I am no macroeconomist; however, I think there are some important dots to connect between cities and economic growth. The Gated City by Ryan Avent, (discussed more in depth here), explores this thesis and offers a nice overview of the research that links population density and productivity. He cites Ed Glaeser and others who see a strong correlation between the two. Glaeser finds that with a 50 percent increase in population density, productivity increases by 4 percent.
Additionally, I find Geoffrey West’s work (not cited by Avent) particularly intriguing. West is a former physicist who has studied the correlation between city size and all sorts of variables from the number of gas stations to the number of bank deposits per year. He’s found that every time a city doubles in size, worker productivity increases by 15 percent. The distinction between West and many others who study this issue is that he focuses on a city’s total population rather than its population density.
Increasing worker productivity is the holy grail of macroeconomics. As worker productivity grows, it raises our wages and standard of living. This is what lifts poor countries out of poverty and ensures that future generations will enjoy a higher standard of living than we do today. Some of the factors that economists widely agree contribute to higher growth rates include education, property rights, and rule of law. Perhaps urbanization should be added to the list too.
I won’t weigh in here on whether the variable that influences productivity is population size or population denisty; maybe they both do. In the context of land use policy, I would argue that it doesn’t matter which variable we look at. By limiting development, land use restrictions typically lead cities to be both less dense and of smaller populations. This applies equally to traditional land use restrictions and to Smart Growth policies like urban growth boundaries.
I would never suggest that lawmakers should undertake efforts to incentivize, or even “nudge,” people to move to cities. However, given all of the data that suggests that people are more productive in cities, policies that limit urban growth should be treated with extreme caution. In the ongoing discussion of how to get people to pay attention to the costs of land use regulation, this argument should carry some weight as economic growth remains lackluster in many parts of the world.
while i agree that lawmakers shouldn’t undertake efforts to incentivise people moving to cities, i believe that they have done quite the opposite with the mortage interest rate deduction and the development of highways. They should, as Alexander Hamilton stated in his Report on Manufacturing, create the correct public policy framework (taxes, land uses, education, other public goods) that make cities attractive to both people (households and labor) and industry. Also, City’s that encourage the construction of new product in more dense ways and with more height, then they would also create incentives for labor and industry (and capital) to flow in their direction.
I’ve only read parts of the book, but these points are similar to Jane Jacob’s arguments in The Economics of Cities.
“I won’t weigh in here on whether the variable that influences productivity is population size or population density”
If you are talking about cities (size or density) you are inherently talking about density, as that is what makes a city a “city” as opposed to not. Cities are essentially areas of density greater than the surrounding rural density. Otherwise we would be talking about the city of the U.S.A. and not New York, L.A., Chicago, Dallas, Houston……………………
My working paper finds that wages (~productivity) increase in American urban areas with increases in both total employment in the urban area and with the percentage of employment that concentrates in employment centers.
Good site ! I would take some issue that worker productivity is the holy grail, that efficiency is the most important by-product of Cities; rather, the spark of innovation that creates wholly new enterprises seems to me the ‘promised land’, having the power not just to multiply but to transform.
How strong is the correlation? In particular, are city size and centralization important correlates of productivity, or are they reduced to nothing by controlling for bigger correlates, as is the case with the (already very weak) correlation between freeway building and congestion relief?
Interesting, I would love to learn more about your findings. Is your working paper available online or would you be willing to share it?
I find market process theory, which focuses on the entrepreneur’s role in economic growth, is better for explaining how markets work than the neoclassical model I’ve described above. However, market process theory doesn’t allow for us to talk in aggregates, so for talking about the role of cities in macroeconomic data, I think it’s necessary to think in terms of productivity rather than in terms of innovation and entrepreneurship.