Chapter 5: Urban Growth

Urban Growth To Explore the sources of urban economic growth and urban employment growth.

Aditya Purnomo Aji | A’lam Hasnan Habib

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Economic Growth: Increase in Per-capita Income City-specific Innovation and Income Human Capital and Economic growth The Urban Labor Market Employment Growth and Decline of the US Manufacturing Public Policy and Equilibrium Employment Projecting Changers in Total Employment Who Benefits from Increased Employment

ECONOMIC GROWTH IN PER-CAPITA INCOME

Economic Growth : Increase in Per-Capita Income Capital Deepening

Increase in Human Capital

Technological Progress

Agglomeration Economies

• Physical capital includes all the objects made by humans to produce goods and services, such as machines, equipment, and buildings.

• Capital deepening is defined as an increase in the amount of capital per worker—it increases productivity and income because each worker works with more capital.

Economic Growth : Increase in Per-Capita Income Capital Deepening

Increase in Human Capital

Technological Progress

Agglomeration Economies

A person’s human capital includes the knowledge and skills acquired through education and experience. An increase in human capital increases productivity and income.

Economic Growth : Increase in Per-Capita Income Capital Deepening

Increase in Human Capital

Technological Progress

Agglomeration Economies

Any idea that increases productivity—from a worker’s commonsense idea about how to better organize production, to a scientist’s invention of a faster microprocessor—is a form of technological progress. The resulting increase in productivity increases income per worker.

Economic Growth : Increase in Per-Capita Income Capital Deepening

Increase in Human Capital

Technological Progress

Agglomeration Economies

Physical proximity increases productivity through input sharing, labor pooling, labor matching, and knowledge spillovers.

City Specific Innovation and Income Basic asumptions : 1. A region of 12 million workers and two cities that are initially identical.

2. The two cities have the same initial utility curve, and the initial equilibrium is shown by point i .

3. The region’s workforce is split equally between two cities of 6 million workers, and the common utility level is $70 per worker.

Lesson Learned :

The benefits of innovation in a single city spread to other cities in the region. Any initial gap in the utility levels of cities will be eliminated by labor migration to the city with the higher utility level, and migration will continue until the utility gap is eliminated.

Human Capital and Economic Growth

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.

In recent decades, the share of metropolitan residents with college degrees has increased significantly.

Between 1980 and 2000, the overall share for U.S. metropolitan areas increased from 0.17 to 0.23. There is substantial variation in the college share across cities, with a range of 0.11 to 0.44 in 2000. The cities with above-average shares experienced more rapid growth in the college share since 1990, so the variation across metropolitan areas has actually increased since then.

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). Urban economic growth (caused by knowledge spillovers / technological progress) tends to reduce income inequality.

An increase in the education or job skills of a specific worker increases the worker’s productivity, and competition among employers increases the wage to match the higher productivity.

Human Capital and Economic Growth

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.

In recent decades, the share of metropolitan residents with college degrees has increased significantly.

Between 1980 and 2000, the overall share for U.S. metropolitan areas increased from 0.17 to 0.23. There is substantial variation in the college share across cities, with a range of 0.11 to 0.44 in 2000. The cities with above-average shares experienced more rapid growth in the college share since 1990, so the variation across metropolitan areas has actually increased since then.

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). Urban economic growth (caused by knowledge spillovers / technological progress) tends to reduce income inequality.

An increase in the education or job skills of a specific worker increases the worker’s productivity, and competition among employers increases the wage to match the higher productivity.

Human Capital and Economic Growth

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.

In recent decades, the share of metropolitan residents with college degrees has increased significantly.

Between 1980 and 2000, the overall share for U.S. metropolitan areas increased from 0.17 to 0.23. There is substantial variation in the college share across cities, with a range of 0.11 to 0.44 in 2000. The cities with above-average shares experienced more rapid growth in the college share since 1990, so the variation across metropolitan areas has actually increased since then.

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). Urban economic growth (caused by knowledge spillovers / technological progress) tends to reduce income inequality.

An increase in the education or job skills of a specific worker increases the worker’s productivity, and competition among employers increases the wage to match the higher productivity.

URBAN LABOR MARKET

Urban Labor Demand The substitution effect

An increase in the city’s wage causes firms to substitute other inputs (capital, land, materials) for the relatively expensive labor.

The output effect

An increase in the city’s wage increases production costs, increasing the prices charged by the city’s firms. Consumers respond by purchasing less output, so firms produce less and hire fewer workers.

Agglomeration effect.

An increase in the wage and the resulting decrease in the quantity of labor demanded reduces agglomeration economies and decreases labor productivity, causing an additional decrease in the quantity of labor demanded.

Shifting the Urban Labor Demand What causes the demand curve to shift to the right or the left?

1. Demand for exports. An increase in the demand for the city’s exports increases export production and shifts the demand curve to the right: At every wage, more workers will be demanded.

2. Labor productivity. An increase in labor productivity decreases production costs, allowing firms to cut prices, increase output, and hire more workers (shifts the demand curve to the right) .

Labor productivity increases with capital deepening, technological progress, increases in human capital, and agglomeration economies.

3. Industrial public services. An increase in the quality of industrial public services (without a corresponding increase in taxes) decreases production costs and thus increases output and labor demand (shifts the demand curve to the right).

Shifting the Urban Labor Demand What causes the demand curve to shift to the right or the left?

4. Business taxes. An increase in business taxes (without a corresponding change in public services) increases production costs, which in turn increases prices and decreases the quantity produced and sold, ultimately decreasing the demand for labor (shifts the demand curve to the left).

5. Land-use policies. Industrial firms require production sites that ( a ) are accessible to the intracity and intercity transportation networks and ( b ) have a full set of public services (water, sewerage, electricity). By coordinating its land-use and infrastructure policies to ensure an adequate supply of industrial land, a city can accommodate existing firms that want to expand their operations and new firms that want to locate in the city.

Export versus Local Employment and The Multiplier Export employment generates local employment via multiplier.

Industry

Multiplier

Export Employment

Local Employment

Wineries

2.74

1

1.74

Photographic film & Chemical Manufacturing

2.53

1

1.53

Spectator Sports

1.54

1

0.54 Sumber : HCONorthwest

The Labor Supply Curve What causes the supply curve to shift to the right or left?

1. Amenities. Anything that increases the relative attractiveness of the city (other than the wage) shifts the supply curve to the right.

2. Residential public services. An increase in the quality of residential public services (without a corresponding increase in taxes) increases the relative attractiveness of the city, causing in-migration that shifts the supply curve to the right.

The Labor Supply Curve What causes the supply curve to shift to the right or left?

3. Residential taxes. An increase in residential taxes (without a corresponding change in public services) decreases the relative attractiveness of the city, causing out-migration that shifts the supply curve to the left.

4. Disamenities. Anything that decreases the relative attractiveness of a city decreases labor supply and shifts the supply curve to the left.

Equilibrium Effect of Changes in Supply and Demand Equilibrium Effects of an Increase in Export Employment

Equilibrium Effects of an Improvement in Public Services

EMPLOYMENT GROWTH AND DECLINE OF THE U.S. MANUFACTURING BELT

U.S Manufacturing Belt 19th Century

20th Century

Innovation in production

The transport costs reduced

Firms allowed to exploit scale econoics

The manufacturing activity widely dispersed

Production process required large volumes of relatively immobile resources

The demand of workers decreased

The manufacuring process concentrated

Many cities grew despite the loss of the population

The Factors that Impact the U.S Manufacturing Belt Dispersion of Manufacturing Activities

The Difference in Human Capital

Housing Fee and Policy in Shrinking Cities

• Previously concentrated on the old manufacturing belt • The main factor is the reducing of the transport cost • Therefore the dispersion causing cities to loss its population, and other cities to grow at the same time

The Factors that Impact the U.S Manufacturing Belt Dispersion of Manufacturing Activities

• • •

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The Difference in Human Capital

Housing Fee and Policy in Shrinking Cities

Form Glasser (2009) in declining cities such as Detroit, Cleveland, and Pittsburgh share of the workforce with college degrees was relatively low.

In contrast of Boston and Menneapolis, where the share was relatively high The cities with relatively high educated workers equipped to make the transition to an economy of greater share While the cities with poorly educated workers had their economy suffered

The Factors that Impact the U.S Manufacturing Belt Dispersion of Manufacturing Activities

The Difference in Human Capital

• Earlier we saw the urban labor supply is positively sloped because larger cities have higher housing prices • But there are further insights; Housing is unusual because it is durable: a wellmaintained house that can last many decades • As result the supply of used housing is relatively inelastic in the downward direction

Labor and Housing in Shrinking Cities

PUBLIC POLICY AND EQUILIBRIUM EMPLOYMENT

Public Policy affects the equilibrium employment through: – – – –

Local Education Public Services Taxes Business Infrastructure

Study Case #1: Taxes and Firm Location Choices • Intercity Elasticity: -0.1 to -0.6 • Intracity Elasticity: -1.0 to -3.0 • Firms tend to be more mobile within the Metropolitan areas rather than between them • Manufacturers are more sensitive to taxes • Metropolitan areas

Study Case #2: Public Services and Location Decisions • Studies by Helms (1985) and Munnel (1990) suggests that tax increase depends on how the extra tax revenue is spent • If the extra revenue is spent on local public services (infrastructure, education, public safety) will increase the relatie attractiveness of the city • In contrast if it is spent on redistributional program

Study Case #3: Subsidies and Incentive Programs • Many cities try to attract new firms by offering special subsidies: – – – –

Tax abatements – exception of paying taxes for 10 years Loan money directly from developers Guarantee loans form private lenders Susidize the provision of land, etc

• Boarnet and Bograt (1996) prove that the programs are not effective in luring firms

Study Case #4: Professional Sports, Stadiums, and Jobs • The premise: The stadium can be used to attract professional sport teams. Thus it will attract atheletes, groundskeepers, ticket takers, and hire workers. In short, it can generate jobs.

• But Baade and Sanderson (1997) show that the premise is otherwise.

• The presence of sports teams decreased total employment.

• Most of the consumers spend on local consumer goods.

• Their employment power comes form their ability to attract money from outside metropolitan area.

• Conclusion: total spending and employment increase but it doesn’t generate many jobs.

Study Case #5: Environmental Quality and Employment • Shifts of demand curve  tax increase  production cost increase  steel price increase  consumers purchase less  demand for labor derease

Study Case #5: Environmental Quality and Employment • Decrease in pollution  Steel producers will reduce pollution to reduce their tax  production cost increase total steel production decrease

• Shift in Supply Curve  Air quality improves  City attractiveness improve  People move in the city

PROJECTING CHANGES IN TOTAL EMPLOYMENT

• It is necessary to project future employment in a city Change in total employment = change in export employment x Employment multiplier • Problem: 1. The approach projects the labor-demand curve not the equilibrium change 2. It focuses on jobs rather than per-capita income 3. It seems to suggest that the city’s fate is in the hands of the people who buy exports

WHO BENEFITS FROM INCREASED EMPLOYMENT?

Who gets the new jobs?

• From Bartik (1991) if a city has 1000 additional jobs it has the following effects: – Unemployment rate 5.40 % to 5.33% – Labor force participation rate 87.5% to 87.64% – Employment rate 82.78% to 82.97%

• The graphic shows that the new residents inhabit 77% of the jobs.

Original residents who were unemployed: 70 Jobs Original residents who were not in labor force: 160 Jobs

New Residents : 770 Jobs

Effects on income per-capita • Increase in real wage. Increase in total employment causes changes in wages and living costs.

• Promotions. An increase in total employment hastens movement upward in the job hierarchy.

• Increase in employment rate.

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