A Blog by Jonathan Low


Oct 16, 2017

The Economics of Geography: Why Big Cities Flourish and Smaller Ones Languish

Scale and economic diversity provide better opportunities, attracting the enterprises and people which drive growth. JL

Eduardo Porter reports in the New York Times:

Small metropolitan areas are having a hard time adapting to economic transitions. Employment grew twice as fast in large metropolitan areas as it did in small ones from 2009, to 2015. Income grew 50% faster. Labor participation shrank half as much. Big cities have a greater variety of employers and more job opportunities, are more productive, more innovative, draw better-educated workers by offering higher wages,  and develop a richer variety of industries. They are growing faster.
You don’t want to be hit by a recession in a city like Steubenville, Ohio.
Eight years into the economic recovery, there are thousands fewer jobs in the metropolitan area that joins Steubenville with Weirton, W.Va., than there were at the onset of the Great Recession. Hourly wages are lower than they were a decade ago. The labor force has shrunk by 14 percent.
The dismal performance is not surprising. Built on coal and steel, Steubenville and Weirton were ill suited to survive the transformations brought about by globalization and the information economy. They have been losing population since the 1980s.
But what made them such bad places to ride out a recession was not just their industrial mix. With only about 120,000 people, they were just too small to adapt to the shock. And they may be too small to survive.

Where Disruption Has Hit U.S. Workers Hardest

Automation and foreign trade have buffeted the nation’s labor force, especially across the Midwest and Southeast. But big metropolitan areas have been more successful than smaller places at recovering from economic shocks.
Rates of recovery from recession
in the 10 states of greatest disruption
How states rank in being disrupted
by foreign trade and automation*
2009 TO 2015, BY
Top 10
Compound annual
growth rate
Compound annual
growth rate
Steubenville and Weirton are on the losing side of yet another cleavage dividing the haves from the have-nots across the United States: geographic inequality.
Whether they rely on steel mills or coal mines, or a hospital or a manufacturing plant, small metropolitan areas are having a hard time adapting to economic transitions.This inability has not only slowed their recovery. As technology continues to make inroads into the economy — transforming industries from energy and retail to health care and transportation — it bodes ill for the future of such areas.
They can be “dangerous places for working people,” said Mark Muro of the Brookings Institution’s Metropolitan Policy Program.
To prove his point, Mr. Muro compared the 100 largest metropolitan areas in the country, those with populations above 550,000, with the 182 smallest, which have populations ranging from 80,000 to about 215,000. On average, the big ones got out of the recession faster than the small ones.
To get a sense of the future, he selected big and small metropolitan areas only in the 10 states most subjected to economic disruption — as defined by the penetration of automation and job displacement as a result of foreign trade — to tease out the effects of these transformative forces.
The difference in performance widened: Private employment grew almost twice as fast in large metropolitan areas as it did in small ones from the trough of the recession, in 2009, to 2015. Income grew 50 percent faster. And the labor participation rate — the share of the working-age population in the labor force — shrank only half as much.
“Economic transitions work against smaller America,” Mr. Muro told me. “This is a period demanding excruciating transitions.”
By now, most Americans live in big metropolitan clusters. Still, the stagnation of small cities is hardly inconsequential. In the presidential election last year, frustrated voters in metropolitan areas with fewer than 250,000 people chose Donald J. Trump over Hillary Clinton by a margin of 57 percent to 38 percent, by one reckoning. Mr. Trump took 61 percent of rural voters and 52 percent of voters in midsize cities. This offset Mrs. Clinton’s advantage in America’s prosperous big cities in critical states.
The frustration that helped deliver the presidency to Mr. Trump is a bad guide for policy. Mr. Trump’s promise to relieve the pain by reviving the coal and steel industries, by keeping immigrants out of the country and by raising barriers against manufactured imports is only a rhetorical balm to satisfy an angry base seeking to reclaim a prosperous past that is no longer available.
Yet it is unclear what should be done to slow the decline of small-city America. For what is driving the decline is the flip side of the forces powering the success of large metropolises: the accumulation of human talent that is spurring investment and driving innovations that are fueling the prosperity of the nation as a whole.
Some of the advantages of big-city living are not hard to find. For starters, big cities have a greater variety of employers and thus more job opportunities in a richer mix of industries than do small cities, whose fortunes are often tied to those of just a small number of employers.
Bigger cities are more productive. They are more innovative. They draw better-educated workers by offering them higher wages. They develop a richer variety of industries. It should not be surprising that they are growing faster.
It was not always so. In the decades after World War II, the share of jobs in big metropolitan areas actually declined, as employment growth spread to smaller cities.
But that was a different economy. Unlike with manufacturing, which took root in cities large and small, and in exurban industrial parks, opportunity in the information era has clustered in dense urban enclaves where high-tech businesses can tap into rich pools of skilled and creative people.
“The thickness of a labor market is crucial in the innovation industries that are drivers of economic success today,” said Enrico Moretti, an economist at the University of California, Berkeley. “This applies to the biotech engineer but not to the welder, who has more replaceable skills.”
Elisa Giannone of the University of Chicago pointed out that the wage gap between rich and poor cities was in fact closing from 1940 to 1980. But then regional convergence stopped, as the wages of college-educated workers started to rise faster in the big cities that were plugged into the digital economy. The cities where people were quickest to adopt the personal computer saw wages increase the fastest.
“Twenty years ago I would never have predicted that urban concentration would be so strong,” said Richard Florida, an urban studies expert at the University of Toronto’s Rotman School of Management. “What has happened is significant, and it is not going away.”
There are a couple of forces that could stop the rise of big cities. Congestion costs — traffic jams, and any rise in urban poverty and crime — could turn them into less attractive places for the smart young men and women who have been critical to their success. Rising real estate prices could also put a brake on their growth. Some economists argue that housing restrictions hamper economic growth by slowing the flow of talent.
Mr. Muro worries that geographic concentration may ultimately hurt the nation’s prosperity, by concentrating innovation in a very small cluster of mega-metro areas. And yet the forces that favor larger cities may be too powerful to save the nation’s Steubenvilles and Weirtons from inexorable decline.
As Mr. Florida noted, the United States economy isn’t even that geographically concentrated by international standards. London produces a third of Britain’s gross domestic product. The output of New York, Los Angeles and Chicago combined doesn’t add up to even 17 percent of the American economy.
A recent paper by economists from the University of Illinois, the University of Quebec, the University of Lausanne and the University of Utah suggested that there were too many American cities and that they were inefficiently small.
Adapting to these sorts of changes will require something different from reviving the industries of old. Smaller metropolitan areas might try plugging into the economic orbit of more successful larger cities. They might try to become innovation hubs by, say, drawing large teaching hospitals.
And yet the future for the residents of small-city America looks dim. Perhaps the best policy would be to help them move to a big city nearby.


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