Urban and Regional Urban and Regional EconomicsEconomicsProf. ClarkProf. Clark

ECON 246ECON 246

Week 4Week 4

Household Locational Household Locational ChoiceChoice

• Just as firms choose locations to Just as firms choose locations to maximize profits, so too are households maximize profits, so too are households optimizers between regions.optimizers between regions.

• We typically assume that households We typically assume that households are utility maximizers.are utility maximizers.

• Look at some figures describing Look at some figures describing migration trends in the U.S.migration trends in the U.S.

Population ChangePopulation Change1950's & 1960's1950's & 1960's

• Percent change in total population by RegionPercent change in total population by Region

1950-60 1950-60 1960-701960-70– Northeast Northeast 13.2% 13.2%

9.7%9.7%– North Central North Central 16.9% 16.9%

9.6% 9.6% – South South 16.5% 16.5% 14.2% 14.2%– West West 38.9% 38.9% 24.1% 24.1%

Percent change in total Percent change in total population by metropolitan population by metropolitan

statusstatus Time PeriodTime Period 1950-60 1950-60 1960-701960-70

SMSA SMSA 26.4% 26.4% 16.6% 16.6%

Central City Central City 11.6% 11.6% 6.4% 6.4%

Suburban Ring Suburban Ring 45.9% 45.9% 26.8% 26.8%

Look at recent information on the Census web Look at recent information on the Census web sitesite

Percent Change in Percent Change in Population by Population by

metropolitan status by metropolitan status by raceraceWhite: White: 1950-60 1950-60 1960-701960-70

SMSA SMSA 23.6% 14.6% 23.6% 14.6%

Central City Central City 5.7% -0.2% 5.7% -0.2%

Suburban Ring Suburban Ring 45.5% 27.6% 45.5% 27.6%

Black:Black:

SMSA SMSA 43.6% 43.6% 32.0% 32.0%

Central City Central City 50.6% 50.6% 32.1% 32.1%

Suburban Ring Suburban Ring 23.1% 31.5% 23.1% 31.5%

Migration patterns: Migration patterns: 1970’s and 1980’s1970’s and 1980’s

Net Inmigration Migration RateNet Inmigration Migration RateSNOWBELTSNOWBELT (70-80) (80-86) (85-90) (70-80) (80-86) (85-90) (70-80) (80-86) (85-90) (70-80) (80-86) (85-90)

NorthNorth -2.88 mil. -0.40 mil. +0.082mil. -5.86% -0.81% +0.16% -2.88 mil. -0.40 mil. +0.082mil. -5.86% -0.81% +0.16%

(NE, MA)(NE, MA) (-2.83 int.) (-1.1 int.)(-2.83 int.) (-1.1 int.)

MidwestMidwest -2.70 mi. -2.03 mil. -0.29 mil -4.77% -3.47% -0.5%-2.70 mi. -2.03 mil. -0.29 mil -4.77% -3.47% -0.5%

(ENC,WNC) (-2.37 int.)(ENC,WNC) (-2.37 int.) (-0.85 mil) (-0.85 mil)

SUNBELT SUNBELT (70-80) (80-86) (85-90) (70-80) (80-86) (85-90)(70-80) (80-86) (85-90) (70-80) (80-86) (85-90)

SouthSouth +5.99 mil. +3.98 mil. +2.84mil +9.54% +5.28% +1.67%+5.99 mil. +3.98 mil. +2.84mil +9.54% +5.28% +1.67%

(SA,ESC,WSC) (3.59 int.) (SA,ESC,WSC) (3.59 int.) (+1.42) (+1.42)

WestWest +4.12 mil +2.51 mil. +2.48 mil +11.8% +5.81% +1.02%+4.12 mil +2.51 mil. +2.48 mil +11.8% +5.81% +1.02%

(PA,MT) (PA,MT) (1.60 int.) (0.54 int.) (1.60 int.) (0.54 int.)

Determinants of MigrationDeterminants of Migration• Life-Cycle EffectsLife-Cycle Effects

– Many events correlated with age:Many events correlated with age:• People graduate from school, marry, have children, People graduate from school, marry, have children,

divorce, retire, lose spouse, etc.divorce, retire, lose spouse, etc.

– Migration propensity peaks in mid. 20’sMigration propensity peaks in mid. 20’s

• Region-specific factorsRegion-specific factors– Employment opportunities, amenities, fiscal factorsEmployment opportunities, amenities, fiscal factors

• Other factorsOther factors– Segregation, discriminationSegregation, discrimination

Two Alternative ModelsTwo Alternative Models

Disequilibrium ModelDisequilibrium Model• Equilibrium in labor Equilibrium in labor

markets within regions.markets within regions.• Disequilibrium between Disequilibrium between

regions.regions.• Workers move in response Workers move in response

to differential returns to to differential returns to human capital.human capital.– Move from low wage to high Move from low wage to high

wage areas.wage areas.

Equilibrium ModelsEquilibrium Models• Equilibrium in labor and Equilibrium in labor and

land markets both within land markets both within and between markets.and between markets.

• Migration tied to altered Migration tied to altered demand for site-specific demand for site-specific factors.factors.

• Due to taste changes Due to taste changes (tied to life-cycle) or (tied to life-cycle) or income changes.income changes.

Disequilibrium Model of Disequilibrium Model of MigrationMigration

• High Wage RegionHigh Wage Region

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LLLH

• Low Wage RegionLow Wage RegionW

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Simplistic Disequilibrium ModelSimplistic Disequilibrium Model

High Wage RegionHigh Wage RegionLow Wage RegionLow Wage RegionW

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Note: All adjustment Note: All adjustment shown on Supply of Labor shown on Supply of Labor

sideside• This is shown for the sake of simplicity.This is shown for the sake of simplicity.

• Actually, demand and supply of labor adjust Actually, demand and supply of labor adjust simultaneously.simultaneously.– Muth has shown that these are simultaneous Muth has shown that these are simultaneous

(1971 paper in (1971 paper in Southern Economic JournalSouthern Economic Journal entitled “Migation: Chicken or Egg”)entitled “Migation: Chicken or Egg”)• Each additional job has 60%-70% chance of being Each additional job has 60%-70% chance of being

taken by an in-migrant.taken by an in-migrant.– Note: Bartik found 77% of new jobs taken by in-migrantsNote: Bartik found 77% of new jobs taken by in-migrants

• Each additional net in-migrant generates 1 Each additional net in-migrant generates 1 additional job.additional job.

More Realistic Disequilibrium More Realistic Disequilibrium Adjustment ModelAdjustment Model

High Wage RegionHigh Wage RegionLow Wage RegionLow Wage RegionW

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Is this consistent with Is this consistent with evidence?evidence?

• Yes for migrations of 1920’s through Yes for migrations of 1920’s through 1950’s.1950’s.– Rural South to urban North and Midwest.Rural South to urban North and Midwest.– South was low wage, North and Midwest South was low wage, North and Midwest

were high wage.were high wage.

• No for migrations of 1960’s through No for migrations of 1960’s through 1990’s.1990’s.– North and Midwest to South and West.North and Midwest to South and West.

Equilibrium Model of Equilibrium Model of MigrationMigration

• At any point in time, wages and land At any point in time, wages and land rents compensate for the mix of location rents compensate for the mix of location specific factors.specific factors.– Highly desirable locations command high Highly desirable locations command high

land rents, and/or low wages.land rents, and/or low wages.– Compensating differentials in wages and Compensating differentials in wages and

rents keep utility constant between regions. rents keep utility constant between regions.

• So why move?So why move?

Altered Demand for Site-Specific Altered Demand for Site-Specific CharacteristicsCharacteristics

• Graves and Linneman argumentGraves and Linneman argument– (1979 (1979 Journal of Urban EconomicsJournal of Urban Economics))– Income growth and taste changes alter Income growth and taste changes alter

demand for amenitiesdemand for amenities– Can only be satisfied by moving.Can only be satisfied by moving.

• Has been generalized to other types of Has been generalized to other types of locational attributeslocational attributes– Fiscal goodsFiscal goods

This view of migration can This view of migration can help to explain migrations help to explain migrations

of 1960’s-1990’sof 1960’s-1990’sLook at some evidence by Clark Look at some evidence by Clark

and Hunter.and Hunter.

Clark and HunterClark and Hunter

““The Impact of Economic The Impact of Economic Opportunity, Amenities and Opportunity, Amenities and

Fiscal Factors on Age-Specific Fiscal Factors on Age-Specific Migration Rates”, Migration Rates”, Journal of Journal of

Regional ScienceRegional Science, 1992, Vol. , 1992, Vol. 32(3), pp. 349-365.32(3), pp. 349-365.

Overview by ChinitzOverview by Chinitz

• Benjamin Chinitz, “The Regional Benjamin Chinitz, “The Regional Transformation of the American Transformation of the American Economy”, Economy”, American Economic Review American Economic Review - Proceedings- Proceedings, May 1986, Vol. 76, pp. , May 1986, Vol. 76, pp. 300-303.300-303.

Urban and Regional Growth Urban and Regional Growth ModelsModels

• You now understand factors that explain You now understand factors that explain why firms and households locate where why firms and households locate where they do.they do.

• We can now discuss the issue of urban We can now discuss the issue of urban and regional growth.and regional growth.

• We develop a simple model of regional We develop a simple model of regional supply and demand.supply and demand.– We then examine various “what-if” scenarios.We then examine various “what-if” scenarios.

Focus on Employment Focus on Employment GrowthGrowth

• Growth in economic terms is frequently Growth in economic terms is frequently defined in terms of growth in income or growth defined in terms of growth in income or growth in employment.in employment.– We focus on employment growth.We focus on employment growth.

• Define employment growth as a change in Define employment growth as a change in employment over time.employment over time.

• Define two types of employmentDefine two types of employment– export or basic employmentexport or basic employment– local or nonbasic employment local or nonbasic employment

Basic vs. Nonbasic Basic vs. Nonbasic EmploymentEmployment

• Basic employment is employment devoted to Basic employment is employment devoted to the exporting of goods outside the city.the exporting of goods outside the city.

• Nonbasic employment is employment Nonbasic employment is employment devoted to satisfy local demands for the devoted to satisfy local demands for the product.product.

• Basic employment brings income into the Basic employment brings income into the region.region.– Nonbasic employment exists only because basic Nonbasic employment exists only because basic

employment exists.employment exists.

Export sector and the Export sector and the Multiplier ProcessMultiplier Process

• To illustrate the influence of exports, think To illustrate the influence of exports, think of the simple demand-based Keynesian of the simple demand-based Keynesian model adapted to the local level.model adapted to the local level.– Assume no government sectorAssume no government sector

• Recall that Y=C+I+X-MRecall that Y=C+I+X-M– where Y=regional income, I=investment, where Y=regional income, I=investment,

X=exports, M=imports.X=exports, M=imports.

• Assume C=cAssume C=coo+c+c11Y; M=mYY; M=mY

Multiplier derivationMultiplier derivation

• By substitution, Y= cBy substitution, Y= coo+c+c11Y +I + X-mYY +I + X-mY

• Solving for Y gives:Solving for Y gives: Y - cY - c11Y + mY = cY + mY = coo+ I + X+ I + X

Y (1-c+m) = cY (1-c+m) = coo+ I + X+ I + X

Y= [1/(1-c+m)]*[cY= [1/(1-c+m)]*[coo+ I + X]+ I + X]

Y/ Y/ X = [1/(1-c+m)]X = [1/(1-c+m)]

• Suppose that c=0.7 and m=0.1, then:Suppose that c=0.7 and m=0.1, then:• Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5 Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5

Demand Induced GrowthDemand Induced Growth• If autonomous consumption (cIf autonomous consumption (coo), investment (I), ), investment (I),

or exports (X) increase, this will induce a more or exports (X) increase, this will induce a more consumption and hence more incomeconsumption and hence more income– (remember C= c(remember C= coo+c+c11Y)Y)

• Suppose X increase by $1000, then Suppose X increase by $1000, then dY= (dY= (Y/ Y/ X )*dX = 2.5*1000 = 2500X )*dX = 2.5*1000 = 2500

• An additional $1500 in local demand was An additional $1500 in local demand was generated from the original $1000 increase in generated from the original $1000 increase in export demand.export demand.

Note: Imports reduce the Note: Imports reduce the multipliermultiplier

• The greater is the propensity to import The greater is the propensity to import (i.e., the larger is m), the smaller is the (i.e., the larger is m), the smaller is the multiplier.multiplier.Y/ Y/ X =[1/(1-c+m)] X =[1/(1-c+m)]

• If c=0.7 and m=0.1, thenIf c=0.7 and m=0.1, then– Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5

• If c=0.7 and m=0.2, thenIf c=0.7 and m=0.2, then– Income Multiplier =1/(1-0.7+0.2)=1/0.5=2.0Income Multiplier =1/(1-0.7+0.2)=1/0.5=2.0

From Income to From Income to Employment MultipliersEmployment Multipliers

• Income is difficult to measure regionally, but Income is difficult to measure regionally, but employment is not.employment is not.

• Employment multipliers can also be Employment multipliers can also be calculated based on same principle.calculated based on same principle.

• Assume changes in total employment Assume changes in total employment related to changes in basic or export related to changes in basic or export employment.employment. E = E = **X where X where =employment multiplier=employment multiplier

or or E/E/X = X =

Assuming a stable Assuming a stable multiplier relationship:multiplier relationship:

E/E/X = T/X = X = T/X =

Suppose Basic Suppose Basic Employment IncreasesEmployment Increases

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DirectEffect

Induced effect

Total Effect

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Why is Demand for Labor Why is Demand for Labor Downward Sloped?Downward Sloped?

• Substitution effect:Substitution effect: As the wage falls, firms substitute toward As the wage falls, firms substitute toward

labor and away from other inputs.labor and away from other inputs.

• Scale effect:Scale effect: As the wage falls, a firms costs fall and the As the wage falls, a firms costs fall and the

firm produces more output and hence hires firm produces more output and hence hires more labor.more labor.

Demand Shifters of Demand Shifters of DemandDemand

• Demand for Workers in Region depends on:Demand for Workers in Region depends on:– Export demand (positive shifter)Export demand (positive shifter)– Labor productivity (positive shifter)Labor productivity (positive shifter)

• lowers costs, thus makes exports more attractive and lowers costs, thus makes exports more attractive and imports less attractive. imports less attractive.

– Business taxes (negative shifter)Business taxes (negative shifter)• holding services constant increases costs.holding services constant increases costs.

– Industrial public services (positive shifter)Industrial public services (positive shifter)• holding taxes constant lowers costs.holding taxes constant lowers costs.

– Land use policies/infrastructure (positive shifter)Land use policies/infrastructure (positive shifter)

Supply of LaborSupply of Labor

• Positively sloped because of labor-Positively sloped because of labor-leisure choice. leisure choice.

• Your book incorrectly claims that it is Your book incorrectly claims that it is due to the migration effect.due to the migration effect.

• In-migration actually shifts the supply In-migration actually shifts the supply curve in the city to the right.curve in the city to the right.– more workers at every wage.more workers at every wage.

Supply shiftersSupply shifters• Improved quality-of-life (positive shifter)Improved quality-of-life (positive shifter)

– Amenities, environmental qualityAmenities, environmental quality

• Residential taxes (negative shifter)Residential taxes (negative shifter)– holding services constantholding services constant– e.g.,property taxes, local income taxese.g.,property taxes, local income taxes

• Public servicesPublic services– holding taxes constantholding taxes constant– e.g., parks, public safety, efficient roads, etc. e.g., parks, public safety, efficient roads, etc.

Regional EquilibriumRegional Equilibrium

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Change in Export DemandChange in Export Demand

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Is this the end of the Is this the end of the story?story?

May induce migration from May induce migration from other regions if large wage other regions if large wage

increase increase

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Measuring Employment Measuring Employment MultiplierMultiplier

• Need to determine that fraction of Need to determine that fraction of employment that is devoted to exporting.employment that is devoted to exporting.

• Location Quotient can be used.Location Quotient can be used.

• LLtrue true = = production in industry iproduction in industry i

consumption in industry iconsumption in industry i• L>1 implies exportingL>1 implies exporting• L<1 implies importingL<1 implies importing

Calculating Location Calculating Location QuotientQuotient

• LLactualactual==%local employment in industry i%local employment in industry i

%national employment in industry i%national employment in industry i

• LLactualactual=(e=(eii/e/eTT)/(E)/(Eii/E/ETT))

• Look at necessary assumptionsLook at necessary assumptions

AssumptionsAssumptions

• Patterns of consumption doesn’t vary Patterns of consumption doesn’t vary spatially.spatially.

• Labor productivity doesn’t vary spatiallyLabor productivity doesn’t vary spatially• No national exporting or importing No national exporting or importing

– Denominator is representative of local needs.Denominator is representative of local needs.

• Each industry produces single Each industry produces single homogeneous product.homogeneous product.– If not, then LQ can be distortedIf not, then LQ can be distorted

If assumptions correctIf assumptions correct• Can derive export employment for industry i = XCan derive export employment for industry i = X ii

• XXii=(e=(eii/e/eTT - E - Eii/E/ETT)*e)*eii

– note book uses other identical formula, but I think this one is more intuitive.note book uses other identical formula, but I think this one is more intuitive.

• XXii=(excess % of employment for i)*e=(excess % of employment for i)*eii

• X=X=i=1 to n i=1 to n XXii

• Once you have X and eOnce you have X and eTT, you have your , you have your

multiplier. multiplier. eeTT/X = /X =

Advantage of approachAdvantage of approach

• Has intuitive appeal which can be Has intuitive appeal which can be understood by noneconomistsunderstood by noneconomists– Exports drive growth.Exports drive growth.

• Limited data requirementsLimited data requirements

• Easy to applyEasy to apply

Weakness of approachWeakness of approach• Problems with assumptions.Problems with assumptions.

• Is multiplier stable?Is multiplier stable?– Short run stability questionable.Short run stability questionable.

• Depends on region, industryDepends on region, industry

– Long run stability?Long run stability?• Depends on city size, industry structure, proximity Depends on city size, industry structure, proximity

to other cities.to other cities.

• All exports have identical multiplier effect, All exports have identical multiplier effect, regardless of industry.regardless of industry.

Weaknesses of ApproachWeaknesses of Approach

• No attention to supply issues.No attention to supply issues.– Assumes infinitely elastic supply curveAssumes infinitely elastic supply curve

• Question of causalityQuestion of causality– Do potential new firms consider size of Do potential new firms consider size of

local service industry when determining local service industry when determining where to locate?where to locate?