Bosquet
& Overman (2016) find, using data from the British Household Panel
Survey clustered by local labour markets, that the elasticity of wages with
respect to birthplace size is 4.6%, which is around two thirds of the 6.8%
elasticity of wages with respect to current city size. So the size of place of
birth “explains” most of the well-known productivity enhancing size effects.
The authors claim that their results suggest that (1) the
effect of birthplace on current location (clearly a high correlation between
the two); and (2) inter-generational transmission (i.e. the correlation between
incomes across generations); largely explain the effect of birthplace. In
contrast, they find no role for (3) human capital formation (it’s not the case
that people born in a high wage location gain better school results,
conditional on parental income etc). Their results “highlight the importance of intergenerational sorting in helping
explain the persistence of spatial disparities”, and show that “there is a geographic component to the
inheritance of inequality”.
What does this tell us? Well (1) is just the usual
agglomeration story: people can be, on average, identical across locations, but
in bigger locations they are more productive through greater scope for specialisation
etc. Given the high correlation between where people are born and where they
end up, birthplace size will statistically “explain” the extra wages that
actually come from pure size effects. And (3) tells us that educational quality
does not vary systematically with size.
(2) however, is about talent. Talent is heritable, and
partially explains the relatively high positive correlation between the
earnings of parents and their children (though advantage and privilege also
play a role in explaining this correlation). This paper is measuring a
geographical concentration of talent. Highly paid talented workers are clustering
in larger locations, and producing talented children who, on average, also stay
in these locations and go on to earn high wages.
(1) is potentially a positive sum game: on the production
side, productivity is higher if everyone clusters in a single large location, rather
than spreading out evenly, because the scope for specialisation is higher; and
on the consumption side, product variety is higher because it is much more
worthwhile to supply niche products in a large market[1].
It is easy to imagine that the consumption benefits of size may be scale
invariant: city 2, twice the size of city 1, will be able to support x% more niche markets than city 1,
independent of the absolute size of city 1[2].
On the production side however, it seems that the positive externalities are more
highly localised and hence less scale invariant. Ahlfeldt
et al (2015) find that “externalities
are highly localised within the city and after around 10 minutes of travel
time, … externalities fall to close to zero”. This seems to imply that
once a city is big enough to support some highly productive cluster, sector or
industry, then doubling the size of the city cannot be expected to further
increase productivity.
Conversely, (2) is a zero sum game: talent in one location
is talent that is not located anywhere else.
Further, it is not clear that increased size ends up providing benefits to the
inhabitants of a location since increased size also increases congestion,
pollution and land costs. Paul
Cheshire claims that the current literature suggests that “doubling a city’s size produces about a 5%
increase in total factor productivity, holding everything else constant”,
but points to French
research that suggests that the benefits from this higher productivity are
entirely swallowed by increased land costs if land supply is fixed, and 40%
absorbed by increased land costs if land is elastically supplied.
To the extent that large cities are exploiting potentially positive
sum gains from (1), it is possible that it is worthwhile, at the margin, to have
public policy that encourages the movement of people from smaller places to the
largest cities (so long as we ensure open-access and freedom to build so that
the land costs are more like the 40% of agglomeration benefits, rather than the
100% of agglomeration benefits under inelastic supply of housing). But to the
extent that the gains from size are actually due to the zero sum game of moving
talent around, then it would be stupid for public policy to encourage talent to
move to large congested, expensive cities and so not be present in places where
land is cheaper.
And, of course, the UK seems to take the potentially less intelligent
option. The Centre for Cities 2014 report, Cities
Outlook 2014, had some fascinating statistics on migration flows within the
UK. The following picture was particularly striking:
Update: The Paul Cheshire CityTalks episode from 23rd June is good. Don't agree with everything he says (in particular he only focuses on the benefits to the people who move, not the costs on the people who don't) but it is interesting throughout.
[1] The
impact of higher productivity will show up in GVA statistics, but the gains
from enhanced product variety do not show up in GVA statistics: rather £1 of
expenditure on consumer goods buys more utility in a larger market because of
this wider product variety.
[2] Although
an individual’s utility likely increases by less when product variety rises by
x% from an initial high level of product variety compared with an initial low
level of product variety.
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