Chapter 5

1. Chapter 5 Urban Growth

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

3. 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

4. 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

5. 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

6. 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

7. Region wide Innovation (both cities) No change in city size, however utility per worker increases 80 Utility per worker 70 6 Workers per city

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

9. Each city is at point i Workers migrate in response to the utility gap 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

10. 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

11. 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 wage D workers

12. 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 wage D’ D workers

13. 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 wage workers

14. 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’ S S’ wage workers

15. 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

16. Empirical evidence: Human Capital • From 1980-2000, 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 whichleads 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.

17. 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.

18. 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.

19. 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.

20. 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

21. Suppose an increase in export demand creates 10 units of export employment Wage 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 100 If the employment multiplier is 2.1, then total employment increases by 2.1x10=21 D3 D2 D1 100 110 121 Number of workers in a city (1,000)

22. 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

23. 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:

24. Will 21 new jobs be created? If Ed=-2 and Es=5, then wage goes up by …… Wage S The city moves along its labor supply curve. What is the new equilibrium wage and labor? 103 100 D3 The number of workers goes up by………….(use the price elasticity of supply formulae) D2 D1 100 110 121 115 By how much does the wage increase? Number of workers in a city (1,000)

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

26. 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

27. It also improves environmental quality increasing the supply of labor wage A pollution tax increases production costs, decreasing the demand for labor S1 S2 100 76 D1 D2 100 110 Number of workers in a city Note that: In this example the supply shift is larger and so equilibrium wage declines and the number of workers increase