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Why Do Cities Matter? Local Growth and Aggregate Growth

68 Pages Posted: 21 Nov 2015  

Chang-Tai Hsieh

University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Enrico Moretti

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2015

Abstract

We study how growth of cities determines the growth of nations. Using a spatial equilibrium model and data on 220 US metropolitan areas from 1964 to 2009, we first estimate the contribution of each U.S. city to national GDP growth. We show that the contribution of a city to aggregate growth can differ significantly from what one might naively infer from the growth of the city’s GDP. Despite some of the strongest rate of local growth, New York, San Francisco and San Jose were only responsible for a small fraction of U.S. growth in this period. By contrast, almost half of aggregate US growth was driven by growth of cities in the South. We then provide a normative analysis of potential growth. We show that the dispersion of the conditional average nominal wage across US cities doubled, indicating that worker productivity is increasingly different across cities. We calculate that this increased wage dispersion lowered aggregate U.S. GDP by 13.5%. Most of the loss was likely caused by increased constraints to housing supply in high productivity cities like New York, San Francisco and San Jose. Lowering regulatory constraints in these cities to the level of the median city would expand their work force and increase U.S. GDP by 9.5%. We conclude that the aggregate gains in output and welfare from spatial reallocation of labor are likely to be substantial in the U.S., and that a major impediment to a more efficient spatial allocation of labor are housing supply constraints. These constraints limit the number of US workers who have access to the most productive of American cities. In general equilibrium, this lowers income and welfare of all US workers.

Suggested Citation

Hsieh, Chang-Tai and Moretti, Enrico, Why Do Cities Matter? Local Growth and Aggregate Growth (May 1, 2015). Kreisman Working Papers Series in Housing Law and Policy No. 30. Available at SSRN: https://ssrn.com/abstract=2693282 or http://dx.doi.org/10.2139/ssrn.2693282

Chang-Tai Hsieh (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Enrico Moretti

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://emlab.berkeley.edu/~moretti/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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