Urban Economics - growth

Just like a country, a city also experiences economic growth based on the level of the following factors:

1. quantity of labor
2. quality of labor (human capital)
3. physical capital
4. technological progress

Labor Demand

As cities grow, more people tend to move to cities. People will continue to move to cities as long as the marginal benefit of moving to a city (higher wages, better amenities) exceed the marginal cost of moving to a city (higher cost of living, more congestion, pollution). The BEA compiles the growth rate of US MSA (metropolitan statistical areas - defined in this link).

When more people enters the city limits, the density grows, and the city can reap the agglomeration benefits. For example, one paper finds that opening large plants in a county can increase total factor productivity by 12% in five years. The wages of labor in a city is determined by labor supply and demand. Demand for labor is determined by the marginal product of labor, and the price of output that is being produced. The following can increase the demand for labor:

1. increase in labor productivity
2. increase in the price of output
3. lower taxes on business
4. amenities for setting up firms

If firms in one sector are growing and hiring more workers, it can create a multiplier effect and encourage other support firms to grow. For example, if the tech industry grows here in RTP, it will also increase demand for banking, transportation and food industries, causing them to grow. This is the multiplier effect of employment. With increased demand for labor, there is also more demand for housing and office/industrial space, an example is the Brickell district in Miami.

One popular (yet ineffective) way of increasing this multiplier is by building sports arenas in cities. Cities spend billions to attract professional teams to come in. However, studies have shown that building sports arenas does not have a meaningful impact on the economy in the long run.

Taxes can affect business location. If a metropolitan area increases tax by 10 percent, it reduce its business activity by 1-6%. ON the other hand, if an individual municipality in a city increases taxes by 10 percent, it can reduce business activity in that municipality by 10-30 percent.

Labor Supply

People are attracted to move to cities mainly for the following reasons:

1. Wages in the city
2. amenities provided by cities
3. taxes in cities
4. services provided in cities.

If one city changes its policies towards firms or individuals, it can affect the surrounding rural communities, and even other cities in the country. Because it can be costly to live in a city in real terms, the cost of living in a city and non-city may be the same, even though the wage differential (in nominal terms) persists,