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Explaining Gentrification: Global Jobs Versus Local Jobs

• April 24, 2014 • 4:00 AM

PIttsburgh. (Photo: Jeffrey M. Frank/Shutterstock)

Gentrification spreads along the lines that link residential areas to the tradable jobs (health care, education, banking, technology) downtown.

From my last post, “Explaining Gentrification”: Regardless of zoning, a neighborhood with residents working a global job will displace those working a local job. Global labor moving into a neighborhood where most people have local jobs can cause ironic gentrification. An example of ironic gentrification:

While large metro areas like New York and San Francisco have grabbed headlines for their sky-high rental prices, Pittsburgh’s rental market is actually rising at a faster rate than New York’s, according to a study from personal finance website NerdWallet.

“We were looking at growth rates, rather than cities with the highest rents, and Pittsburgh is in a rapid economic growth period now,” said Divya Raghavan, a senior analyst for NerdWallet in San Francisco. “While New York and San Francisco are already well-established top cities in the U.S., Pittsburgh is considered an up and coming city.” …

… Pittsburgh’s growth is rooted in its diverse economy, which includes higher education, health care, banking and a growing technology industry. But that growth also has pushed up rents.

Pittsburgh is not a place where one would expect to find spiraling rents, unless we were talking about a downward spiral. At best, population growth is moribund. Net migration into the region is a few whiskers on the right side of zero. Vacant and abandoned properties are a huge problem. Pittsburgh is a shrinking Rust Belt city with all the trappings. What gives?

Pittsburgh’s economy is growing, in the right sectors (e.g. “higher education, health care, banking and a growing technology industry”). Those are “tradable” jobs, global jobs. Tradable industries find customers outside of the region. Non-tradable jobs, local jobs, cannot be outsourced. Auto mechanics in Pittsburgh aren’t threatened by cheaper auto mechanics in Vietnam. Which explains the shortcoming of tradable jobs. They can be outsourced. But not all tradable jobs can be outsourced, at least for now. These jobs are, like non-tradable jobs, tied to geography. Manufacturing is a tradable industry that used to be tied to geography. Regional natural resources as well as innovation gave Pittsburgh its comparative advantage. The innovation is still there. The advantage of physical geography no longer matters. Wages decrease as more places compete for those jobs.

The legacy of Pittsburgh’s comparative advantage in manufacturing, namely innovation, begat the talent production assets of the University of Pittsburgh (Pitt) and Carnegie Mellon University (CMU). CMU in particular produces graduates in high demand around the world. CMU produces tradable talent, global talent for global jobs. Likewise, Pitt produces global talent for global jobs. Tradable innovation industries that can no longer afford higher wages look to the sources of talent for financial relief. Tradable employers are moving to places where the tradable employees are manufactured. Instead of steel, Pittsburgh now makes global talent.

What does producing global talent have to do with gentrification? Federal Reserve Bank of Cleveland to my rescue:

Home-price growth in Cleveland and Detroit is very small in all deciles except for the two lowest-price deciles. Some of the price increases in the lowest-price deciles may be attributable to what statisticians call “mean reversion.” Mean reversion—the return to a long-run trend—might occur due to measurement error or transient local shocks. Either way, the more interesting part of the figure is seen in the difference in growth rates between Cleveland and Detroit and Pittsburgh and Buffalo. While Cleveland and Detroit show less than 20 percent growth in all of the upper five deciles, Pittsburgh and Buffalo show much stronger growth rates in the top deciles (especially in the top decile). The relatively stronger home-price growth rates in Pittsburgh and Buffalo’s top deciles may be driven by increases in educational attainment in neighborhoods close to these cities’ major higher education institutions.

Emphasis added. Link a neighborhood—in any city, regardless of policy constraints on housing—to global (i.e. tradable) jobs that are geographically dependent and you’ll find gentrification pressure. Gentrification often spreads along subway or surface light rail routes that link residential areas to downtown global jobs. Furthermore, universities have become centers of gentrification (see Cleveland), actively redeveloping adjacent neighborhoods. Tenured residents with local (i.e. non-tradable) jobs will have a tough time competing with newcomers benefiting from global wages.

Jim Russell

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