Chapter 8 The Urban Labor Market

Purpose Analyze the urban labor market

Introduction Cities are remarkably dynamic Growth at striking rates: Chicago’s population expanded by 270% in the 1850s Las Vegas grew by 85% by 1990 Losses also possible: Saint Louis lost 12% of its population in the 1990s

Why Cities Grow? Urban growth reflects the choice of individuals to live in a particular place Choice is driven by economic return; i.e., wages, amenities and living cost City growth varies: because these factors vary across space

The Labor Demand Curve Negatively sloped because of: Substitution effect: increase in wage causes factor substitution away from labor. Output effect: increase in wage increases production costs and price of final good wage D workers

Factors causing a shift in the demand curve Labor demand shifts right: Increase in demand for final goods Technological innovation raising productivity: (higher MRP) Increase in human capital Lower business taxes Industrial Public services wage D’ D workers

The Labor Supply Curve The higher the wage the larger the number of workers in a city Two assumptions: Hours worked/worker constant Participation rate constant Thus, an increase in wage increases labor supply because more workers move to the city. S wage workers

Shifting the supply curve Amenities: Anything that increases the relative attractiveness of a city. Disamenities: e.g., higher pollution Residential taxes Residential public service S’ S S’ wage workers

Human Capital and Economic Growth Increase in human capital results in higher productivity. Competition between firms results in a higher wage An educated worker has more ideas to share and better communication skills. Increased human capital increases the rate of technological progress and therefore growth rate

Empirical evidence: Human Capital From 1980-2000, share of metropolitan residents with degrees increased from 17% to 23%. Variation in college share in 2000: 11% to 44% The larger the college share the higher the rate of growth which leads to divergence in income across cities Beneficiaries of educational spillovers: the effect of a 1% increase in college share on wages: high-school dropouts (1.9%) high-school graduates (1.6%) college graduates (0.4%) Convergence in income distribution Proximity to star researchers an important factor in birth of biotechnology firms.

2. Export goods and Employment Growth Sometimes cities experience growth due to changes that take place outside the city Define Export goods (tradeable goods): goods produced for sale to people living outside the city, Local goods (non tradeable goods): goods sold to local residents. Employment Multiplier Process

Multiplier Employment is the sum of export employment and local employment. Export workers: produce export goods. An increase in demand for export goods will create new export employment. Higher export employment creates higher incomes. Demand for local goods will increase, which in turn stimulates local employment.

Multiplier Higher export demand generates export jobs. $ Higher export demand generates export jobs. Export workers spend part of their income on local products. Increased demand for local products creates new local jobs. New local workers spend portion of income on other local products.

Multiplier Employment multiplier measures the change in total employment for each additional export job that has been created. The average value for the multiplier is 2.13, indicating that a one unit increase in export employment increases total employment in the metropolitan area by 2.13, i.e., creates 1.13 local jobs

Suppose an increase in export demand creates 10 units of export employment Wage The increased demand for export workers of 10 created higher demand for local jobs of 11, i.e. every export job creates demand for 1.1 local job 100 If the employment multiplier is 2.1, then total employment increases by 2.1x10=21 D3 D2 D1 100 110 121 Number of workers in a city (1,000)

Equilibrium Effects As the number of workers in a city increases, the prices of housing and land increase To compensate workers for the higher cost of living, wages will go up

Equilibrium Effects Bartick (1991) estimates that the elasticity of the cost of living with respect to labor force is 0.2 Wages must rise accordingly so If we reverse the previous expression we get the elasticity of labor supply:

Will 21 new jobs be created? If Ed=-2 and Es=5, then wage goes up by …… Wage S The city moves along its labor supply curve. What is the new equilibrium wage and labor? 103 100 D3 The number of workers goes up by………….(use the price elasticity of supply formulae) D2 D1 100 110 115 121 By how much does the wage increase? Number of workers in a city (1,000)

Public Policy and Urban Employment Public Policy plays a role in creating employment in a city: Taxes Public Services Subsidies and incentives programs

Environmental Regulation and urban employment Regulation can affect urban employment Environmental regulation raise costs of production and therefore reduce demand for labor It also improves environmental quality making it more desirable for workers to locate in areas with more stringent regulations

It also improves environmental quality increasing the supply of labor wage A pollution tax increases production costs, decreasing the demand for labor S1 S2 100 76 D1 D2 100 110 Number of workers in a city Note that: In this example the supply shift is larger and so equilibrium wage declines and the number of workers increase