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.

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2 responses to “The Positive Feedback Loop of Urbanization”

  1. thomasthethinkengine says :

    I feel like the enormous economic positives of agglomeration must have a lot to do with face-to-face contact. I recently became a consultant of sorts and there’s no reason I couldn’t Skype my work in from a part of the world where I pay a *lot* less rent.

    But every job I’ve won has started with me shaving, putting on a tailored suit and cufflinks, meeting people and having coffee with them.

    When you’re providing information services that are in part a credence good – which a lot of the modern economy is – the packaging that surrounds them is an enormous part of their perceived quality.

    Human brains are wired to respond strongly to face-time with other people and I wonder if that explains why agglomeration economics has persisted as relevant even after the communications technology revolution.

    • Alex Copulsky says :

      I think this is right – for whatever reason, even though distance working has been “solved” at least since the invention of email, it hasn’t taken off. I suspect there’s something hardwired or close to it that makes it more difficult to work with and trust somebody that you can’t see. I don’t think agglomerations of talent and knowledge are becoming irrelevant any time soon. I can say from personal experience that the information revolution certainly hasn’t made SF or Cambridge any less relevant, and in fact quite the opposite.

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