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2012-10-18 10:31:33
America s big cities are larger than Europe s. That has important economic
consequences
Oct 13th 2012 | from the print edition
AMERICA is full of vast, empty spaces. Europe, by contrast, seems chock-a-block
with humanity, its history shaped by a lack of continental elbowroom.
Ironically, Europe s congestion partly reflects the fact that its large cities
suck up relatively few people. Although America and the euro zone have similar
total populations, America s 50 largest metropolitan areas are home to 164m
people, compared with just 102m in the euro area. This striking disparity has
big consequences.
Differences in metropolitan populations may help explain gaps in productivity
and incomes. Western Europe s per-person GDP is 72% of America s, on a
purchasing-power-parity basis. A recent study by the McKinsey Global Institute,
the consultancy s research arm, reckons that some three-quarters of this gap
can be chalked up to Europe s relatively diminutive cities. More Americans than
Europeans live in big cities: there is a particular divergence in the size of
each region s middleweight cities, those that teem just a little less than
the likes of New York and Paris (see chart). And the premium earned by
Americans in large cities relative to those in the countryside is larger than
that earned by urban Europeans.
The advantage bestowed by large cities can be explained by their evolving
economic role. In the industrial era, cities boomed because expensive transport
made it attractive for firms to locate near coal deposits, waterways and each
other. Isolated businesses could not match the cost savings from compact urban
supply chains. The industrial heartlands in Europe and America sprang up for
these reasons. Yet falling transport costs have made this centripetal force
less important over the past half-century, leaving many industrial cities, like
Detroit, in deep trouble.
Cities today have a productivity advantage for different reasons, to do with
ideas rather than costs. When one firm in a city comes up with a new technique,
product or design, nearby firms may quickly build on it or hire its creator.
One firm s innovation boosts its own productivity but also spills over to other
businesses. Companies that prefer seclusion cut themselves off from these
knowledge spillovers .
Such spillovers mattered in the industrial age, too. Alfred Marshall, an
economist, waxed lyrical on the subject in 1890, noting that the mysteries of
the trade become no mysteries; but are as it were in the air. In his book
Triumph of the City , Ed Glaeser of Harvard University describes a fin-de-si
cle Detroit that resembles a 20th-century Silicon Valley, as Henry Ford, Ransom
Olds and David Buick keep tabs on, and occasionally work with, each other to
pioneer a car industry out of their garages.
But the importance of spillovers seems to be increasing, even though the costs
of communication are falling. Advanced information technology makes it easier
for someone in San Francisco to speak to someone in Paris, but it also makes
the ideas to be communicated more complex. Academic citations provide a simple
way to track this evolution. A 2008 paper by Benjamin Jones of Northwestern
University finds that it takes ever more people to produce new research, a
trend he attributes to the increasing burden of knowledge associated with
rising technological complexity and an expanding knowledge base.
Another study by Pierre Azoulay of the Massachusetts Institute of Technology,
Joshua Graff Zivin of the University of California, San Diego, and Columbia
University s Bhaven Sampat also tracked academic work. The authors find that
when a prominent researcher moves from one city to another, his peers in the
origin city are less likely to cite his patents. Innovation today requires an
ever-larger crowd of experts, preferably working in the same garage.
That makes more densely populated places more attractive to people who want to
share knowledge. Technology innovators and entrepreneurs congregate in Silicon
Valley, for instance, rather than in smaller places where they have less to
offer to, or get from, would-be partners. And knowledge-sharing among such
people tends to make cities more productive as they get bigger. In a 2009 paper
Mr Glaeser and Matthew Resseger of Harvard University find that in highly
skilled areas, city size explains 45% of the variation in worker productivity
(it has almost no effect in underskilled cities). This connection between size,
skills and productivity is not simply due to brainier workers choosing to live
in more populous places. The cities themselves seem to promote learning. Mr
Glaeser and Mr Resseger note that new arrivals to big cities do not receive the
city s wage premium all at once, but rather enjoy faster wage growth over time.
No fire without big smokes
What explains Europe s relatively small cities? Regulatory barriers to growth
may be to blame. Tight zoning rules limit housing supply and raise prices by
driving a wedge between construction costs and market prices. This regulatory
tax amounts to over 300% in the office markets in Frankfurt, Paris and Milan,
according to a 2008 study by Paul Cheshire and Christian Hilber of the London
School of Economics, but is just 50% in Manhattan and, in effect, zero in
fast-growing places like Houston. Taxes that add to transaction costs also help
explain low European mobility.
Comparatively smaller cities also reflect incomplete European integration.
Paris is large by national standards, for instance, accounting for around 30%
of French GDP and boasting incomes per person some 59% above the western
European average. But if there was genuine freedom of movement within Europe,
big-city wage premiums should trigger a flood of migrants from outside national
borders. There are linguistic barriers in the way, of course, but other
obstacles, like the portability of pensions and the recognition of professional
qualifications, make it even harder for Europe to match America s urban
jungles.
Sources
"Urban America: US cities in the global economy", James Manyika, Jaana Remes,
Richard Dobbs, Javier Orellana and Fabian Schaer, McKinsey Global Institute
Report, April 2012
"Triumph of the city: How our greatest invention makes us richer, smarter,
greener, healthier, and happier", Edward Glaeser, Penguin Books, 2011
"The burden of knowledge and the 'death of the renaissance man': Is innovation
getting harder?", Benjamin Jones, Review of Economic Studies, 2009
"The diffusion of scientific knowledge across time and space: Evidence from
professional transitions for the superstars of medicine", Pierre Azoulay,
Joshua Graff Zivin and Bhaven Sampat, National Bureau of Economic Research
Working Paper #16683, January 2011
"The complementarity between cities and skills", Edward Glaeser and Matthew
Resseger, National Bureau of Economic Research Working Paper #15103, June 2009
"Office space supply restrictions in Britain: The political economy of market
revenge", Paul Cheshire and Christian Hilber, Economic Journal, 2008
http://www.Economist.com/blogs/freeexchange
from the print edition | Finance and economics