Urban Growth

ECONOMIC GROWTH: INCREASE IN

PER-CAPITA INCOME

• Capital deepening
• Increases in human capital
• Technological progress
• Agglomeration economies.
CITY-SPECIFIC INNOVATION AND INCOME

• In the initial equilibrium

shown by point i , a region’s
workforce is divided equally
between two cities of 6
million workers. Innovation in
one city shifts its utility curve
upward, and in the absence of
migration, the innovative city
moves to point j .
• Migration to the innovative
city generates points b
(innovative city) and s (other
city). The innovation
increases utility in both cities
and shifts population to the
innovative city.
Regionwide Innovation and Income

• Consider next the effect of simultaneous innovation in both cities.

Suppose the two cities experience the same innovation, and thus
experience the same upward shift of the utility curve. In this case,
both cities would move from point i to point j , and point j would
be the new equilibrium.
• There would be no utility gap to overcome with migration because
both cities would experience the same change in productivity. As a
result, each city would maintain its workforce of 6 million
workers.
HUMAN CAPITAL AND ECONOMIC GROWTH

• Urban economists have explored the effects of human capital on

urban productivity and income.
• If better-educated workers generate more ideas, an increase in
human capital also increases the rate of technological innovation.
Glaeser, Scheinkman, and Shleifer (1995) show that cities with
relatively high levels of human capital experienced relatively large
increases in per-capita income over the period 1960–1990,
suggesting a link between human capital and the rate of
technological progress.
HUMAN CAPITAL AND ECONOMIC GROWTH

• There is evidence that the largest beneficiaries of educational

spillovers are less-skilled workers. One study estimated that a 1
percent increase in a city’s share of college-educated workers
increases the wage of high-school dropouts by 1.9 percent, while
it increases the wage of high-school graduates by 1.6 percent and
the wage of college graduates by 0.4 percent (Moretti, 2004).
• This reflects the general observation that urban economic growth
tends to reduce income inequality (Wheeler, 2004).
THE URBAN LABOR MARKET

• Urban Labor Demand

• Marginal revenue product = Marginal product x price of output
Agglomeration Economies and
Urban-Labor Demand
• Agglomeration economies
generate a relatively fl at
labor demand curve. An
increase in the wage from w'
to w" decreases the quantity
demanded from N' to N" in the
absence of agglomeration
economies.
• If the city is subject to
agglomeration economies, the
quantity of labor demanded
decreases to N *.
• For a conventional demand curve, an increase in the wage has two
effects
• The substitution effect.
• The output effect.
• Agglomeration effect.
Shifting the Urban Labor Demand Curve

• Demand for exports

• Labor productivity
• Business taxes
• Industrial public services
• Land-use policies
Export versus Local Employment and the
Multiplier

• We can divide production in the urban economy into two types,

export and local. Export goods are sold to people outside the city.
For example, steel producers sell most of their output to
customers outside the city where steel is produced. In contrast,
local goods are sold to people within the city. Most of the output
of bakeries, bookstores, and pet salons is sold within the city.
Total employment is the sum of export employment and local
employment.
Direct and Multiplier Effects of an Increase in
Export Employment

• If export employment increases by

10,000, the labor-demand curve
shifts to the right ( D 1 to D 2 )
because of the direct effect
(10,000 workers) and shifts further
to the right ( D 2 to D 3 ) because
of the multiplier effect (11,000
additional local workers).
The Labor-Supply Curve

• A fixed number of work hours per worker:

• A fixed labor-force participation rate:

• Why is the supply curve positively sloped?

• An increase in total employment in the city increases the total
demand for housing and land, pulling up their prices. Recall the
first axiom of urban economics:
• Prices adjust to generate locational equilibrium
• What causes the supply curve to shift to the right or left? The
position of the supply curve is determined by the following
factors:
• Amenities.
• Disamenities.
• Residential taxes.
• Residential public services.
Equilibrium Effects of Changes in Supply
and Demand

• An increase in export
employment shifts the
demand curve to the
right, reflecting both the
direct and multiplier
effects. The equilibrium
moves from point i to
point n , with an increase
in the wage and total
employment.
Equilibrium Effects of an Improvement in
Public Services

• An improvement in residential
public services increases labor
supply and shifts the supply
curve to the right. The
equilibrium moves from point i
to point n , with a decrease in
the wage and an increase in
total employment.
EMPLOYMENT GROWTH AND DECLINE OF THE
U.S. MANUFACTURING BELT

• The model of the urban labor market

provides some insights into the rise and
then decline of the manufacturing belt
in the Northeast and Great Lakes
regions of the United States. The
manufacturing belt developed in the
second half of the 19th century.
• Innovations in production allowed firms
to exploit scale economies, and many of
the production processes required large
volumes of relatively immobile
resources (e.g., coal and iron ore).

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EMPLOYMENT GROWTH AND DECLINE OF THE
U.S. MANUFACTURING BELT

• The dispersion of manufacturing decreased

the demand for manufacturing workers
throughout the old manufacturing belt. In
some cities, the equilibrium total
employment decreased, causing population
losses.
• Among the cities that lost population over
the period 1970–2000 were Detroit (7% loss),
Cleveland (28% loss), and Pittsburgh (5%
loss). In contrast, many cities grew despite
the loss of manufacturing employment.
Among the cities that gained population
over the 30-year period were Boston (11%
gain) and Minneapolis (50% gain).
Cleveland.com
Cleveland in the 1970s: A gritty city survives turbulent times
The Role of Human Capital

• What explains the different experiences of these cities? As

documented by Glaeser (2009), the key factor is the stock of
human capital. In declining cities such as Detroit, Cleveland, and
Pittsburgh, the share of the workforce with college degrees was
relatively low. In contrast, in growing cities such as Boston and
Minneapolis, the college share was relatively high.
• A number of studies have quantified the connection between
human capital and urban growth. In the Glaeser study for the
period 1980–2000, the estimated elasticity of population growth
with respect to the share of the adult population
Labor and Housing Markets in Shrinking
Cities

• Earlier we saw that the urban labor-supply curve is positively

sloped because larger cities have higher housing prices. To achieve
locational equilibrium in the regional labor market for a given
occupation, the real wage (the market wage divided by the cost of
living) must be equal across cities. If a larger city has higher
housing prices, it must have a higher market wage to offset a
higher living cost.
Durable Housing and Kinked Supply Curve

• Housing is durable, so the

supply curve is kinked at
the initial equilibrium
(point a ). A decrease in
demand generates a
relatively large decrease
in price (from p ' to p ")
and a relatively small
decrease in quantity (from
h ' to h ").
Durable Housing and Kinked Supply Curve

• The kinked supply curve has important implications for the

regional labor market. As a city shrinks, locational equilibrium in
the regional labor market (equal real wages across cities) is
restored with a relatively large decrease in the price of housing
and a relatively small decrease in the market wage.
• In other words, workers can be indifferent among cities with
roughly the same wages but large differences in the price of
housing. Comparing the typical declining city to the typical
growing city (Gyorko, 2009), the declining city has a wage that is 2
percent lower ($14.49 versus $14.75) and a housing price that is
37 percent lower ($71,560 versus $112,540).
PUBLIC POLICY AND EQUILIBRIUM
EMPLOYMENT

• Taxes and Firm Location Choices

• A high-tax city will grow at a slower rate than a low-tax city,
everything else being equal . Of course, one of the items included
in everything else is public services. The evidence suggests that if
two cities have the same level of public services but different tax
liabilities, the high-tax city will grow at a slower rate.
Taxes and Firm Location Choices

• Intercity location decisions. The elasticity is between −0.10 and

−0.60: A 10 percent increase in taxes in a particular metropolitan
area decreases business activity in the metropolitan area by 1
percent to 6 percent.
• Intracity location decisions. The elasticity is between −1.0 and
−3.0: If an individual municipality increases its taxes by 10
percent, business activity in the municipality decreases by 10
percent to 30 percent.
Public Services and Location Decisions

• There is evidence that local public services have a strong positive

effect on regional business growth. If two cities differ only in the
quality of their local public services, the city with better public
services will grow at a faster rate.

• Similarly, if a city improves its public services, it will grow faster,

everything else (including taxes) being equal. The public services
that have the largest positive effect on business growth are
education and infrastructure.
Subsidies and Incentive Programs

• Many cities try to attract new firms by offering special subsidies. One
approach is to lure firms with special tax abatements—for example, an
exemption from paying property taxes for 10 years.

• Some cities loan money directly to developers, and others guarantee

loans from private lenders. Some cities subsidize the provision of land
and public services for new development.

• The city purchases a site, clears the land, builds roads and sewers, and
then sells the site to a developer at a fraction of the cost of acquiring
and developing the site.
Environmental Quality and Employment

• Is there a trade-off between environmental quality and total

employment? Consider a city with two industries, a polluting steel
industry and a clean industry. Suppose the city imposes a pollution
tax: Steel producers pay $100 for every ton of pollution they
generate. The pollution tax affects both sides of the urban labor
market as follows:
• Shift of demand curve
• Decrease in pollution
• Shift of supply curve
 The Equilibrium Effects of a Pollution Tax

• A pollution tax increases production

costs, decreasing the demand for
labor. It also improves
environmental quality, increasing
the supply of labor. The equilibrium
moves from point i to point n .
• In this example, the supply shift is
large relative to the demand shift,
so the equilibrium employment
increases. The tax decreases the
equilibrium wage.
PROJECTING CHANGES IN TOTAL
EMPLOYMENT
• It is sometimes necessary to project future employment in a city. Cities use employment
projections to plan public services such as roads and schools, and fi rms use employment
projections to predict the future demand for their products. The projected
• change in total employment is computed as follows:
• Change in total employment = Change in export employment x Employment multiplier
• Who Gets the New Jobs?
PROJECTING CHANGES IN TOTAL
EMPLOYMENT
• Who Gets the New Jobs?
• Bartik (1991) studied the effects of increases in employment on unemployment rates,
labor-force participation rates, and migration rates in 89 metropolitan areas. His results
suggest that if a city starts with 100,000 jobs, a 1 percent increase in employment
(1,000 additional jobs) has the following effects:
• The unemployment rate (the number of unsuccessful job searchers divided by the
workforce) decreases from 5.40 percent to 5.33 percent.
• • The labor-force participation rate (the workforce divided by the number of adults)
increases from 87.50 percent to 87.64 percent.
• • The employment rate (jobs divided by the number of adults) increases from 82.78
percent to 82.97 percent.
Effects on Real Income per Capita

• How does an increase in total employment affect a city’s real

income per capita? Income could increase in several ways:
• Increase in the real wage
• Promotions
• Increase in the employment rate
SUMMARY

• 1. An increase in per-capita income results from capital deepening, increases in

human capital, technological progress, and agglomeration economies.
• 2. An increase in export employment increases local employment through the
multiplier process.
• 3. The urban labor-supply curve is positively sloped because a larger city has
higher housing prices, requiring firms to pay higher wages to compensate
workers for higher living costs.
• 4. A large fraction of new jobs in a city are filled by newcomers, leaving few
jobs for original residents.
• 5. An increase in total employment in a city increases real income per capita by
( a ) hastening the move up the job hierarchy and ( b ) increasing the labor-
force participation rate.
REFERENCES AND ADDITIONAL READING

• 1. Anderson, John E., and Robert W. Wassmer. “The Decision to ‘Bid for Business’: Municipal Behavior in Granting Property Tax
Abatements.” Regional Science and Urban Economics 25 (1995), pp. 739–57.
• 2. Baade, Robert A., and Allen R. Sanderson. “The Employment Effects of Teams and Sports Facilities.” Sports, Jobs and Taxes, eds.
Roger Noll and Andrew Zimbalist. Washington, D.C.: Brookings, 1997.
• 3. Bartik, Timothy J. Who Benefi ts from State and Local Economic Development Policies? Kalamazoo, MI: Upjohn Institute, 1991.
• 4. Black, Duncan, and Vernon Henderson. “A Theory of Urban Growth.” Journal of Political Economy 107 (1999), pp. 252–84.
• 5. Boarnet, Marlon, and William T. Bogart. “Enterprise Zones and Employment: Evidence from New Jersey.” Journal of Urban Economics
40 (1996), pp. 198–215.
• 6. Dowall, David. “An Evaluation of California’s Enterprise Zone Programs.” Economic Development Quarterly 10 (1996), pp. 352–68.
• 7. Eberts, Randall W., and Joe A. Stone. Wage and Adjustment in Local Labor Markets . Kalamazoo, MI: Upjohn Institute, 1992.
• 8. Glaeser, Edward, Jose Scheinkman, and Andrei Shleifer. “Economic Growth in a Cross-Section of Cities.” Journal of Monetary
Economics 36 (1995), pp. 117–43.
• 9. Glaeser, Edward. “Growth: The Death and Life of Cities.” Chapter 2 in Making Cities Work , ed. Robert P. Inman. Princeton, NJ:
Princeton University Press, 2009.
• 10. Gyourko, Joseph. “Housing: Urban Housing Markets.” Chapter 5 in Making Cities Work , ed. Robert P. Inman. Princeton, NJ:
Princeton University Press, 2009.
• 11. Helms, L. Jay. “The Effect of State and Local Taxes on Economic Growth: A Times Series-Cross Section Approach.” Review of
Economics and Statistics 68 (1985), pp. 574–82.
• 12. Lucas, Robert. “On the Mechanics of Economic Development.” Journal of Monetary Economics 22 (1988), pp. 3–22.