The Positive Feedback Loop of Urbanization
There is something of a debate about why people make more money in cities, and whether at the individual level it’s wisest to make more money in a higher-cost city or less money in a lower-cost city. Emily Badger has an excellent piece on economist Rebecca Diamond’s work on the growing educational/economic divide across American cities. Diamond found (unsurprisingly, if you’ve ever compared Boston and Detroit) that places with more college graduates are expensive, but tend to be nicer and to offer higher-paying jobs. In short, even after you account for the higher cost of living big, well-developed cities tend to come out ahead. That doesn’t surprise me, but this did – places with higher concentrations of college graduates tend to pay college graduates more!
This suggests that the urbanist case is actually right – that people are more productive in cities than rural areas. There are two countervailing forces that could act on the wages of highly-skilled workers in areas with many of them, greater supply and greater productivity. We should expect to see lower wages for college grads in cities with lots of them, and the fact that the opposite holds true suggests that there are in fact quite substantial productivity benefits gained by embedding in a local economy with more specialization and more opportunities to apply specialized skills.
Urbanization is a positive feedback loop of productivity. Urban workers produce more – while they have to pay more in housing costs, there is a positive net social benefit that increases the more people take up the opportunity. This is actually the opposite of a collective action problem, a situation where everyone is incentivized to take actions that make everyone else better off. Even better, this generates surplus income that can be taxed to make rural residents better-off, something the state does now through taxing income and spending on services/infrastructure in rural areas. The main thing standing in its way is structural constraint, namely the limited housing available in the densest and richest urban areas.
Arguably, by preventing development rich urban landholders are extracting rents from the rest of the country. Certainly from the rest of their states.