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

• 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

• 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

• 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

• 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

80
70
No change in city size, however utility per worker increases
6
Workers per city

• 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
Workers migrate in response to the utility gap
The utility in the innovative city falls to
75
The utility in the other city rises to
75

• 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

• 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

• 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
D’ workers

• 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

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

• 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

• 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 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.

• 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.

• 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.

$
• 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.

• 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
100
100 110 121
D1
D3
D2
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)

• 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

• Bartick (1991) estimates that the elasticity of the cost of living with respect to labor force is 0.2
e ( C , N )

% change in cos t of
% change in labor living force

0 .
2
• Wages must rise accordingly so e ( W , N )

% change
% change in in Wage labor force

0 .
2
• If we reverse the previous expression we get the elasticity of labor supply: e ( N , W )

% change in
% change labor in force
Wage

1
0 .
2

5

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

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

• 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

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