City size influenced by location choices of educated households

This week I was tasked to deliver an annual public lecture. I suppose it is the sort of thing professors might have done a century ago when there were fewer forms of entertainment to distract the curious.

I doubt an economic lecture competes well with the Kardashians. Still, I was excited to get to talk to a broader audience than professors typically do, and the topic interested me with its timely message. Let me explain.

For more than a half-century economists have puzzled over a statistical regularity that defines the relative size of cities. Up until last year, no really convincing explanation existed for this relationship called Zipf’s law.

There were some tantalizing hints that it could be caused by something called agglomerations. My lecture described how research now convincingly argues that relative city size is mostly influenced by the location choices of more educated households and agglomerations. This is important for us today.

It turns out that the average productivity of workers is highly linked to the size of the city they are located in. This is called agglomerations. As I estimated for the U.S., the GDP produced by each worker rises by almost 2.0 percent with each 10 percent growth in population.

This means that the average worker in a Fort Wayne-sized city would produce about $50,000 more per year in goods and services than a worker in a Muncie-sized city. This agglomeration effect is what makes cities attractive to businesses.

Reinforcing the agglomerations effect is that talented workers tend to migrate toward larger cities because that is where they can reap the greatest reward for their skills.

Using educational attainment as a proxy measure for talent, this is clearly happening; although anyone who has endured a departmental faculty meeting knows that education and talent are loosely correlated. Still, this means that agglomeration effects are reinforced by migration and together play a key role in determining the future of American cities.

The impact of agglomeration is now so large that nothing else much seems to matter. All government can do is promote agglomerations of households and businesses. Perhaps it is easiest to understand this if we break down the effects of policy on the demand for and supply of workers in a city.

On the demand side, businesses prefer low taxes, a predictable regulatory environment and generally a strong business climate. Nationally, Indiana scores at or very near first place in all of these important measures, with great success in job creation. But that is only half the story.

The supply of labor is determined by households, who are influenced by great schools, good transportation infrastructure, arts and cultural activities, recreational opportunities and natural and endogenous amenities such as retail, restaurants and amusements. Few places in Indiana can boast a full list of these.

That is why only handful of Hoosier counties have grown in the past two decades. Applying economic research to Indiana gives abundantly clear answers to the economic growth problems that challenge Indiana communities. So too, does common sense.