Douwe Osinga's Blog: Income distribution and the cost of living

Saturday, March 26, 2005

Income distribution and the cost of living

One of the first things visitors notice about Switzerland in general and more specific Zurich, is that it is expensive. It happens to be also a very livable city (some say the most livable), but that is hardly consolance for a short term visitor. For European visitors I have a simple explanation. Switzerland is richer than the EU, so it is only logical that things are more expensive. The richer countries are, the more expensive stuff gets (and yes, Switzerland is richer even if you take into account the higher prices). For visitors from the US, the story is more complicated.

Income per head in Switzerland is slightly lower than that in the US ($32 700 per head in CH vs  $37,800 in the US). However, prices are lower in the US. Of course this has to do a lot with the fact that the dollar is so cheap, but this doesn't explain it away completely. Even at what economist say is a fair price for the dollar, Switzerland will still be expensive. So what's going on?

In a world with free trade, but no free movement of people, some prices will tend to become the same all over, while others will not. Things that can be traded will, like stereo's, things that cannot be traded, like hair cuts, will not. Of course if you buy a stereo in a shop, you are also paying for the service you get, so even the price of a stereo will not be quite the same, but you get the idea. So what determines the price of the non-tradables? Mostly wages of people.

Mostly wages of poor people. See, most of the richer people ultimately work of international competing companies. When you buy a non-tradable, your money goes to the hairdresser, the waiter, the shop assistant. Relatively poor people. And these people are just paid badly in the US compared to Switzerland. So although it is nice that a lot of these low paid service things are cheap in the US, this very much depends on the uggly side of the american society: unequality. How much are you willing to pay for fixing that?