How do we explain San Francisco? Or Boston or New York City? These are very expensive places to live, yet they thrive, defying economic gravity. While basic economics suggests that businesses would eventually leave such cities in search of locations more affordable for their workers, these places continue to be centers of world-leading economic activity and major talent magnets. And what does their experience say about Seattle?
In an influential 2006 paper, three urban economists coined the term "superstar city" to describe regions that continue to prosper in the face of high housing prices. The paper notes that in certain places, a combination of physical and policy constraints has led to a limited supply of housing. But because those places have attracted very productive industries, top earning workers can afford to bid up housing prices. And because these businesses and their high paid workers sprinkle so much cash around the local economy, service businesses will do well, charging whatever it takes to keep up with high costs.
Then comes the counterintuitive part: there is no self-correcting mechanism. As long as these regions continue to attract new high paying enterprises and high earning individuals, the pattern can go on indefinitely. Superstar cities, the authors note, are a result of two trends of recent decades: industrial concentration and increased income inequality.
Does this sound like Seattle in the past 20 years? Even with the bursting of the housing bubble, prices remain high in the region, and most of the price run-up happened along with the growth of technology industries that paid well. The numbers suggest that Seattle sits on the cusp of superstardom, not as prohibitive as the California or Northeast regions, but not as open as the affordable and prosperous Sunbelt metro areas.
So what's not to like about the region's emerging superstardom? Mostly the fact that the benefits have not been widely shared.
As noted in the last post, technology-based industries have accounted for nearly all of the Puget Sound region's growth over the past 20 years, and during that time average wages have grown substantially. But an uncomfortable reality lurks behind that success: the average was pulled up almost entirely by the software sector, with much smaller wage increases for everyone else. So while tech employees could afford those high housing prices easily, most other households could not.
Over the long haul, superstardom will shape the economy into something that long-time residents would not recognize: the hourglass.
A healthy metropolitan economy has a thick middle layer of high productivity manufacturing and transportation industries that employ people at a range of skill levels. But while these industries pay well, they are more cost-sensitive than purely technology-based firms and will struggle in a high cost environment. If they face increasing labor rates, driven by high housing prices, they will eventually leave.(Remember, New York City was once the largest manufacturing center of the country and San Francisco was a major seaport.)
The result is the hourglass economy, with highly paid technology workers at the top, lower paid service workers at the bottom, and little in between. The center fails to hold. And as noted, this is a very sustainable economic pattern that will persist in the absence concerted efforts to keep the middle layers of the economy healthy.
The Puget Sound technology economy began to grow in the 1980s, and as Century 21 City chronicles, the region did manage to hold onto the middle: aerospace, ports, shipyards, remnants of resource industries. But it did not add much to the middle layers, and those industries remain flat.
High costs and isolation have made this a challenging region for manufacturers. But meeting the challenge is worth the effort. No one wants to live in a place populated only by technology workers and those who make their lattes.