Arnold Kling  

The Economics of Cities

Sumner, the Stock Market, and ... New Year's Blogging Resolution...

Edward L. Glaeser and Joshua D. Gottlieb survey the fundamental economics questions about cities, including why they exist.

Cities are ultimately nothing more than proximity, so the returns to urban concentration can be seen as reductions in transport costs.

...a complete urban model has at least three key area-level dependent variables: wages, population levels and housing prices. These three variables are determined by three equilibrium conditions. First, workers must be indifferent across space. This ensures that real wages, corrected for local price and amenity levels, must be equalized across metropolitan areas. Second, firms must be in equilibrium, which means that wages equal the marginal productivity of labor. Third, the housing market must be in equilibrium, which requires housing prices to equal the costs of providing housing, at least in growing markets.

...the spatial equilibrium model allows us to easily reject the view that consumer amenities are the primary force driving urban concentration in the U.S. If cities were driven by amenities, then real wages should be lower in big urban areas, and this is not the case. The real wage premium associated with living in big cities has declined over time (Glaeser and Gottlieb, 2006) which suggests that cities have become relatively more pleasant places to live, perhaps because of the decline in crime (Schwartz, Susin and Voicu, 2003). Yet even today, however, people require a mild wage premium to locate in big urban areas.

What is the relevant margin?

Is it living in Washington, D.C. vs. living in a nearby suburb? Or is it living the greater D.C. metro area (including the suburbs) or living somewhere remote? In my case, you would have to pay me a wage premium to get me to move into the District. However, you would have to pay me a tremendous wage premium to get me to move to, say, Hagerstown.

Of course, I am not a migrant, which suggests that I am inframarginal. I enjoy consumers' surplus living where I am, and my marginal preferences are not observable in the data on my wage or my house price.

It would appear that if G&G are correct, then Richard Florida is not. In Florida's model, a city needs certain amenities in order to draw "the creative class." However, the G&G analysis would say that, when indicators of skills are controlled for, wages are still higher in large urban areas. This suggests that , all else equal, even the "creative class" would prefer to live elsewhere. Of course, Florida could still be correct in terms of comparative advantage. That is, for two locations of equal population density, the one with the more "hip" amenities will be the one where the "creative class" demands a smaller waqe premium.

Stevenson and Wolfers argue that marriage was once based on production complementarity, and now it tends to be based on consumption complementarity. My impression, contra G&G, is that a similar trend is taking place in cities. I was just in Tucson, and that is a good city for someone who likes biking and/or live rock concerts. It does not seem so good for someone who likes ethnic dining and movies. I suspect that people who choose Tucson (or other cities) do so more because of what they can consume there than because of what they can produce there.

There are some amenities where the minimum scale of a city is likely to be high (professional sports teams). Scale may also be an advantage in terms of subtle consumption complementarities: if the people who supply A like to consume B, the people who consume B like to consume C, and so on, then the equilibrium is for everyone to flock to a large city.

People may choose to live in New York City because they have expensive tastes, and that may in turn lead them to strive for high salaries. People who choose remote areas, on the other hand, may be happier earning lower wages and consuming more in the form of leisure or inexpensive pleasures. Again, I find myself wondering what is the relevant margin and whose preferences end up being represented in market prices.

Perhaps someone ought to apply the G&G analysis to higher education. Does the phrase "ultimately nothing more than proximity" not describe colleges and universities?

COMMENTS (5 to date)
Marcus writes:

One lives in Manhattan so one can socialize with other people who live in Manhattan.

I live in Lexington KY which is by far the biggest city I have ever lived. I really have no desire to live in any place larger. I've been to Manhattan and found it to be a fascinating place. I see the attraction. I wouldn't want to live there.

When a person buys a house they're not just buying a house, they're buying into a neighborhood of largely like mind people who have similar kinds of goals and values.

Bob McGrew writes:

I live in Silicon Valley because of what I can produce there - there's no other place in the world where an engineer can do the same kind of things. (Start-ups, principally.)

Cities and areas seem to be specializing more than they did before, though it would be interesting to find out whether the fraction of people who have those skills is increasing. (Silicon Valley specializes in tech companies, but many of the people who work at those companies don't have technical skills - consider trainers, marketers, etc.)

Admittedly, when you start looking at knowledge workers, the break-down between production and consumption begines to seem arbitrary. If I were banned from working at a startup, I'd still like to live in Silicon Valley just so I can talk about the things that interest me (which is mostly technology.)

Peter Gordon writes:

Locational ties are not what they once were (when jobs were plentiful in just a few places). Many people now thrive on surprises. Surprises can enhance production (creativity) as well as consumption (including a satisfying social life). Where do we find these? In many places and even via the internet. The margins that we consider involve the odds of encountering (pleasing) surprises vs. the costs of placing us in their path. What qualifies as a worthy surprise varies from person to person, as does our tolerance in terms of what we will put up with. All of this probably responds to stage of the life cycle. The good news is that there are many choices and many niches.

guthrie writes:

I grew up in your county, Arnold (neighborhood of Franklin Park, just south of Rockville). Since I've lived in Kansas City, Los Angeles and currently in a town just adjacent to Milwaukee. For me, it was relationships that drew me to each of these areas.

I suppose if you consider interpersonal relationships themselves as ‘consumption complementarity' units (not just based on consumption), then I suppose this theory would hold. I just wanted to be close to those I loved and what I did for a living and what I consumed were secondary and tertiary concerns.

Colin K writes:

Urban amenities are largely a matter of experiences available for purchase. By contrast, the benefits of living in a rural area or suburb (space, solitude, lack of crime, good schools) are part of the package deal.

If you live in the city, additional labor provides the opportunity to consume more and better amenities. For those who work straight through dinner 5 nights a week, there is the chance to order the $300 omakase menu at Nobu on Saturday night.

By contrast, if you enjoy the amenities of the suburbs, more labor only means less time spent enjoying them.

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