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I recently attended a lecture by Nobel prize-winning economist Professor Joseph Stiglitz about the challenge of rising income inequality, which is also the topic of his latest book Rewriting the rule of the American economy. There he shows that since the late 1970s, income inequality has risen in almost all industrialised countries and even more sharply in the United States and the UK.
Two main factors have driven this trend. The first is the shift of many jobs in tradable sectors from advanced economies to countries where wages are lower, for example car manufacturing being moved to Central and Eastern Europe, or IT services to India. The second is what economists call “skilled-biased technological change”, and can be described more simply as machines and computers being able to perform the automated tasks that used to be carried out by humans. This technological change has tended to replace administrative and routine jobs; while at the same time increasing the value and productivity of more highly skilled workers.
Clearly these trends pose challenges to policymakers who are concerned with the rising costs of welfare spending and underemployment. But as Stiglitz pointed out, inequality in and of itself is not necessarily a bad thing: some people get paid more simply because they work longer hours, do riskier jobs, take on more responsibilities or because they have invested time and money in education and training.
With this caveat, Stiglitz’s recommendations focused on important national policies such as taxing inherited wealth and financial transactions, boosting wages by a combination of tax credits and minimum wage rises, and improving access to education.
But given the importance of cities in creating both wealth and job opportunities, I was surprised that he didn’t say more about their role in addressing this issue.
When looking at the performance of our cities, inequality is arguably a sign that a city is doing its job. As Ed Glaeser argues in his book The Triumph of the City: “cities can be places of great inequality” because they “attract some of the world’s richest and poorest people”. Cities attract poor people because they provide better opportunities to those who move in and to those who already live there. For example, Enrico Moretti (Professor of Economics at the University of California) has shown that in the United States, people with low skill levels in successful cities tend to earn more than some high-skilled people in less successful cities.
But too many cities in the UK are not performing this crucial role. Stiglitz shows that intergenerational mobility – the likelihood that children from poor families move up the income scale – has actually gone down in the UK and in the United States. Inequality of opportunity is what we should be concerned about, and this is where policy needs to focus its attention.
The question is how policy can help cities do their job of both growing the size of the economic pie and providing opportunities for more people, regardless of their background. One obvious but difficult way is to remove the obstacles that might stop people from accessing better-paid jobs and training opportunities in thriving cities. In London, Cambridge and Bristol, for example, high housing costs are a barrier for low income workers, and so the focus should be on building new homes. In other places such as Birmingham, Liverpool and Stoke, improving skills and educational attainment should be at the heart of any policies trying to improve equality of opportunity.
In all cities, there is also a need to encourage firms to invest in the training of their employees so that low-skilled workers can transition to better-paid jobs, and to do more to increase the educational attainment of pupils. Policy can also experiment with different ways to help people move to cities with better opportunities. Moretti, for example, proposes paying a mobility voucher, in addition to unemployment benefits, to those that want to relocate to more successful places.
While many of the policies aimed at reducing income inequality are national (taxation, the minimum wage), we also need to be thinking about the role of cities in driving growth, creating opportunities and making sure more people have access to them.
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