How do cities allocate and reallocate labour?

Rubén Hernández-Murillo,and Christopher Martinek of St Louis Fed have a superb short note on the topic. They say US economy and employment has shifted from low skill to high skill.

Between January 1990 and January 2010, for example, employment in iron and steel mills manufacturing declined by about 57 percent, while employment in textiles and apparel manufacturing declined by about 50 percent and 82 percent, respectively. In contrast, over the same period, employment in professional and business services increased by 53 percent, education and health services by 80 percent, and leisure and hospitality services by 40 percent.

But we do not see same trends across cities.

These large shifts in the skill composition of employment did not occur uniformly across all U.S. cities, however. Some cities experienced labor reallocation from unskilled to skilled sectors within the local labor market, while others experienced net migration in and out of the local labor market that varied in magnitude across skilled and unskilled sectors. These different patterns contributed to the fortunes and misfortunes of cities across the United States.

What explains this allocation of labor in cities? There are two theories. First focuses on certain advantages a city has which helps it change. Second focuses on the quality of labor within a city which enables the change

The first, which we call the industry concentration story, suggests that the initial prominence of an industry in a city is an important determinant of growth of that industry in that city. This is because interaction among firms within the same industry  improves their productivity and/or because the city’s geographic characteristics or natural resources prove attractive for that industry regardless of the industry’s skilled labor intensity.

The second, which we call the human capital externalities story, suggests that a higher initial level of skilled labor in a city creates positive effects on productivity growth that spill across  all industries  and raise overall employment growth in that city. This view also suggests that industry specific  employment growth in a city is quite sensitive to the initial levels of local skilled labor.

So which one applies to US cities?

The authors look at a study which says second theory works better to explain the developments in US cities:

These findings suggest that, while the industry concentration story may help explain why some cities choose to specialize in certain industries, the human capital externalities story is more useful for understanding how cities grow over time and how they can adapt to shocks that lead to employment reallocation across industries. In fact, recent evidence indicates that cities with a larger supply of skilled labor employ skilled labor more intensively across all industries. This is particularly true in larger cities. Therefore, cities with a relatively abundant supply of skilled labor in declining sectors may have faced fewer difficulties by reallocating employment from the declining sectors to the rising sectors.

Great stuff. If we look at the charter cities idea it is trying to work on both the above theories. First the city will build basic living conditions which will lead to labor (skilled and unskilled)coming in the city.

The question that comes to my mind is how some cities end up getting more skilled labor than others? There are so many possibilities here. First could be that city has good schools, colleges training centres etc which leads to skilled labor. Second it could be that a city promotes migration and invites talent across the country. Third, city has a bit of both the factors. Likewise there could be many factors.

Next question is once we have broad understandings of what works, why can’t these factors be implemented in other cities? There are implementation issues and isn’t as easy.

How certain cities develop and how certain cities lose out is an exciting and central part of economic development. Always interesting to understand the various theories on urban development.

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