Service Workers Shall Inherit the City

(Bloomberg Opinion) -- American cities are following a new script.

Over the past generation, high-cost cities like New York and San Francisco have been transformed by rising inequality and high housing costs in a winner-take-all economy. The past couple of years, though, are different. New economic realities, with service workers’ wage growth outpacing overall wage growth and big tech companies increasingly looking to diversify their geographic footprints, should reduce overall inequality but make high-cost cities uneconomical for many of the types of workers who have flocked to them.

We got to where we are today because the combination of globalization and technological innovations led to a clustering of talent in superstar cities. Well-educated, well-paid workers, typically young and childless, moved into a handful of cities, driving up housing costs given the political and economic difficulty of building housing in those cities. Those higher housing costs squeezed out working-class residents and families, leaving an enlarged class of knowledge workers and then a lower-paid class of service workers that catered to the needs of those knowledge workers.

But changes for both groups of workers over the past couple years could break that pattern. The market for lower-paid service workers is structurally tight for the first time in a generation, with wages in industries like retail and food/beverage growing at around 5 percent per year.

Service Workers Shall Inherit the City

There are a variety of reasons. The workers entering the labor market are more educated than the workers who are retiring. The teen labor force participation rate has decreased dramatically over the past 20 years, most likely reflecting cultural changes as young people focus more on higher education rather than working part-time jobs or going straight to work.

Changes in the immigration mix since the financial crisis mean the new immigrants coming to the U.S. are more likely to go into well-paid knowledge jobs rather than lower-paid service jobs. And the well-paid knowledge workers who have moved into superstar cities tend to have high demand for eating out, dry cleaning services, transportation services like Uber and Lyft, and so on.

All of these factors have increased the demand for and reduced the supply of service workers, putting upward pressure on wages.

And the labor market for well-paid knowledge workers appears to be increasingly mobile, judging by the shifting corporate expansion strategies of large tech companies. Amazon is building campuses in northern Virginia and Nashville. Apple will build one in Austin. Google's expansion plans this year will result in the company having offices in 24 out of 50 states. All else equal, the companies would probably prefer to stay concentrated in their original metro areas, but high costs, talent shortages, and in some cases the need to be close to customers makes that onerous.

As long as the economic expansion continues, because of these dynamics, we should expect service labor wage growth to continue outpacing knowledge worker wage growth. You can't outsource a line cook or an Uber driver to another city, but companies can shift their knowledge jobs to lower-cost metros. At a macro level this should reduce income inequality as lower-paid workers catch up. But it also means the composition of workers in high-cost cities will shift.

It should make life a little easier for service workers: Going from making $10 an hour to $15 an hour is a big increase, even if it's debatable whether that counts as a livable wage given the cost realities of city life. But as those labor costs are passed on to customers, a lot of the amenities that make city life desirable to knowledge workers will become more expensive, threatening to price out some of the upper-middle-class workers who have flocked to cities. If Uber/Lyft rates go up 50 percent and burritos cost $15 and food delivery services start shutting down, that big city life isn't looking as attractive.

The end result might be reduced inequality in high-cost cities, with a better life for the remaining working class but fewer knowledge workers able to afford their current lifestyle.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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