Production v Consumption: what drives workers to our cities today?

Human capital has long been recognised to be a key driver of modern economic growth (Florida, 2002). This is based on the idea that the diversity of economic actors within cities, and their high levels of interaction, promote the creation and development of new products and technology. Developing this further, economic growth could be said to be facilitated by these human spillovers, with studies finding that people are more productive when located closely to other highly skilled individuals (Florida, 2002). Therefore, attracting human capital is key to fostering economic growth within a town, city or region. The literature suggests that places are able to attract talent through two methods: firstly, the traditional view is that places attract people by matching them to jobs and economic opportunities; secondly, the more recent view, is that places attract people by providing a range of lifestyle amenities, specifically for the highly skilled individuals (Florida, 2002). Therefore, we need to understand the difference between these two approaches because the conclusions from either would have significant consequences for the type of growth policy that could be pursued.

Firms and workers are seen to be more productive in large and dense urban environments than other locations. This is seen to link back to the idea of Marshall’s three forces of agglomeration: learning, sharing and matching (Puga, 2010). Work by Glaeser (1999) suggests that young workers move to big cities because of interactions with experienced workers, which helps them to acquire valuable skills (Puga, 2010). Thus, showing the advantages of learning. If there are many firms within a city, then simultaneously applying to all suitable jobs means that there is a reduced chance that none of them work out, hence the sharing of risk. A large labour market within a city may mean that there are potentially better matches between employers and employees, and hence can lead to higher income per capita (Durant & Puga, 2004). Therefore, we can look at the migration patterns of highly skilled individuals, to see to what extent the attraction of production plays a significant role in migration. One study shows that highly skilled migrants (those with a college degree), are more likely to move to areas that specialise in their industry, regardless of urban size and hence amenities associated with this, and that they were not more willing than non-degree holders to trade-off income against amenities (Brown & Scott, 2012). Furthermore, another study looking at power couples (those in which both partners have a college education), suggest that they are increasingly and disproportionately locating in large metropolitan areas because of the associated colocation matching benefits (Costa & Kahn, 2000). These studies therefore suggest that the production benefits of cities, are still playing a large role in attracting individuals to a location.

However, matching is much more than matching employers with employees and vice versa. Matching can encompass a variety of things, such as finding a place to live based on your lifestyle preferences. Since the late 1970s, there has been a growing body of work that has argued that workers, especially those with high levels of human capital, may be choosing where to live based on local amenities rather than earning opportunities (Brown & Scott, 2012). It is argued that this has become more prominent because of the decline of transport costs (by more than 90%) throughout the 20th century (Gottlieb & Glaeser, 2006). As such, this has allowed individuals and firms to no longer be tied to natural resources and large infrastructure. Hence, we see the rise of consumer cities, located in places which have amenities that consumers want (Gottlieb & Glaeser, 2006). These amenities are said to include: the natural environment, cultural and recreational amenities, along with the quality of social life. An example of this is that as January mean temperatures rise by 10 degrees, expected growth from 1920 to 2000 increases by 5.4% (Glaeser & Kohlhase, 2004). Consequently, we have seen the rise of the ‘Sunbelt’ and the decline of the ‘Rustbelt’. One such theory is that by Florida (2002), who suggests that tolerance and diversity, play leading roles in attracting individuals. This is because these can both be associated with low barriers to entry, helping to attract talent and hence generate higher incomes, while fostering growth.

Both of these arguments would lead to different policy solutions: production policies would be aimed at shoring up agglomeration economies such as collective action to internalize externalities, while consumption policies would focus on providing amenities to attract highly skilled workers. We need to be able to decide between these, otherwise policy may become ineffective and lead to stagnation in some areas. While cities remain critical to a nation’s economic growth, it is crucial that we find the right balance.

References

Brown, W. & Scott, D., 2012. Human Capital location choice: accounting for amenities and thick labor markets. Journal of Regional Science, 52(5), pp. 787-808.

Costa, D. & Kahn, M., 2000. POwer couples: changes in the locational choice of the college education, 1940-90. Quarterly Journal of Economics, 115(4), pp. 1287-1315.

Durant, G. & Puga, D., 2004. Micro-foundations of urban agglomeration economies. In: J. Henderson & J. Thisse, eds. Handbook of Regional and URban Economics. s.l.:s.n., pp. 2063-2117.

Florida, R., 2002. The Economic Geography of Talent. Annals of the association of amercian geogrpahers, 92(4), pp. 743-755.

Glaeser, E. & Kohlhase, J., 2004. Cities, regions and the decline of transport costs. Papers in Regional science, Volume 83, pp. 197-228.

Gottlieb, J. & Glaeser, E., 2006. Urban Resurgence and the Consumer City. Urban studies, 43(8), pp. 1275-1299.

Puga, D., 2010. The magnitude and causes of agglomeration economies. Journal of Regional Science, 50(1), pp. 203-219.