Urban and Regional Economics Prof. Clark

1. Urban and Regional EconomicsProf. Clark ECON 246 Week 4

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

3. Population Change1950's & 1960's • Percent change in total population by Region 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 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 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) 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.)

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

10. Disequilibrium Model Equilibrium in labor markets within regions. Disequilibrium between regions. 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. Migration tied to altered demand for site-specific factors. Due to taste changes (tied to life-cycle) or income changes. Two Alternative Models

11. High Wage Region Low Wage Region Disequilibrium Model of Migration W S W S WH WL D D LH L L LL

12. High Wage Region Low Wage Region Simplistic Disequilibrium Model S W W S’ S’ S WH W’ WL D D L L LH LH’ LL’ LL

13. Note: All adjustment shown on Supply of Labor side • This is shown for the sake of simplicity. • 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. • Note: Bartik found 77% of new jobs taken by in-migrants • Each additional net in-migrant generates 1 additional job.

14. High Wage Region Low Wage Region More Realistic Disequilibrium Adjustment Model W S W S’ S’ S WH W’ WL D D’ D D’ L L LL’ LL LL’ LL

15. Is this consistent with evidence? • 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. • 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. • 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?

17. Altered Demand for Site-Specific Characteristics • Graves 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 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.

21. Urban and Regional Growth Models • 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 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. • We focus on employment growth. • Define employment growth as a change in employment over time. • Define two types of employment • export or basic employment • local or nonbasic employment

23. Basic vs. Nonbasic Employment • 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. • 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. • Assume no government sector • Recall that Y=C+I+X-M • where Y=regional income, I=investment, X=exports, M=imports. • Assume C=co+c1Y; M=mY

25. Multiplier derivation • By substitution, Y= co+c1Y +I + X-mY • Solving for Y gives: Y - c1Y + mY = co+ I + X Y (1-c+m) = co+ I + X Y= [1/(1-c+m)]*[co+ I + X] Y/ X = [1/(1-c+m)] • Suppose that c=0.7 and m=0.1, then: • Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5

26. Demand Induced Growth • If autonomous consumption (co), investment (I), or exports (X) increase, this will induce a more consumption and hence more income • (remember C= co+c1Y) • Suppose X increase by $1000, then dY= (Y/ X )*dX = 2.5*1000 = 2500 • 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. Y/ X =[1/(1-c+m)] • If 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, 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. • Employment multipliers can also be calculated based on same principle. • Assume changes in total employment related to changes in basic or export employment. E = *X where =employment multiplier or E/X = 

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

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

31. Why is Demand for Labor Downward Sloped? • Substitution effect: As the wage falls, firms substitute toward labor and away from other inputs. • Scale effect: 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: • Export demand (positive shifter) • Labor productivity (positive shifter) • lowers costs, thus makes exports more attractive and imports less attractive. • Business taxes (negative shifter) • holding services constant increases costs. • Industrial public services (positive shifter) • holding taxes constant lowers costs. • Land use policies/infrastructure (positive shifter)

33. Supply of Labor • Positively sloped because of labor-leisure choice. • 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. • more workers at every wage.

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

35. Regional Equilibrium W S We D L Le

36. Change in Export Demand W S W2 W1 D’’ D L L1 L2

37. Is this the end of the story?

38. May induce migration from other regions if large wage increase W S S’ W2 W3 W1 D’’ D L L1 L2 L3

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

40. Calculating Location Quotient • Lactual=%local employment in industry i %national employment in industry i • Lactual=(ei/eT)/(Ei/ET) • Look at necessary assumptions

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

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

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

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

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