Transcript ECON 246 - Week #5

Urban and Regional
Economics
Prof. Clark
ECON 246
Week 4
Household Locational Choice
• Just as firms choose locations to
maximize profits, so too are households
optimizers between regions.
• We typically assume that households
are utility maximizers.
• Look at some figures describing
migration trends in the U.S.
Population Change
1950's & 1960's
• Percent change in total population by Region
1950-60
1960-70
– Northeast
13.2%
9.7%
– North Central
16.9%
9.6%
– South
16.5%
14.2%
– West
38.9%
24.1%
Percent change in total population by
metropolitan status
Time Period
SMSA
Central City
Suburban Ring
1950-60
26.4%
11.6%
45.9%
1960-70
16.6%
6.4%
26.8%
Look at recent information on the Census web
site
Percent Change in Population
by metropolitan status by race
White:
SMSA
Central City
Suburban Ring
Black:
SMSA
Central City
Suburban Ring
1950-60 1960-70
23.6%
14.6%
5.7%
-0.2%
45.5%
27.6%
43.6%
50.6%
23.1%
32.0%
32.1%
31.5%
Migration patterns:
1970’s and 1980’s
Net Inmigration
SNOWBELT (70-80)
North
(NE, MA)
Midwest
(80-86)
(70-80)
(80-86)
(85-90)
-2.88 mil. -0.40 mil. +0.082mil. -5.86%
-0.81%
+0.16%
-3.47%
-0.5%
(-2.83 int.)
South
-2.70 mi. -2.03 mil. -0.29 mil
(70-80)
(PA,MT)
-4.77%
(-0.85 mil)
(80-86)
(85-90)
(70-80)
(80-86)
(85-90)
+9.54%
+5.28%
+1.67%
+5.99 mil. +3.98 mil. +2.84mil
(SA,ESC,WSC) (3.59 int.)
West
(85-90)
(-1.1 int.)
(ENC,WNC) (-2.37 int.)
SUNBELT
Migration Rate
+4.12 mil
(+1.42)
+2.51 mil. +2.48 mil +11.8% +5.81%
(1.60 int.)
(0.54 int.)
+1.02%
Determinants of Migration
• Life-Cycle Effects
– Many events correlated with age:
• People graduate from school, marry, have
children, divorce, retire, lose spouse, etc.
– Migration propensity peaks in mid. 20’s
• Region-specific factors
– Employment opportunities, amenities,
fiscal factors
• Other factors
– Segregation, discrimination
Two Alternative Models
Disequilibrium Model
Equilibrium Models
• Equilibrium in labor and
• Equilibrium in labor
land markets both
markets within regions.
within and between
• Disequilibrium between
markets.
regions.
• Migration tied to altered
• Workers move in response
demand for site-specific
to differential returns to
factors.
human capital.
– Move from low wage to high • Due to taste changes
(tied to life-cycle) or
wage areas.
income changes.
Disequilibrium Model of
Migration
W
• Low Wage Region • High Wage Region
S
W
S
WH
WL
D
D
LL
L
LH
L
Simplistic Disequilibrium Model
W
Low Wage Region
S’
S
W
High Wage Region
S
S’
WH
W’
WL
D
D
LL’ LL
L
LH LH’
L
Note: All adjustment shown
on Supply of Labor side
• This is shown for the sake of simplicity.
• Actually, demand and supply of labor adjust
simultaneously.
– Muth has shown that these are simultaneous
(1971 paper in Southern Economic Journal
entitled “Migation: Chicken or Egg”)
• Each additional job has 60%-70% chance of being
taken by an in-migrant.
– Note: Bartik found 77% of new jobs taken by in-migrants
• Each additional net in-migrant generates 1
additional job.
More Realistic Disequilibrium
Adjustment Model
W
Low Wage Region
High Wage Region
S
W
S’
S
S’
WH
W’
WL
D
D
LL’ LL
D’
D’
L
LL’ LL
L
Is this consistent with
evidence?
• Yes for migrations of 1920’s through
1950’s.
– Rural South to urban North and Midwest.
– South was low wage, North and Midwest
were high wage.
• No for migrations of 1960’s through
1990’s.
– North and Midwest to South and West.
Equilibrium Model of
Migration
• At any point in time, wages and land
rents compensate for the mix of location
specific factors.
– Highly desirable locations command high
land rents, and/or low wages.
– Compensating differentials in wages and
rents keep utility constant between
regions.
• So why move?
Altered Demand for Site-Specific
Characteristics
• Graves and Linneman argument
– (1979 Journal of Urban Economics)
– Income growth and taste changes alter
demand for amenities
– Can only be satisfied by moving.
• Has been generalized to other types of
locational attributes
– Fiscal goods
This view of migration can
help to explain migrations of
1960’s-1990’s
Look at some evidence by Clark
and Hunter.
Clark and Hunter
“The Impact of Economic
Opportunity, Amenities and
Fiscal Factors on Age-Specific
Migration Rates”, Journal of
Regional Science, 1992, Vol.
32(3), pp. 349-365.
Overview by Chinitz
• Benjamin Chinitz, “The Regional
Transformation of the American
Economy”, American Economic Review
- Proceedings, May 1986, Vol. 76, pp.
300-303.
Urban and Regional Growth
Models
• You now understand factors that
explain why firms and households
locate where they do.
• We can now discuss the issue of urban
and regional growth.
• We develop a simple model of regional
supply and demand.
– We then examine various “what-if”
scenarios.
Focus on Employment Growth
• Growth in economic terms is frequently
defined in terms of growth in income or
growth in employment.
– We focus on employment growth.
• Define employment growth as a change
in employment over time.
• Define two types of employment
– export or basic employment
– local or nonbasic employment
Basic vs. Nonbasic Employment
• Basic employment is employment
devoted to the exporting of goods
outside the city.
• Nonbasic employment is employment
devoted to satisfy local demands for the
product.
• Basic employment brings income into
the region.
– Nonbasic employment exists only because
basic employment exists.
Export sector and the
Multiplier Process
• To illustrate the influence of exports,
think of the simple demand-based
Keynesian model adapted to the local
level.
– Assume no government sector
• Recall that Y=C+I+X-M
– where Y=regional income, I=investment,
X=exports, M=imports.
• Assume C=co+c1Y; M=mY
Multiplier derivation
• By substitution, Y= co+c1Y +I + X-mY
• Solving for Y gives:
Y - c1Y + mY = co+ I + X
Y (1-c+m) = co+ I + X
Y= [1/(1-c+m)]*[co+ I + X]
Y/ X = [1/(1-c+m)]
• Suppose that c=0.7 and m=0.1, then:
• Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5
Demand Induced Growth
• If autonomous consumption (co),
investment (I), or exports (X) increase, this
will induce a more consumption and hence
more income
– (remember C= co+c1Y)
• Suppose X increase by $1000, then
dY= (Y/ X )*dX = 2.5*1000 = 2500
• An additional $1500 in local demand was
generated from the original $1000 increase
in export demand.
Note: Imports reduce the
multiplier
• The greater is the propensity to import
(i.e., the larger is m), the smaller is the
multiplier.
Y/ X =[1/(1-c+m)]
• If c=0.7 and m=0.1, then
– Income Multiplier =1/(1-0.7+0.1)=1/0.4=2.5
• If c=0.7 and m=0.2, then
– Income Multiplier =1/(1-0.7+0.2)=1/0.5=2.0
From Income to Employment
Multipliers
• Income is difficult to measure
regionally, but employment is not.
• Employment multipliers can also be
calculated based on same principle.
• Assume changes in total employment
related to changes in basic or export
employment.
E = *X where =employment multiplier
or E/X = 
Assuming a stable multiplier
relationship:
E/X = T/X = 
Suppose Basic Employment
Increases
Direct
Effect
W
Induced effect
Total
Effect
D
D’
D’’
L
Why is Demand for Labor
Downward Sloped?
• Substitution effect:
As the wage falls, firms substitute toward
labor and away from other inputs.
• Scale effect:
As the wage falls, a firms costs fall and the
firm produces more output and hence hires
more labor.
Demand Shifters of Demand
• Demand for Workers in Region depends on:
– Export demand (positive shifter)
– Labor productivity (positive shifter)
• lowers costs, thus makes exports more attractive
and imports less attractive.
– Business taxes (negative shifter)
• holding services constant increases costs.
– Industrial public services (positive shifter)
• holding taxes constant lowers costs.
– Land use policies/infrastructure (positive
shifter)
Supply of Labor
• Positively sloped because of laborleisure choice.
• Your book incorrectly claims that it is
due to the migration effect.
• In-migration actually shifts the supply
curve in the city to the right.
– more workers at every wage.
Supply shifters
• Improved quality-of-life (positive shifter)
– Amenities, environmental quality
• Residential taxes (negative shifter)
– holding services constant
– e.g.,property taxes, local income taxes
• Public services
– holding taxes constant
– e.g., parks, public safety, efficient roads, etc.
Regional Equilibrium
W
S
We
D
Le
L
Change in Export Demand
W
S
W2
W1
D’’
D
L1
L2
L
Is this the end of the story?
May induce migration from other
regions if large wage increase
W
S
S’
W2
W3
W1
D’’
D
L1
L2
L3
L
Measuring Employment
Multiplier
• Need to determine that fraction of
employment that is devoted to
exporting.
• Location Quotient can be used.
• Ltrue = production in industry i
consumption in industry i
• L>1 implies exporting
• L<1 implies importing
Calculating Location Quotient
• Lactual=%local employment in industry i
%national employment in industry i
• Lactual=(ei/eT)/(Ei/ET)
• Look at necessary assumptions
Assumptions
• Patterns of consumption doesn’t vary
spatially.
• Labor productivity doesn’t vary spatially
• No national exporting or importing
– Denominator is representative of local
needs.
• Each industry produces single
homogeneous product.
– If not, then LQ can be distorted
If assumptions correct
• Can derive export employment for
industry i = Xi
• Xi=(ei/eT - Ei/ET)*ei
– note book uses other identical formula, but I think this one is
more intuitive.
• Xi=(excess % of employment for i)*ei
• X=i=1 to n Xi
• Once you have X and eT, you have your
multiplier.
eT/X = 
Advantage of approach
• Has intuitive appeal which can be
understood by noneconomists
– Exports drive growth.
• Limited data requirements
• Easy to apply
Weakness of approach
• Problems with assumptions.
• Is multiplier stable?
– Short run stability questionable.
• Depends on region, industry
– Long run stability?
• Depends on city size, industry structure,
proximity to other cities.
• All exports have identical multiplier
effect, regardless of industry.
Weaknesses of Approach
• No attention to supply issues.
– Assumes infinitely elastic supply curve
• Question of causality
– Do potential new firms consider size of
local service industry when determining
where to locate?