Chapter 5 Urban Growth

Purpose This chapter explores the determinants of growth in urban income and employment

Introduction Cities are remarkably dynamic Growth at striking rates: ▫Chicago’s population expanded by 270% in the 1850s ▫Las Vegas grew by 85% by 1990 Losses also possible: ▫Saint Louis lost 12% of its population in the 1990s

Why Cities Grow? Urban growth reflects the choice of individuals to live in a particular place Choice is driven by economic return; i.e., wages, amenities and housing cost City growth varies: because these factors vary across space

A. Economic Growth Defined as increase in Per-Capita Income Traditional sources of economic growth: ▫Capital deepening ▫Increase in human capital ▫Technological progress Geographical proximity as a source of growth ▫Agglomeration economies

1. Technological Innovation We will show how innovation within a city affects its per capita income using the urban utility curve from chapter 4. Consider a region with 12 m workers and two identical cities. Each city experiences technological innovation that results in a higher wage

Region wide Innovation (both cities) 6 Workers per city Utility per worker No change in city size, however utility per worker increases

City Specific Innovation Suppose instead that only one of the two cities experiences technological progress. How will this change affect each city?

Each city is at point i The innovative city moves to a higher utility curve at point j. This outcome is not a locational equilibrium The utility in the innovative city falls to 75 The utility in the other city rises to 75 Workers migrate in response to the utility gap

Urban Labor Market How does technological innovation affect wages and employment? We will use a model of the urban labor market to answer the above question Labor demand: firms located in the city Labor supply: households living in the city

The Labor Demand Curve Negatively sloped because of: ▫Substitution effect: increase in wage causes factor substitution away from labor. ▫Output effect: increase in wage increases production costs and price of final good D workers wage

Factors causing a shift in the demand curve Labor demand shifts right: ▫Increase in demand for final goods ▫Technological innovation raising productivity: (higher MRP) ▫Increase in human capital ▫Lower business taxes ▫Industrial Public services D workers wage D’

The Labor Supply Curve The higher the wage the larger the number of workers in a city Two assumptions: ▫Hours worker/worker constant ▫Participation rate constant Thus, an increase in wage increases labor supply because more workers move to the city. S workers wage

Shifting the supply curve Amenities: Anything that increases the relative attractiveness of a city. Disamenities: e.g., higher pollution Residential taxes Residential public service S workers wage S’

Human Capital and Economic Growth Increase in human capital results in higher productivity. Competition between firms results in a higher wage Evidence: A better skilled/educated worker has more ideas to share. Increased human capital increases rate of technological progress and therefore growth rate

Empirical evidence: Human Capital From , share of metropolitan residents with degrees increased from 17% to 23%. Variation in college share: 11% to 44% The larger the college share the higher the rate of growth which leads to variation divergence in income across cities Beneficiaries of educational spillovers: the effect of a 1% increase in college share on wages: ▫high-school dropouts (1.9%) ▫high-school graduates (1.6%) ▫college graduates (0.4%) Convergence in income distribution Proximity to star researchers an important factor in birth of biotechnology firms.

2. Export goods and Employment Growth Sometimes cities experience growth due to changes that take place outside the city Define ▫Export goods: goods produced for sale to people living outside the city, ▫Local goods: goods sold to local residents. Export goods affect demand for local goods through the multiplier process.

Multiplier Employment is the sum of export employment and local employment. Export workers: produce export goods. An increase in demand for export goods will create new export employment. Higher export employment creates higher incomes. Demand for local goods will increase, which in turn stimulates local employment.

Multiplier Higher export demand generates export jobs. Export workers spend part of their income on local products. Increased demand for local products creates new local jobs. New local workers spend portion of income on other local products. $

Multiplier Employment multiplier measures the change in total employment for each additional export job that has been created. The average value for the multiplier is 2.13, indicating that a one unit increase in export employment increases total employment in the metropolitan area by 2.13, i.e., creates 1.13 local jobs

Suppose an increase in export demand creates 10 units of export employment If the employment multiplier is 2.1, then total employment increases by 2.1x10=21 The increased demand for export workers of 10 created higher demand for local jobs of 11, i.e. every export job creates demand for 1.1 local job Number of workers in a city (1,000) Wage D3 D2 D1

Equilibrium Effects As the number of workers in a city increases, the prices of housing and land increase To compensate workers for the higher cost of living, wages will go up

Equilibrium Effects Bartick (1991) estimates that the elasticity of the cost of living with respect to labor force is 0.2 Wages must rise accordingly so If we reverse the previous expression we get the elasticity of labor supply:

The city moves along its labor supply curve. What is the new equilibrium wage and labor? By how much does the wage increase? If Ed=-2 and Es=5, then wage goes up by …… The number of workers goes up by………….(use the price elasticity of supply formulae) Number of workers in a city (1,000) Wage D3 D2 D1 Will 21 new jobs be created? S

Public Policy and Urban Employment Public Policy plays a role in creating employment in a city: ▫Taxes ▫Public Services ▫Subsidies and incentives programs

Environmental Regulation and urban employment Regulation can affect urban employment Environmental regulation raise costs of production and therefore reduce demand for labor It also improves environmental quality making it more desirable for workers to locate in areas with more stringent regulations

Note that: In this example the supply shift is larger and so equilibrium wage declines and the number of workers increase S1 S2 Number of workers in a city D1 D2 wage A pollution tax increases production costs, decreasing the demand for labor It also improves environmental quality increasing the supply of labor