Who Gets the Surplus?

The post below, on price effects and the case for public provision, left out one of the articles that got me thinking about these questions in the first place: Robert Gordon's Has the Rise in American Inequality Been Exaggerated? The piece makes a number of provocative claims about inequality, some convincing, some less so. But the interesting bit, in terms of the price effects argument, is on college wage premium and geographic variations in the cost of living:

A stunning new data set [on geographic price-level differences] undermines our previous conclusion (2008) that real income per capita has increased significantly in superstar bi‐coastal metropolitan areas. ... Without adjustment for price level differences, per capita incomes in Massachusetts and New York are respectively 26.1 percent and 20.0 percent above the national average. With correction for regional price disparities, these percentages drop to 10.7 and ‐0.2 percent respectively.

In an important and related piece of research, Moretti (2008) notes that college graduates disproportionately cluster in metropolitan areas that have a high cost of housing. He finds that fully two‐thirds of the previously documented increase in the return to college between 1980 and 2000 vanishes when he corrects for differences in the cost of living across metropolitan areas. His cross‐area price measures are comprehensive and ingenious and take account of differences in housing costs, housing quality ... and price differences of non‐housing goods... Moretti then asks why college graduates sort into expensive cities. He carries out an empirical analysis that distinguishes between supply and demand factors and concludes that college graduates move to expensive cities because jobs for college graduates are increasingly located in those cities, not because they particularly like living in those cities. [my emphasis]

Gordon goes on to suggest some reasonable caveats to these findings, but whether the exact figure is two-thirds or something lower, the point remains that the supposed education premium can often only be fully realized in cities, where a large part of it is claimed by urban landowners rather than the person with the education.

And this is the fundamental point: We always have to ask, where is the market power? Who gets the rents? Wherever the surplus originates, where it ends up depends on who has the monopoly -- who controls something in inelastic supply.

This is an important question for policy, as in the post below. But it's also something you'll find union and community activists thinking about. If you're trying to put pressure on the boss, you better make sure it's the boss with power; and that means the one who controls the relevant scarce resource. A couple decades ago, that was often a manufacturer, while the retailers downstream were dispersed in a competitive market. Now it's often the other way round.