Chapter 5

Report
Chapter 5
Urban Growth
Purpose
• This chapter explores the determinants of
growth in urban income and employment
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
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
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
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
Utility per worker
Region wide Innovation (both
cities)
No change in
city size,
however utility
per worker
increases
80
70
6
Workers per city
City Specific Innovation
• 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
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
• 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
The Labor Demand Curve
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
wage
Factors causing a shift in the demand
curve
D’
D
workers
• The higher the wage the
larger the number of workers
in a city
• Two assumptions:
wage
The Labor Supply Curve
S
▫ Hours worker/worker
constant
▫ Participation rate constant
• Thus, an increase in wage
increases labor supply
because more workers move
to the city.
workers
Shifting the supply curve
S’
wage
• Amenities: Anything
that increases the
relative attractiveness
of a city.
• Disamenities: e.g.,
higher pollution
• Residential taxes
• Residential public
service
S
S’
workers
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
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
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.
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.
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.
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.
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
If the
employment
multiplier is
2.1, then
total
employment
increases by
2.1x10=21
Wage
Suppose an
increase in
export demand
creates 10 units
of export
employment
100
D3
D1
D2
100 110 121
Number of workers in a city (1,000)
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
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
Equilibrium Effects
• 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 living
 0 .2
% change in labor force
• Wages must rise accordingly so
e (W , N ) 
% change in Wage
 0 .2
% change in labor force
• If we reverse the previous expression we get the elasticity
of labor supply:
e( N ,W ) 
% change in labor force
% change in Wage

1
0 .2
5
The city
moves along
its labor
supply curve.
Wage
Will 21 new
jobs be
created?
S
103
100
What is the
new
equilibrium
wage and
labor?
By how
much does
the wage
increase?
If Ed=-2 and
Es=5, then
wage goes
up by ……
D3
D2
D1
100 110115 121
Number of workers in a city (1,000)
% Change in wage 
% change in demand
Ed  Es
The number
of workers
goes up
by………….(use
the price
elasticity of
supply
formulae)
Public Policy and Urban Employment
• Public Policy plays a role in creating
employment in a city:
▫ Taxes
▫ Public Services
▫ Subsidies and incentives programs
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
wage
It also
S1
A pollution
improves
tax
S2
100
environmental
increases
quality
76
production
increasing the
costs,
D1
supply of labor
decreasing
D2
the
100 110
demand for
Number of workers in a city
labor
Note that: In this example the supply shift is larger
and so equilibrium wage declines and the number of
workers increase

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