Urban Economics Urban Growth

Transcription

1 Urban Economics Urban Growth

2 Urban Growth What is growth? Economic growth: Increase in a city s wage per-capita Employment growth: Increase in a city s total workforce One of the key questions: Who benefits from economic and employment growth?

3 Urban Growth Stylized Facts From Glaeser, Scheinkman and Vishny s (JME, 1995) analysis of 203 US cities from : Income and population growth move together. Growth is positively related to initial schooling. Growth is negatively related to initial unemployment. Growth is negatively related to the initial share of employment in manufacturing. Racial composition and segregation are uncorrelated with urban growth. Government expenditures (except for sanitation) are uncorrelated with growth. Government debt is positively correlated with later growth. Research on other factors (e.g., convergence, persistence, climate, social capital )

4 Urban Growth Economic Growth Traditional non-geographical sources of economic growth are: Capital deepening: Increase in the amount of capital per worker. Increase in human capital: Knowledge and skills acquired through education and experience. Technological progress: Ideas and innovations that increase productivity From geographical perspective: Agglomeration economies: As discussed before, these include increase in productivity through proximity

5 Urban Growth Economic Growth We have to distinguish between a change in a city s income level and a change in the income growth rate! Growth rate is determined by: The rate of capital deepening (how rapidly increases capital per worker each year) The rate of technological process (how many new ideas are developed) The increase in human capital

6 Urban Growth City-Specific Innovation and Income Focus: Connection between technological progress and income. Setting: Region with 12 million workers Two cities (6 million each) Initially, both cities have the same utility curve (hump-shaped) The common utility level is $70

7 Urban Growth City-Specific Innovation and Income Urban economic growth from technological progress: s j b 70 i U Workers per city

8 Human Capital and Economic Growth How does an increase in human capital effect the income? Better education leads to skilled workers, which makes them more productive. Competition among firms increases the wage to match the higher productivity. Workers learn from one another (knowledge spillovers). More knowledge generates more ideas and additionally increases the technological progress.

9 Human Capital and Economic Growth Some Evidence Glaeser, Scheinkman, and Schleifer (1995) show that cities with high levels of human capital experienced relatively large increases in per-capita income between 1960 and Evidence suggests that the largest beneficiaries of knowledge spillovers are the less skilled workers. Moretti (2004) estimates that a 1 percent increase in a city s share of college-educated workers raises wages of high-school dropouts by 1.9 percent, 1.6 percent for high-school graduates, and 0.4 percent for college graduates. The results support the general assumption that urban economic growth may reduce income inequality (Wheeler, 2004).

10 Human Capital and Economic Growth Some Evidence Zucker, Darby, and Brewer (1998) find that physical proximity to star researchers is an important factor in the birth of biotechnological firms. They locate close to researchers providing specific human capital. Evidence for less developed countries: A study of Chinese cities underlines the importance of secondary education (Mody and Wang, 1997) and its effects on income growth. Enrollment increase from 30% to 35%: growth rate increases 5 percent points. Enrollment increase from 55% to 60%: growth rate increases 3 percent points.

11 Human Capital and Economic Growth Some Evidence Glaeser/Saiz The Rise of the Skilled City

12 Model of urban labor market: Metropolitan area is part of a larger regional economy Free movement of households and firms between cities Labor demand comes from firms in the city Labor supply comes from households in the city Production is divided into local and export production Local goods are sold to consumer inside the city Export goods are sold to people outside the city The model shows the effects of changes in demand and supply on equilibrium wages and equilibrium employment in the city

13 Export, Local, and the Multiplier Export and local employment are connected by the multiplier: E.g.: An export firm hires 100 new workers to expand production Workers earn income Income is (partially) spent on local goods Local firms increase production and hire new workers etc. Increases in export employment create a multiplier effect that leads to an increase in local employment.

14 Export, Local, and the Multiplier To assess how many local jobs are generated by additional export jobs, the employment multiplier is estimated. = change in total employment per unit change in export employment A multiplier of 2.4 implies that a one-unit increase in export employment generates a total employment increase in the metropolitan area of 2.4 jobs (or additional 1.4 jobs in the local industry). Multipliers vary across cities and industries

15 Labor Demand The labor demand curve is negatively sloped and decreases as the wages increase: The substitution effect: Resource intensive labor is substituted for capital, land or materials. The output effect: Higher wages raise product prices leading to a diminishing demand on the market. As demand decreases so does the production, which also decreases labor demand. A shift to the right (left) of the labor demand curve implies an increasing (decreasing) workforce at the same income level

16 Labor Demand Causes of a shifting demand curve may be: Demand for exports: An increase in the demand for export goods increases production and labor demand. Labor productivity: Increasing productivity decreases production costs and more workers can be hired. Business taxes: Higher taxes on business increase production costs, which leads to higher product prices, a decreasing production, and ultimately a decreasing demand for labor. Industrial public services: Better industrial services decrease production costs and increase output and labor demand. Land use policies: Through the provision of public services (infrastructure) and zoning, a government can actively influence location decisions of firms.

17 Labor Demand Wages per day ($) 100 D1 D2 D Workers per city (1000)

18 Labor Supply The supply curve of labor is positively sloped (higher wage attracts workers). Assumptions: Number of hours per worker is fixed: Increasing wages have a negligible effect on the aggregate hours worked. Labor-force participation rate is fixed: Increasing wages will keep the fraction of the city s population in the workforce constant. Increasing wages will attract workers and cause increasing labor supply.

19 Labor Supply Why is the supply curve positively sloped? Increasing total employment in a city = increasing demand for land and housing. Land Values and rental prices will rise. To ensure locational equilibrium, the workers must be compensated for the higher cost of living. Bartik (1991) finds an elasticity of the cost of urban living with respect to the size of the labor force of 0.20 or:

20 Labor Supply a 10% change in the labor force increases the cost of living by 2%. To keep real wages constant, the elasticity of the wage with respect to the labor force must also be 0.2 or: How will the supply of labor respond? We just calculate the inverse or:

21 Labor Supply a 2% increase in wages increases the labor force by 10% (only applies to an individual city; not nation-wide). What determines the position of the labor supply curve? In general, all factors that serve in making a city more or less attractive for residents. Amenities: Anything that increases perceived attractiveness (safety, infrastructure, entertainment, etc). Disamenities: Anything that decrease the perceived attractiveness (congestion, pollution, crime). Residential taxes (without a corresponding increase in public services). Residential public services (without a corresponding increase in taxes)

22 Equilibrium Effects: Supply and Demand Wages per day ($) As population increases, wages rise to compensate residents. S D1 D Workers per city (1000)

23 Equilibrium Effects: Supply and Demand Problem: The slopes of the curves are unknown (only the level) -> How to find the new equilibrium wage? To calculate the adjusted change in demand we use the defined supply elasticity of 5.0

24 Equilibrium Effects: Supply and Demand In our case, a 21% change in demand leads to an increase of 3% in wages and an adjusted demand (new total employment increase) of 15%.

25 Example: Supply Change Wages per day ($) As an example, we consider a change in public services. Here, increasing the services leads to decreasing wages. 100 S1 S2 88 D Workers per city (1000)

26 Who Benefits? How are newly generated jobs distributed (old residents, newcomer)? How does an increase in total employment affect income per capita? Bartik (1991) studied the effects of changing employment and unemployment rates, participation, and migration rates in 89 metropolitan areas. If a city starts with 100,000 jobs, a 1% increase in employment will: decrease the unemployment rate from 5.40 to 5.33% increase the participation rate from to 87.64% increase the employment rate from to 82.97%

27 Who Benefits? The created (1000) jobs are divided as follows: New residents: 770 Old residents: 230 formerly unemployed: 70 formerly not in labor force: 160 Increases in employment cause cause population growth, so only a small fraction of new jobs is filled by original residents

28 Effects on Real Income per Capita Income may increase in several ways: 1.Increase in the real wage: Real wages will be unaffected, since higher nominal wages are offset by higher living costs. 2.Promotions: Increasing labor demand causes firms to promote workers more rapidly (especially less educated workers). 3.Increase in the employment rate: The fraction of the workingage residents that is employed increases.