Who gets the urban surplus?
High productivity in cities creates an economic surplus relative to other areas. How is this divided between workers and land-owners? Simple models with homogenous labour suggest that it accrues largely – or entirely – in the form of land-rents. This paper shows that heterogeneity of labour in two m...
| Main Authors: | , |
|---|---|
| Format: | Working paper |
| Published: |
Centre for Economic Policy Research
2017
|
| Summary: | High productivity in cities creates an economic surplus relative to other areas. How is this divided between workers and land-owners? Simple models with homogenous labour suggest that it accrues largely – or entirely – in the form of land-rents. This paper shows that heterogeneity of labour in two main dimensions (productivity differentials and housing demands) radically changes this result. Even a modest amount of heterogeneity can drive the land share of surplus down to 2/3rds or lower, as high productivity and/or low housing demand individuals receive large utility gains. It follows that land value appreciation understates the value of urban amenities and infrastructure. In a system of cities the sorting of workers across cities means that, while total rent is highest, the rent share of surplus is lowest in the largest and most productive cities. |
|---|