 the deviation in the real wage is –1.7 per cent…

Broadly, incumbent workers lose from the policy, while incumbent capital owners gain. At a 5 per cent discount rate, the net present value of per capita incumbent wage income losses over the period 2005 – 2025 is $1,775. The net present value of per capita incumbent capital income gains is $1,953 per capita…

Owners of capital in the sectors experiencing the largest output gains will, in general, experience the largest gains in capital income. Also, the distribution of capital income is quite concentrated: the capital owned by the wealthiest 10 per cent of the Australian population represents approximately 45 per cent of all household net wealth…

With Sydney’s and Melbourne’s populations projected to skyrocket on the back of continued strong immigration (see below charts), the outcomes for ordinary Australians and inequality are destined to get much worse.

ScreenHunter_16328 Nov. 25 07.45
ScreenHunter_16327 Nov. 25 07.45

It is precisely the wrong kind of economic model that Australia should be facilitating via ongoing high immigration and a ‘Big Australia’: one that places overall growth ahead of improving productivity, sustainability and individual living standards.

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Unconventional Economist
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  1. “There’s a reason why the numbers of homeless people in Australia’s major cities are expanding as the rich get richer!”

    The last couple of Governments have made it pretty clear that this is because the poor are naturally lazy and that governments need to provide the incentive for them to work by eliminating all government handouts and welfare for this group. People need to remember the unwritten maxim, that government handouts and welfare should only be for the wealthy who are obviously also hard working.

    • Mining BoganMEMBER

      Nobody can forget the words Bozo Joe Hockey about the poor.

      Hey, isn’t Bozo the son of Lebanese migrants? Maybe that Dutton bloke is correct. Not many have done more damage to Australia than Joe has.

    • Why dumb down degrees too?

      Having overcrowded roads, trains, hospitals, is one thing – but Gillard also decided to dumb down Aussie degrees!

      Thanks for 3 big lies Gillard.

  2. I know some lifelong Melbournians who have just about had it, the city is simply reaching breaking point.

    • I’m one of them.

      Imagine the shithole Melbourne will become if the projections of an 8 million population mid-century come true? That’s 1,850 extra people each week (97,000 every year) for the next 35 years!

      It’s madness. Complete and utter madness.

        • I will someday. But for now it gets down to these factors:

          1) My kids are in school. In particular, my oldest is autistic and goes to a special school that he fits into well.
          2) My mum is elderly and her health isn’t good.
          3) My wife has had health issues (breast cancer) and her treatment team is here.
          4) My wife is close to her parents.

          Without these factors, I would move to the Sunshine Coast in a heart beat. But for now, I am grounded.

      • Indeed. Hopefully common sense will prevail before then. I don’t miss the gridlocked traffic on a Saturday morning, cattle herding trains – it’s a shame because Melbourne has so much going for it.

      • There will be negative feedback at some point making it less attractive causing the rate of growth to slow. The only real “brake” that state governments have on growth of the capital cities is restriction of supply of land for broad hectare development and zoning restrictions on apartments (which I recall rightly is not MB favourite thing). Certainly the states could do things to encourage more regional growth; for example payroll tax breaks for regional employment, but those things get messy.

      • Seem to have the same menu as yourself Unconventional Economist, had to come back from London to look after sick family, as in all of them in parallel just about and then my wife also got breast cancer.. have been stuck in Melbourne for the last few years and unable to get away. Cannot afford to replicate what we left in London and not willing to pay the prices for rubbish in the out burbs and neither of us can replicate the jobs we had. I am pretty sure that even though much of Londons economy is based on bullshit, Melbourne is far worse, based almost solely on house price rises and the FIRE business if you are lucky enough to be on the inside of it.
        As for 8 million people, well I cant wait, it should be amusing to see our roads clogged up like Bangkok or Cairo cause sure as crap stinks ‘They’ meaning LIB/LAB will not grow the infrastructure in line with that beyond a band aid, some chewing gum and a bit of wire here and there. In fact in their minds so long as we keep pressure on house prices, then everything is fine in the world.

  3. I thought that the purpose of “Urban Planning” was to study things like large cities and provide an analysis independent of the strict economic view. Where are our Urban Planners who should be locked in a vigorous debate over the dysfunction of our cities?

    It’s odd really. There are many issues we face today which should be widely debated, but instead they are whitewashed, shut down and generally marginalised. The miracle of instant communications has resulted in a type of voluntary self imposed censorship.

  4. I wouldn’t want to be in a dense city during a calamity. Food, water, law and order. Not saying regional areas would be better for law and order, but food and water at least would be available. Then again, civil war is something that happens to other countries.

  5. It is not “bigness” that is the inequality-causing problem, it is the rigged land markets and gouging land rents. Small cities can have just as bad a problem. For example, no city in NZ is really “big”, not even Auckland – but the problems are every bit as bad. Wellington ranks with Wichita and Grenoble for population, and has been shown in a study by Prof Philip Morrison, to be suffering from serious “distributional consequences” of its “creativity”. Morrison does not get it about the rigged land markets, but his study is really helpful to those who do.

    There is probably no city in the UK, no matter how small, that does not suffer from the inequality consequences of rigged urban property markets.

    Besides the fact that some US cities of several million population, who are adding something like 200,000 people per year, still manage to have median multiples around 3 and amazing opportunity for all; disparate mega-cities like Tokyo and Bangkok now are managing to have far more affordable housing markets than we do. Tokyo has had strong growth in spite of Japanese demographics being in a hole, and Bangkok is just insane. But somehow their regulatory settings around “housing supply” have managed to deliver what ours have not.