Ryan Avent, who maintains the indispensable blog The Bellows, is one of my favorite writers on economics and urbanism. He recently drew attention to two interesting papers which are related to his response to an article in the the American Prospect by Alec MacGillis which was critical of Richard Florida (which mammoth previously highlighted). Avent contends that the competition among cities for highly productive workers is inevitably and partially zero-sum, because these workers will tend to aggregate:

That tautology [referencing the American Prospect article: “Creative people seek out places that draw a lot of creative people.” – SB] doesn’t just lie at the heart of Florida’s theory; it describes the actual functioning of urban economies. The value in economically dynamic cities is the people that populate them. Where once, firms would pay high land prices to be near coal deposits or harbors, based on the economic advantages those amenities conferred, they now pay high land prices to be near talent. This yen to concentrate in particular areas has a number of dynamics. Firms want to be near customers and clients. Workers want to be near firms. Firms want to be near workers. Where there are lots of firms and workers, there will also be businesses serving those workers — in business and in the provision of consumption opportunities — and those services attract additional firms and workers. Everyone wants to be where everyone is, and it’s tough for anyone to go somewhere else because somewhere else is where people aren’t.

The result is an urban geography that’s very lumpy. People clump together, because there are gains to doing so.

Recently, Avent highlighted a paper which puts some academic muscle behind this point by identifying one of the signaling mechanisms behind this aggregation (more simply – how do highly productive workers know where to clump?). The abstract reads:

Agglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at a location. When workers’ price elasticity of demand for housing is negatively correlated with their productivity, skill-biased technological change causes a core-periphery bifurcation where the agglomeration of high-skill workers eventually constitutes a unique stable equilibrium. When workers’ price elasticity of demand for housing and their productivity are positively correlated, skill-biased technological improvements will never result in a core periphery equilibrium. This paper claims that location can at best be an approximate rather than a precise sieve for high-skill workers. [hyperlinks added – SB]

High housing prices in cities may act as a signaling mechanism to businesses about worker productivity in those areas.   Workers who 1) purchase higher priced housing expect themselves to be able to earn the money to pay their mortgage or rent, and 2) are responding to the externalities present in that area which they believe assists their productivity.  In the above argument, the tautology presented is that creative class workers are both those who are signaling and the externality which causes the signaling.  It’s plausible that high housing prices aren’t just indicative of a quality workforce to employers, but also to other workers; and the fact that workers are willing to pay a premium for housing is demonstrative of the value they see in ‘lumpy’ portions of the urban geography.

We can see the paradox implied for cities on the outside of this feedback loop looking in – their relative lack of creative class competitiveness should be offset by increased affordability, yet instead of making the cities more attractive, it only serves to reinforce the perceived shortfalls of the city!  Avent proposes a number of federal and local policies for shrinking cities (investment in education, investment in infrastructure, “aid” to ameliorate problems resulting from decline) that I find a whole lot more compelling than those espoused by Florida, whose prescriptions are not as incisive as his diagnosis – they seem to be designed as products easily re-sold to cities who are looking for a silver bullet, instead of measured responses to challenging conditions.

The second paper Avent highlights argues that small cities in a region can ‘borrow’ size from one another, allowing them to approach some of the benefits of density seen in larger urban regions while reducing some of the disadvantages.  From the abstract:

Recent concepts [such] as megaregions and polycentric urban regions emphasize that external economies are not confined to a single urban core, but shared among a collection of close-by and linked cities. However, empirical analyses of agglomeration and agglomeration externalities so-far neglects the multicentric spatial organization of agglomeration and the possibility of ‘sharing’ or ‘borrowing’ of size between cities. This paper takes up this empirical challenge by analyzing how different spatial structures, in particular the monocentricity – polycentricity dimension, affect the economic performance of U.S. metropolitan areas. OLS and 2SLS models explaining labor productivity show that spatial structure matters. Polycentricity is associated with higher labor productivity. This appears to justify suggestions that, compared to relatively monocentric metropolitan areas, agglomeration diseconomies remain relatively limited in the more polycentric metropolitan areas, while agglomeration externalities are indeed to some extent shared among the cities in such an area. However, it was also found that a network of geographically proximate smaller cities cannot provide a substitute for the urbanization externalities of a single large city.

Linking up all our shrinking cities probably isn’t the answer – we need to be judicious with how public money is reinvested into cities, looking not only at propping up flailing urban centers but also at how the money can be spent most cost-effectively, with the greatest net benefit to the economy as a whole. However, it’s clear that there are economic benefits to tight regional networking, and that strategies emphasizing investment in telecommunications and transportation are worth evaluating as we grapple with a changing economic and urban landscape in the United States.

[Link to paper 1, link to paper 2. Avent also writes for The Economist’s Free Exchange blog]