When studying urban economics, a common starting point is to make the obvious observation that economic activity does not have an even geographic distribution.
Instead, it clusters in metropolitan areas. To put it another way, even with higher real estate costs, higher wages and prices, traffic congestion, pollution, and crime, businesses find it economically worthwhile to locate in urban areas. For such firms, there must be some offsetting productivity benefit. The Summer 2020 issue of the Journal of Economic Perspectives includes a four paper symposium on "Productivity Advantages of Cities."
Here, I'll focus on a few themes of the first two papers. But it's impossible to read the papers in late-summer 2020 without wondering if the productivity advantages of cities that they describe are going to be a casualty of public concerns over the pandemic and rising crime in urban areas.
Duranton and Puga provide an overview of the research on economic gains from population density. They write:
While urban economists broadly agree on the magnitude of the productivity benefits of density, the evidence distinguishing between possible sources is less solid. Duranton and Puga (2004) classify the mechanisms into three broad classes. First, a larger market allows for a more efficient sharing of local infrastructure, a variety of intermediate input suppliers, or a pool of workers. Second, a larger market also allows for better matching between employers and employees, or buyers and suppliers. Finally, a larger market can also facilitate learning, by facilitating the transmission and accumulation of skills or by promoting the development and adoption of new technologies and business practices.
They also point out that these "agglomeration economies" at some point can be outweighed by costs of density like land prices, housing prices, transport costs, and congestion.
Theory has long hypothesized that as population and density increase in a city, its benefits initially accumulate faster, but eventually, its costs dominate (Henderson 1974). Fujita and Thisse (2013) call this the “fundamental trade-off of spatial economics,” because it explains both the existence of cities and their finite sizes. However, compared to research on benefits of density, there is a paucity of research on its costs, which Glaeser (2011) dubbed the “demons of density.”
Rosenthal and Strange dig into some of the productivity advantages of density, and discuss the evidence that the gains of economic activity by being grouped together operate at many levels. For example, if one looks at a certain region, it's not just that economic activity is concentrated within the metropolitan area. In addition, there will be pockets of increased density within the overall urban area, like the Wall Street area in New York. And even within those pockets of higher density, there will be geographic concentrations of specific kinds of firms--like financial or legal or advertising firms--that are bunched within a few blocks or even on different floors in the same buildings. At all of these different levels, there is evidence of productivity gains from being grouped together. They write:
Agglomeration effects operate at various levels of spatial aggregation, including regional, metropolitan, and neighborhood scales. In fact, there is also evidence that agglomeration effects operate below the neighborhood level, including within buildings and organizations. Although agglomeration effects can extend over broad distances, they also attenuate, with nearby activity exerting the strongest effect on productivity.
For the last few months, the density of workplaces in the US economy has dramatically diminished. Whatever the productivity benefits of density in cities, concerns over the pandemic and then also about prevalence of crime and rioting are causing firms and workers to push back against density. Moreover, the different dimensions of density can reinforce each other: that is, a city with lots of residents and workers will also tend to have more option for shopping, restaurants, and entertainment, which in turn makes the city a more attractive destination for residents and workers. Conversely, when many workers shift to telecommuting and many residents are trying to stay home to the extent possible, the firms that offer shopping, restaurants, and entertainment are going to suffer.
Duranton and Puga point out that over time, these kinds of changes and cycles in urban areas are not new. They write:
[W]hat will be the long-run consequences of this virus for our densest cities? Pandemics have hit cities the hardest for centuries, and cities have adapted and been shaped by them—from investments in water and sewage systems to prevent cholera, to urban planning to reduce overcrowding and improve air circulation and access to sunlight in response to tuberculosis. Maybe temporary social distancing measures will also leave a permanent footprint on cities—for instance, in the form of more space for pedestrians and bicycles or a gain of outdoor versus indoor leisure environments. But the idea that this pandemic will change cities forever is likely an overstretch. Cities are full of inertia and this crisis has stressed both the costs and benefits of density. Confinement is forcing us to see both the advantages and the great limitations of online meetings relative to the more subtle and unplanned in-person exchanges. It has made us realize that many tasks are impossible to do from home. At schools and universities, the haphazard transition to online courses may speed up their development, or it may delay it as many students have become frustrated by losing aspects of a full educational experience. For a while, some people may try to avoid dense cities for fear of contagion, but others may be drawn to them seeking work opportunities in difficult times.
They may turn out to be correct, especially if a trustworthy and effective coronavirus vaccine emerges. Maybe I've just got a case of the 2020 blues today, but I find that I'm less optimistic. It feels to me as if our society is jamming a huge amount of change into a short time. Just in economic terms, for example, there have been conversations about the future of telecommuting, telemedicine, and distance learning for decades--but now we are leaping ahead with all of these changes all at once. I don't expect metropolitan areas to go away, but there may be substantial shifts within a given urban area in what characteristics people desire in their living arrangements, the location of where they work, the mixture of jobs and industries, how people relax, and how often they are willing to mix with a crowd. At present many households and firms are still cobbling together temporary arrangements--or at least arrangements that are intended to be temporary. But some proportion of that temporary is likely to have long-lasting and disruptive effects.
A version of this article first appeared on Conversable Economist.
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.