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Urban and Regional Economics Prof. Clark ECON 246 Week 4.

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1 Urban and Regional Economics Prof. Clark ECON 246 Week 4

2 Household Locational Choice Just as firms choose locations to maximize profits, so too are households optimizers between regions.Just as firms choose locations to maximize profits, so too are households optimizers between regions. We typically assume that households are utility maximizers.We typically assume that households are utility maximizers. Look at some figures describing migration trends in the U.S.Look at some figures describing migration trends in the U.S.

3 Population Change 1950's & 1960's Percent change in total population by RegionPercent change in total population by Region 1950-60 1960-70 1950-60 1960-70 –Northeast 13.2% 9.7% –North Central 16.9% 9.6% –South 16.5% 14.2% –West 38.9% 24.1%

4 Percent change in total population by metropolitan status Time Period Time Period 1950-60 1960-70 1950-60 1960-70 SMSA 26.4% 16.6% Central City 11.6% 6.4% Suburban Ring 45.9% 26.8% Look at recent information on the Census web site

5 Percent Change in Population by metropolitan status by race White: 1950-60 1960-70 SMSA 23.6% 14.6% Central City 5.7% -0.2% Suburban Ring 45.5% 27.6% Black: SMSA 43.6% 32.0% Central City 50.6% 32.1% Suburban Ring 23.1% 31.5%

6 Migration patterns: 1970’s and 1980’s Net Inmigration Migration Rate Net Inmigration Migration Rate SNOWBELT (70-80) (80-86) (85-90) (70-80) (80-86) (85-90) North -2.88 mil. -0.40 mil. +0.082mil. -5.86% -0.81% +0.16% (NE, MA) (-2.83 int.) (-1.1 int.) Midwest -2.70 mi. -2.03 mil. -0.29 mil -4.77% -3.47% -0.5% (ENC,WNC) (-2.37 int.) (-0.85 mil) (ENC,WNC) (-2.37 int.) (-0.85 mil) SUNBELT (70-80) (80-86) (85-90) (70-80) (80-86) (85-90) South +5.99 mil. +3.98 mil. +2.84mil +9.54% +5.28% +1.67% (SA,ESC,WSC) (3.59 int.) (+1.42) West +4.12 mil +2.51 mil. +2.48 mil +11.8% +5.81% +1.02% (PA,MT) (1.60 int.) (0.54 int.)

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9 Determinants of Migration Life-Cycle EffectsLife-Cycle Effects –Many events correlated with age: People graduate from school, marry, have children, divorce, retire, lose spouse, etc.People graduate from school, marry, have children, divorce, retire, lose spouse, etc. – Migration propensity peaks in mid. 20’s Region-specific factorsRegion-specific factors –Employment opportunities, amenities, fiscal factors Other factorsOther factors –Segregation, discrimination

10 Two Alternative Models Disequilibrium Model Equilibrium in labor markets within regions.Equilibrium in labor markets within regions. Disequilibrium between regions.Disequilibrium between regions. Workers move in response to differential returns to human capital.Workers move in response to differential returns to human capital. –Move from low wage to high wage areas. Equilibrium Models Equilibrium in labor and land markets both within and between markets.Equilibrium in labor and land markets both within and between markets. Migration tied to altered demand for site-specific factors.Migration tied to altered demand for site-specific factors. Due to taste changes (tied to life-cycle) or income changes.Due to taste changes (tied to life-cycle) or income changes.

11 Disequilibrium Model of Migration High Wage RegionHigh Wage Region WLWL L LHLH Low Wage RegionLow Wage Region W L W L D S S D WHWH

12 Simplistic Disequilibrium Model High Wage Region High Wage Region Low Wage Region W L W L D S WLWL S D WHWH L LHLH S’ W’ L L’ L H’

13 Note: All adjustment shown on Supply of Labor side This is shown for the sake of simplicity.This is shown for the sake of simplicity. Actually, demand and supply of labor adjust simultaneously.Actually, demand and supply of labor adjust simultaneously. –Muth has shown that these are simultaneous (1971 paper in Southern Economic Journal entitled “Migation: Chicken or Egg”) Each additional job has 60%-70% chance of being taken by an in-migrant.Each additional job has 60%-70% chance of being taken by an in-migrant. –Note: Bartik found 77% of new jobs taken by in-migrants Each additional net in-migrant generates 1 additional job.Each additional net in-migrant generates 1 additional job.

14 More Realistic Disequilibrium Adjustment Model High Wage Region High Wage Region Low Wage Region W L W L D S WLWL S D WHWH S’ W’ L L’ L L D’ L L’ L L D’

15 Is this consistent with evidence? Yes for migrations of 1920’s through 1950’s.Yes for migrations of 1920’s through 1950’s. –Rural South to urban North and Midwest. –South was low wage, North and Midwest were high wage. No for migrations of 1960’s through 1990’s.No for migrations of 1960’s through 1990’s. –North and Midwest to South and West.

16 Equilibrium Model of Migration At any point in time, wages and land rents compensate for the mix of location specific factors.At any point in time, wages and land rents compensate for the mix of location specific factors. –Highly desirable locations command high land rents, and/or low wages. –Compensating differentials in wages and rents keep utility constant between regions. So why move?So why move?

17 Altered Demand for Site-Specific Characteristics Graves and Linneman argumentGraves and Linneman argument –(1979 Journal of Urban Economics) –Income growth and taste changes alter demand for amenities –Can only be satisfied by moving. Has been generalized to other types of locational attributesHas been generalized to other types of locational attributes –Fiscal goods

18 This view of migration can help to explain migrations of 1960’s-1990’s Look at some evidence by Clark and Hunter.

19 Clark and Hunter “The Impact of Economic Opportunity, Amenities and Fiscal Factors on Age-Specific Migration Rates”, Journal of Regional Science, 1992, Vol. 32(3), pp. 349-365.

20 Overview by Chinitz Benjamin Chinitz, “The Regional Transformation of the American Economy”, American Economic Review - Proceedings, May 1986, Vol. 76, pp. 300-303.Benjamin Chinitz, “The Regional Transformation of the American Economy”, American Economic Review - Proceedings, May 1986, Vol. 76, pp. 300-303.

21 Urban and Regional Growth Models You now understand factors that explain why firms and households locate where they do.You now understand factors that explain why firms and households locate where they do. We can now discuss the issue of urban and regional growth.We can now discuss the issue of urban and regional growth. We develop a simple model of regional supply and demand.We develop a simple model of regional supply and demand. –We then examine various “what-if” scenarios.

22 Focus on Employment Growth Growth in economic terms is frequently defined in terms of growth in income or growth in employment.Growth in economic terms is frequently defined in terms of growth in income or growth in employment. –We focus on employment growth. Define employment growth as a change in employment over time.Define employment growth as a change in employment over time. Define two types of employmentDefine two types of employment –export or basic employment –local or nonbasic employment

23 Basic vs. Nonbasic Employment Basic vs. Nonbasic Employment Basic employment is employment devoted to the exporting of goods outside the city.Basic employment is employment devoted to the exporting of goods outside the city. Nonbasic employment is employment devoted to satisfy local demands for the product.Nonbasic employment is employment devoted to satisfy local demands for the product. Basic employment brings income into the region.Basic employment brings income into the region. –Nonbasic employment exists only because basic employment exists.

24 Export sector and the Multiplier Process To illustrate the influence of exports, think of the simple demand-based Keynesian model adapted to the local level.To illustrate the influence of exports, think of the simple demand-based Keynesian model adapted to the local level. –Assume no government sector Recall that Y=C+I+X-MRecall that Y=C+I+X-M –where Y=regional income, I=investment, X=exports, M=imports. Assume C=c o +c 1 Y; M=mYAssume C=c o +c 1 Y; M=mY

25 Multiplier derivation By substitution, Y= c o +c 1 Y +I + X-mYBy substitution, Y= c o +c 1 Y +I + X-mY Solving for Y gives:Solving for Y gives: Y - c 1 Y + mY = c o + I + X Y - c 1 Y + mY = c o + I + X Y (1-c+m) = c o + I + X Y (1-c+m) = c o + I + X Y= [1/(1-c+m)]*[c o + I + X] Y= [1/(1-c+m)]*[c o + I + X]  Y/  X = [1/(1-c+m)]  Y/  X = [1/(1-c+m)] Suppose that c=0.7 and m=0.1, then:Suppose that c=0.7 and m=0.1, then: Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5

26 Demand Induced Growth If autonomous consumption (c o ), investment (I), or exports (X) increase, this will induce a more consumption and hence more incomeIf autonomous consumption (c o ), investment (I), or exports (X) increase, this will induce a more consumption and hence more income –(remember C= c o +c 1 Y) Suppose X increase by $1000, thenSuppose X increase by $1000, then dY= (  Y/  X )*dX = 2.5*1000 = 2500 dY= (  Y/  X )*dX = 2.5*1000 = 2500 An additional $1500 in local demand was generated from the original $1000 increase in export demand.An additional $1500 in local demand was generated from the original $1000 increase in export demand.

27 Note: Imports reduce the multiplier The greater is the propensity to import (i.e., the larger is m), the smaller is the multiplier.The greater is the propensity to import (i.e., the larger is m), the smaller is the multiplier.  Y/  X =[1/(1-c+m)] If c=0.7 and m=0.1, thenIf c=0.7 and m=0.1, then –Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5 If c=0.7 and m=0.2, thenIf c=0.7 and m=0.2, then –Income Multiplier =1/(1-0.7+0.2)=1/0.5=2.0

28 From Income to Employment Multipliers Income is difficult to measure regionally, but employment is not.Income is difficult to measure regionally, but employment is not. Employment multipliers can also be calculated based on same principle.Employment multipliers can also be calculated based on same principle. Assume changes in total employment related to changes in basic or export employment.Assume changes in total employment related to changes in basic or export employment.  E =  *  X where  =employment multiplier  E =  *  X where  =employment multiplier or  E/  X = 

29 Assuming a stable multiplier relationship:  E/  X = T/X = 

30 Suppose Basic Employment Increases W L Direct Effect Induced effect Total Effect D D’ D’’

31 Why is Demand for Labor Downward Sloped? Substitution effect:Substitution effect: As the wage falls, firms substitute toward labor and away from other inputs. As the wage falls, firms substitute toward labor and away from other inputs. Scale effect:Scale effect: As the wage falls, a firms costs fall and the firm produces more output and hence hires more labor. As the wage falls, a firms costs fall and the firm produces more output and hence hires more labor.

32 Demand Shifters of Demand Demand for Workers in Region depends on:Demand for Workers in Region depends on: –Export demand (positive shifter) –Labor productivity (positive shifter) lowers costs, thus makes exports more attractive and imports less attractive.lowers costs, thus makes exports more attractive and imports less attractive. –Business taxes (negative shifter) holding services constant increases costs.holding services constant increases costs. –Industrial public services (positive shifter) holding taxes constant lowers costs.holding taxes constant lowers costs. –Land use policies/infrastructure (positive shifter)

33 Supply of Labor Positively sloped because of labor- leisure choice.Positively sloped because of labor- leisure choice. Your book incorrectly claims that it is due to the migration effect.Your book incorrectly claims that it is due to the migration effect. In-migration actually shifts the supply curve in the city to the right.In-migration actually shifts the supply curve in the city to the right. –more workers at every wage.

34 Supply shifters Improved quality-of-life (positive shifter)Improved quality-of-life (positive shifter) –Amenities, environmental quality Residential taxes (negative shifter)Residential taxes (negative shifter) –holding services constant –e.g.,property taxes, local income taxes Public servicesPublic services –holding taxes constant –e.g., parks, public safety, efficient roads, etc.

35 Regional Equilibrium W L S D WeWe LeLe

36 Change in Export Demand W L S D W1W1 L1L1 D’’ L2L2 W2W2

37 Is this the end of the story?

38 May induce migration from other regions if large wage increase May induce migration from other regions if large wage increase W L S D W1W1 L1L1 D’’ L2L2 W2W2 S’ W3W3 L3L3

39 Measuring Employment Multiplier Need to determine that fraction of employment that is devoted to exporting.Need to determine that fraction of employment that is devoted to exporting. Location Quotient can be used.Location Quotient can be used. L true = production in industry iL true = production in industry i consumption in industry i consumption in industry i L>1 implies exportingL>1 implies exporting L<1 implies importingL<1 implies importing

40 Calculating Location Quotient L actual =%local employment in industry iL actual =%local employment in industry i %national employment in industry i %national employment in industry i L actual =(e i /e T )/(E i /E T )L actual =(e i /e T )/(E i /E T ) Look at necessary assumptionsLook at necessary assumptions

41 Assumptions Patterns of consumption doesn’t vary spatially.Patterns of consumption doesn’t vary spatially. Labor productivity doesn’t vary spatiallyLabor productivity doesn’t vary spatially No national exporting or importingNo national exporting or importing –Denominator is representative of local needs. Each industry produces single homogeneous product.Each industry produces single homogeneous product. –If not, then LQ can be distorted

42 If assumptions correct Can derive export employment for industry i = X iCan derive export employment for industry i = X i X i =(e i /e T - E i /E T )*e iX i =(e i /e T - E i /E T )*e i –note book uses other identical formula, but I think this one is more intuitive. X i =(excess % of employment for i)*e iX i =(excess % of employment for i)*e i X=  i=1 to n X iX=  i=1 to n X i Once you have X and e T, you have your multiplier.Once you have X and e T, you have your multiplier. e T /X =  e T /X = 

43 Advantage of approach Has intuitive appeal which can be understood by noneconomistsHas intuitive appeal which can be understood by noneconomists –Exports drive growth. Limited data requirementsLimited data requirements Easy to applyEasy to apply

44 Weakness of approach Problems with assumptions.Problems with assumptions. Is multiplier stable?Is multiplier stable? –Short run stability questionable. Depends on region, industryDepends on region, industry –Long run stability? Depends on city size, industry structure, proximity to other cities.Depends on city size, industry structure, proximity to other cities. All exports have identical multiplier effect, regardless of industry.All exports have identical multiplier effect, regardless of industry.

45 Weaknesses of Approach No attention to supply issues.No attention to supply issues. –Assumes infinitely elastic supply curve Question of causalityQuestion of causality –Do potential new firms consider size of local service industry when determining where to locate?


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