INTRODUCTION
This blog intervention is a review of Enrico Moretti’s article Are Cities the New Growth Escalator? This article brings an interesting perspective on the economic impacts of Contemporary cities, enriching our discussions in class by linking to theories in labor economics and urban economics. The article provides critical elements to the results of contemporary urban development from an economic perspective.
Enrico Moretti is professor at University of California, Berkeley, his research covers the fields of labor economics and urban economics. His article Are Cities the New Growth Escalator? aims at addressing two questions. First, it discusses the vast disparities in incomes and productivity across cities and locations. What makes some cities more economically successful than others in productivity and salaries? Second, it looks at what role does the economic policy plays in generating the disparities and agglomeration. Should governments design regional economic development policies in order to redistribute the economic activities? Concrete examples across various cities are used in order to better explain the phenomenons, providing a comparative overview of the urban economics landscape in the world.
In the first part of the article, the author argues that disparities are unlikely to be explained by exogenous factors, such as natural resources endowments. Instead, most productivity differences reflect endogenous factors. Three endogenous forces are responsible for the agglomeration across cities: thick labor, thick markets for specialized service providers, and knowledge spillovers. Understanding them holds the key to policy design, which makes a transition to the second part of the article: the role of regional economic development policies.
The second chapter tackles on the issue of place-based economic policy and its role. The paper clarifies the economic logic behind these policies, by introducing their implications in the cities, as well as identifying who the winners and losers are. These implications shed lights on when government intervention would make sense, when the policies are efficient, and when not.
UNDERSTANDING AGGLOMERATION FORCES
In the first part of the article, the author argues that disparities are not explained by exogenous factors, but endogenous factors. Three endogenous forces are responsible for the agglomeration across cities: thick labor, thick markets for specialized service providers, and knowledge spillovers.
We notice that the idea of the IRS (increasing returns to scale) is not mentioned by the author. However, it does serve as an important way to begin considering the agglomeration effects. As more people begin concentrating, there may be effects that generate increasing returns to scale, from knowledge sharing and specialization. The three main forces of agglomeration (thick labor, thick markets for specialized service providers, and knowledge spillovers) that are stressed by the author could be categorized as external economies of scale. By locating or specializing the production of a city, there are observed productivity benefits – and individual benefits.
Matching. Workers with different skills are attracted to firms with different requirements. In larger city, the diversification of production means that worker costs are reduced since people are more matched to the position they have. This effect is called thick labor effect by the author, and is considered as a key reason of the industrial clusters. Moreover, this “perfect matching” matters more for high-skilled workers than low-skilled ones.
Sharing and specializing. According to Adam Smith, sharing productivity gains through specialization (Smith, 1976). Increasing size of workforce leads to increasing division of labor and enhanced productivity. Large cities are able to propose more variety of ingredients because of sufficient demand for these intermediary goods and services, enabling further specialization in some ways. This provides the fertilized ground for thick markets for specialized service providers according to the author.
Learning. The interactions and knowledge exchange in large cities take place throughout professional life, enabling knowledge generation, knowledge diffusion and knowledge accumulation. This process generates knowledge spillovers, increasing productivity and wages and it also explains the difference between rich and poor countries in long term.
CHALLENGES OF URBAN ECONOMICS: IMPLICATIONS OF REGIONAL ECONOMIC DEVELOPMENT POLICIES
The second chapter tackles on the issue of place-based economic policy and its role. The paper clarifies the economic logic behind these policies, by introducing their implications in the cities, as well as identifying who the winners and losers are. These implications shed lights on when government intervention would make sense, when the policies are efficient, and when they are not.
Firstly, the author addresses the big-push policies through the exemple of Tennessee Valley Authority (TVA) during the Great Depression to lift a poor region out of poverty. These big-push measures could start by investing in large infrastructure programs. They do encourage labor to arrive, but few demand is provided in the new territory. Critics are numerous on the top-down and unnatural characteristics of this approach. According to the author, the fail of the big-push policies in generating significant economic growth is due to the lack of private sector, thus the labor demand. However, it is extremely hard for government and decision makers to predict and identify the future growth and give incentives to attract a specific private sector.
The second exemple is the Cluster building policies. This approach aims at using economic subsidies to attract large companies in order to seed a cluster. It seems to be an ideal alternative to the first approach as it provides strong ground of the presence of private sector, as well as demand. However, critics are pointing to the waste of public funding, as well the few social benefits to the local community. Ultimately, the only winners in the game are the companies. It is up to the mayors and governors to consider the effect of the redistribution from one place to another, is it benefiting the all the places as a hole? Or is it hurting other parts of the country?
Finally, the light has been shed on the universities and education. The universities and colleges are identified as productive amenities in class. Policy makers seek to raise the education of their residents by supporting local colleges and universities given the positive relationship between education level and local economic growth of a given city. However, the author argues that universities are not guarantee of economic success, but only effective when they are part of a larger ecosystem, integrating to the thick market and specialized intermediate services. Once cluster being established, universities start fostering growth, becoming part of the ecosystem. Another explanation of the uncertainty of this approach might be the highly mobile nature of the college student group: since they are extremely mobile, they do not necessarily choose to stay in a place until the local conditions is particularly attractive.
WHO BENEFITS AND WHO IS RESPONSIBLE?
If the previous sections shed lights on the efficiency and productivity of the policies could bring, this last section would focus more on the equity and equality. What are the actors that are involved in the redistribution? Who benefits? Who should make the rules and intervene?
The actors involving in redistribution of resources and wealth are not always the ones that were originally targeted by the policies, due to the tight link between the labor market and housing market. As more people move to a particular city on the basis of wage offered and demand for labor, the influx of population results in a rise of housing costs. If a city’s supply is elastic, notably due to the ability to expand at its fringes, prices may stay relatively stable, workers benefit. Alternatively, when there is no ability to increase housing supply (for zoning, geographic features, etc), housing prices will rise, homeowners benefit. It causes people to stop coming to the city or rather leading to skill-biased emigration since many low paid workers will see a decrease in their utility.
Their mobility is obviously, contingent on their interest in moving from their city of origin and other idiosyncratic preferences. Additionally, the utility of living in a city is not only a factor of wages and consumption costs, but also involves the utilities and amenities offered, this is less discussed in the article by the author.
Although unskilled worker groups might leave from the city with rising costs, those who stay ultimately gain from the agglomeration effect, seeing less competition in their field they also experience a rising wage. If many of the unskilled laborers leave the one city, to another particular city, they will face more competition and likely experience decrease in wages, however, the outflux of skilled laborers towards the other urban area may alternatively lead to compensations in terms of their housing costs.
The redistribution of wealth brings completely different effects to different interest groups, homeowners and renters, low-skilled and high-skilled workers creating larger disparities in cities. Magnitude of gains and losses for different groups depends not only on land use regulations and housing elasticities, but also on the mobility of workers, which was less discussed and developed in the article.
CONCLUSION
In the early 2000s, some researchers argued that, the concentration of jobs would not exist anymore, and more opportunities will spread to low-cost locations. Empirically, this did not turn out to be true in most countries. Most of the economic growth is still concentrated in several large cities. However, some places such as China are catching up. Some cities have seen significant economic growth, but there are still strong disparities within the country. In terms of the governance, it’s extremely difficult for several cities and the local government to catch up with the situation and generate economic growth, due to the historical factors, as well as the lack of well-educated labor force and an well established innovation sector. Local government should take the responsibility, but there is no unique formula. The policies should be local, by taking consideration of all the local specificities and local expertise.
Overall, this paper provides a clear and comprehensive overview of the urban economics phenomenons, such as agglomeration effect, and external economies of scale. The analysis of policies and explanation of theories are based on concrete examples across a variety of cities in the world, which provides a global and comparative perspective. However, several concepts which seem key to the explanations have not been introduced explicitly, or not even mentioned. For example, the role of the urban amenities has been rarely mentioned and developed in the article, as well as the mobility of the workers (their attachment to hometown etc.). It would have been crucial to take these factors in account in explaining the forces of flow and agglomeration.
Sources:
Moretti, Enrico. 2013. Are cities the new growth escalator? (English). Washington DC ; World Bank Group. http://documents.worldbank.org/curated/en/455521468148522294/Are-cities-the-new-growth-escalator
Le Cycle 2019 