Chapter 5

1. Chapter 5 Urban Growth

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. Urban Growth 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 Need to understand why 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)

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

10. Labor Market How does technological innovation affect wages and employment? We will use a model of the urban labor market to explore how wages and employment can vary Firms and households can move freely between cities. 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, reducing quantity of output demanded and labor demanded

12. Factors causing a shift in the demand curve Change in demand for goods: higher demand for goods generates higher labor demand Technological innovation raising productivity: higher MRP which raises labor demand The same applies to increase in human capital

13. Factors causing a shift in the demand curve Business taxes: higher taxes raise cost and prices, decreasing output produced and labor demand. Industrial public services: improved public services, increases productivity

14. 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.

15. Shifting the supply curve Amenities: Anything that increases the relative attractiveness of a city. Disamenities: e.g., higher pollution Residential taxes Residential public service

16. 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

17. Human Capital Facts From 1980-2000, share of metropolitan residents with degrees increased. Variation in college share leads to variation in growth rates (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.

18. 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.

19. 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.

20. 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.

21. 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

23. 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

24. 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:

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

27. 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

29. Assignment Questions 1, 2, 4, 5 and 9 pages 108-110. Due Thursday Oct 15.