Katelyn Rokus
It’s no secret that some cities are wealthier than others. As of 2018, the 15 cities with the highest GDP accounted for $24 trillion, about 11% of the world’s total wealth (Desjardins). While certain cities have always been wealthier due to a larger population or an advantageous location, recent trends in the United States have indicated that the gap in wages between more and less wealthy cities has been widening for educated workers (“Superstar Cities”). Ultimately, this divergence is due to the inability of small cities to compete in the monopolistically competitive “industry” of production in cities.
Just as restaurants or clothing stores need to somete for customers, cities must compete to be the location of wealthy firms, such as Google or Amazon, whose business brings along large numbers of high-paying jobs. Each city offers its own unique location, infrastructure, customers, and labor pool, meaning that the decision of which city to choose matters to a firm. In this way, each city represents a differentiated product for firms to select from.
While some cities do offer firms monetary bids to locate there (“Superstar Cities”), nonprice competition is much more common. Product discrimination often takes the form of location and quality. Metropolitan areas, by nature, contain a large population, placing business in close proximity to potential customers. This benefit of location allows firms to save on the cost of transporting goods to customers. More importantly, highly educated workers are more concentrated in large cities, making it easier to find workers with specialized skills (“Superstar Cities”). Between their lack of population and dispersion of educated workers, small cities find it hard to draw firms to their locations.
As more and more firms move to big cities, educated workers follow, perpetuating the cycle of wage inequality. One proposed solution to this problem for cities to “collectively agree to stop competing to lure firms with piles of taxpayer cash” (“Superstar Cities”). This would create a more even playing field for smaller cities, however, collusion is nearly impossible in monopolistic competition. With the incentive of housing wealthy firms, cities would be likely to undercut the agreement to stop bribing firms. The only way for small cities to effectively reduce the regional wage gap would be to invest in the education of their citizens. If small cities could prove the value of their labor force, they might be able to draw firms away from major metropolitan areas.
Works Cited
Desjardins, Jeff. “The 15 Richest Cities Hold 11% of the Planet's Wealth.” Business Insider, Business Insider, 21 Feb. 2018, www.businessinsider.com/the-15-richest-cities-hold-11-of-the-planets-wealth-2018-2.“Superstar Cities Have a Big Advantage in Attracting High-Paying Jobs.” The Economist, The Economist Newspaper, 15 Nov. 2018, www.economist.com/finance-and-economics/2018/11/17/superstar-cities-have-a-big-advantage-in-attracting-high-paying-jobs.
I definitely agree with all of your information regarding the way that big cities are able to use incentives to lure firms and large corporations in to generate an even large income for the city. However, I do think that some major companies will not always fall for the incentives, and therefore will result to the smaller cities. Also, big cities are only so big, so not every firm can get into a big city. With many smaller and rural cities getting developed, it has started to become a more attractive place for large businesses to locate to because they know that they can help build up the economy. Also, many people that work in the city don’t always live there, and may commute into work more than an hour each day, showing that no matter where a business is, people who want to work for them will find a way.
ReplyDeleteThis is a great analysis! This also correlates with data about the economy recovering from the 2008 economic recession. Although as a whole our economy has recovered, this recovery has disproportionately benefited cities. Many of the most effected by the Recession were those who lost homes after the housing bubble burst. Owning homes is more common in rural and suburban areas than in the urban areas that gained the most business and capital in the last decade. This has left poorer areas less well off relative to those in cities and as industries in the US become less competitive and larger this trend will likely continue. I believe this is why there is not only a huge education and income gap between large and small cities but also a political one as both have different incentives. This is supported by the last few elections and particularly in Texas, where cities like Dallas, Houston and Austin, the economic centers of the state, have voted for Democrats by wider margins while rural areas of the state and smaller cities have voted for Republicans by wider margins.
ReplyDeleteAn important incentive I have noticed that these smaller cities use is paying employees higher wages in order to convince them to relocate. For instance, in healthcare, physicians can make a much higher salary in a more remote, rural setting due to their high demand. You would think that a doctor in New York City who sees many more patients a day than a doctor in Alaska makes the higher wage, however often this incorrect. Because so many people are attracted to live in these "superstar cities" competition for these jobs is higher and people can be incentivized to move where job competition is low and wages are high. An influx of jobs in these remote locations can only serve to increase business when more consumers relocate to these areas, and thus increase the cities' individual wealth.
ReplyDeleteBusinesses can prosper in well-known or large cities due to the traffic of customers and the intelligent labor force. However, I think that firms that (re)locate in large cities don’t always evaluate their implicit costs or opportunities that they’re giving up by not choosing to set up in smaller cities. This is because there would be less competition in a close vicinity in a small city, whereas in a city such as New York, a hungry customer can walk two blocks and come across four different bakeries. With less competitor’s in a wide geographical range, businesses could raise their prices and demand wouldn’t be affected as much because consumers would have to go out of their way if they wanted to get the product or service at a cheaper price.
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