An NBER conference on Cities, Labor Markets, and the Global Economy took place in Cambridge on October 25-26. Research Associates Edward L. Glaeser of Harvard University and Stephen J. Redding of Princeton University organized the meeting, sponsored by the Smith Richardson Foundation. These researchers' papers were presented and discussed:
Eran Hoffmann, Hebrew University, and Monika Piazzesi and Martin Schneider, Stanford University and NBER
Jobs at Risk, Regional Growth, and Labor Market Flows
Hoffmann, Piazzesi, and Schneider study how regional growth trends shape the dynamics of regional labor markets. New data on manufacturing worker flows for US cities 1957-1981 show that growing cities see on average more new hires and more voluntary quits, but fewer forced layoffs. Moreover, recessions in growing cities are special in that hiring and quits are low, whereas their key feature in shrinking cities is a spike in layoffs. A model of migration and on-the-job search explains the cross-section of flows with differences in growth trends alone. Its key feature is that jobs can become at risk: they have lower match surplus and are more likely to terminate in recessions. In growing cities, better prospects from on-the-job search lead workers to quit jobs at risk earlier, which reduces layoffs and misallocation.
Jan Eeckhout, University College London; Christoph Hedtrich, Universitat Pompeu Fabra; and Roberto Pinheiro, Federal Reserve Bank of Cleveland
Technology, Spatial Sorting, and Job Polarization
Wage Inequality has increased substantially in the last four decades. A lot of it can be attributed to technological change. But there are two competing drivers: Skill Biased Technological Change (SBTC) which leads to a rising college premium and automation of routine occupations which leads to job polarization. Using a novel data set on Information Technology (IT) adoption, Eeckhout, Hedtrich, and Pinheiro exploit geographical variation and the sorting patterns of differentially skilled workers to infer the main driver of wage inequality. They find strong evidence that there is more automation in big cities. Big cities also have a disproportionate decrease in the share of routine cognitive jobs (clerical workers and low-level white collar workers). The researchers propose an economic mechanism where the substitutability of routine workers by IT leads to higher IT adoption large cities than in small cities. Wages and productivity are higher in large cities, whereas technology prices are constant across cities. This technology also generates thick tails in the skill distribution in large cities.
Sharat Ganapati, Georgetown University; Woan Foong Wong, University of Oregon; and Oren Ziv, Michigan State University
Ganapati, Wong, and Ziv study the effects of transportation networks in international trade and the potential for local and regional spillovers from the concentration of commerce at entrepôts, trading hubs where goods travel through -- from other origins, and bound for other destination. Using novel data, they retrace the path of each containerized good entering the US and document the ubiquitous use of entrepôts in global shipping, the significant heterogeneity in connectivity, and the concentration of shipments through a small number of entrepôts. The researchers build a model of endogenous entrepôt formation which incorporates route choice by exporters within a Ricardian setting and economies of scale in shipping, allowing for entrepôts to emerge endogenously. They use the model to estimate trade costs on each leg and the effect of scale on shipping costs. Finally, the researchers embed their estimation in a quantifiable general equilibrium model to run counterfactuals which show that (1) changes in trade costs of a node in the transportation network results in regional trade and welfare spillovers and (2) the magnitude of this spillover is larger when the node is an entrepôt.
Cecile Gaubert, Patrick M. Kline, and Danny Yagan, University of California, Berkeley and NBER
Place-based redistribution is ubiquitous but has traditionally enjoyed little support among economists. Gaubert, Kline, and Yagan develop a class of spatial equilibrium models characterizing the equity-efficiency tradeoff that arises when taxes and transfers are indexed to location. Transfers from one region to another are found to be welfare improving under empirically plausible assumptions on preference heterogeneity, even in an environment with optimal place-blind income taxes. A calibration shows that optimal place-based redistribution may be large.
Esteban Rossi-Hansberg, Princeton University and NBER; and Pierre-Daniel Sarte and Felipe Schwartzman, Federal Reserve Bank of Richmond
Cognitive Hubs and Spatial Redistribution (NBER Working Paper 26267)
In the US, cognitive non-routine (CNR) occupations associated with higher wages are disproportionately represented in larger cities. To study the allocation of workers across cities, Rossi-Hansberg, Sarte, and Schwartzman propose and quantify a spatial equilibrium model with multiple industries that employ CNR and alternative (non-CNR) occupations. Productivity is city-industry-occupation specific and partly determined by externalities across local workers. They estimate that the productivity of CNR workers in a city depends significantly on both its share of CNR workers and total employment. Together with heterogeneous preferences for locations, these externalities imply equilibrium allocations that are not efficient. An optimal policy that benefits workers equally across occupations incentivizes the formation of cognitive hubs, leading to larger fractions of CNR workers in some of today's largest cities. At the same time, these cities become smaller to mitigate congestion effects while cities that are initially small increase in size. Large and small cities end up expanding industries in which they already concentrate, while medium-size cities tend to diversify across industries. The optimal allocation thus features transfers to non-CNR workers who move from large to small cities consistent with the implied change in the industrial composition landscape. Finally, the researchers show that the optimal policy reinforces equilibrium trends observed since 1980. However, these trends were in part driven by low growth in real-estate productivity in CNR-abundant cities that reduced welfare.
Fabian Eckert, Princeton University
Growing Apart: Tradable Services and the Fragmentation of the U.S. Economy
Between 1980 and 2010, the college wage premium in US labor markets with larger initial shares of high-skill service employment grew substantially faster than the nationwide average. Eckert shows that this trend can be explained within the context of a model of inter-regional trade, where a reduction in communication costs magnifies regional specialization in high-skill services, raising the skill premium in service-exporting regions and reducing it in service-importing regions. Quantitatively, Eckert shows that the decline in communication costs inferred from sectoral trade imbalances can explain a substantial part of the differential skill premium growth across US labor markets in the data. These regional changes aggregate to account for 30 percent of the rise in the overall US college wage premium between 1980 and 2010.
Nicholas Bloom, Stanford University and NBER; Kyle Handley, University of Michigan and NBER; André Kurmann, Drexel University; and Philip A. Luck, University of Colorado Denver
The Impact of Chinese Trade on U.S. Employment: The Good, The Bad, and The Debatable
Using confidential US Census micro data Bloom, Handley, Kurmann, and Luck find three results. First, there is no evidence that Chinese import competition generated net job losses. In low-human capital areas (for example, much of the South and mid-West) manufacturing saw large job losses, driven by plant shrinkage and closure. But in high-human capital areas (for example, much of the West Coast or New England) manufacturing job losses were limited, with much larger gains in service employment, particularly in research, management and wholesale. As such, Chinese competition reallocated employment from manufacturing to services, and from the US heartland to the coasts. Second, looking at the firm-level data the researchers find almost all of the manufacturing job losses are in large, multinational firms that are simultaneously expanding in services. Hence, these large firms appear to have offshored manufacturing employment while creating US service sector jobs. Indeed, the researchers show large publicly traded US firms do not seem to have been negatively impacted by the rise in Chinese imports. Finally, the impact of Chinese imports disappears after 2007. The researchers find strong employment impacts from 2000 to 2007, but nothing since from 2008 to 2015.
Gabriel Kreindler, Harvard University, and Yuhei Miyauchi, Boston University
Measuring Commuting and Economic Activity inside Cities with Cell Phone Records
Kreindler and Miyauchi show that commuting flows constructed from cell phone transaction data predict the spatial distribution of wages and income in cities. In a simple workplace choice model, commuting flows follow a gravity equation whose destination fixed effects correspond to wages. The researchers use cell phone data from Dhaka and Colombo, covering hundreds of millions of commuter-day observations, to invert this relationship. Model-predicted income at the workplace level predicts self-reported survey workplace income, and model-predicted residential income predicts nighttime lights. In an application, the researchers estimate that predicted commuter income is 4-5% lower on days with hartals (transportation strikes) in Dhaka.
Costas Arkolakis, Yale University and NBER; Rodrigo Adão, University of Chicago and NBER; and Federico Esposito, Tufts University
General Equilibrium Indirect Effects in Space: Theory and Measurement
How do shocks to economic fundamentals in the world economy affect local labor markets? In a framework with a flexible structure of spatial linkages, Adão, Arkolakis, and Esposito characterize the model consistent shock exposure of a local market as the exogenous shift in its production revenues and consumption costs. In general equilibrium, labor outcomes in any market respond directly to the market's own shock exposure, and indirectly to other markets shocks exposures. The researchers show how spatial linkages control the size and the heterogeneity of these indirect effects. They then develop a new estimation methodology -- the Model-implied Optimal IV (MOIV) -- that exploits quasi-experimental variation in economic shocks to estimate spatial linkages and evaluate their counterfactual implications. Applying their methodology to US Commuting Zones, the researchers find that difference-in-difference designs based on model-consistent measures of local shock exposure approximate well the differential effect of international trade shocks across CZs, but miss around half of the aggregate effect, partly due to the offsetting action of indirect effects.
Victor Couture, University of California, Berkeley; Cecile Gaubert, University of California, Berkeley and NBER; Jessie Handbury, University of Pennsylvania and NBER; and Erik Hurst, University of Chicago and NBER
Income Growth and the Distributional Effects of Urban Spatial Sorting (NBER Working Paper 26142)
Couture, Gaubert, Handbury, and Hurst explore the impact of rising incomes at the top of the distribution on spatial sorting patterns within large U.S. cities. They develop and quantify a spatial model of a city with heterogeneous agents and nonhomothetic preferences for locations with different amenities of endogenous quality. As the rich get richer, their increased demand for luxury amenities available downtown drives housing prices up in downtown areas. The poor are made worse off, either being displaced or paying higher rents for amenities that they do not value as much. Endogenous provision of private amenities amplifies the mechanism, while public provision of other amenities in part curbs it. The researchers quantify the corresponding impact on well-being inequality. Through the lens of the quantified model, the change in the income distribution between 1990 and 2014 led to neighborhood change and spatial resorting within urban areas that increased the welfare of richer households relative to that of poorer households by an additional 1.7 percentage points on top of their differential income growth.