• 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).
Walter P. Reuther Library - Wayne State University
Walter P. Reuther Library (2839) Freeways, I-75, Ford, Detroit, Michigan, 1970 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.
