AFR - Future Lies in Skilled Cities

Australian Financial Review, 7 December 2010

One of my favourite Banjo Paterson's poems is Clancy of the Overflow: a contrast between the life of the drover who 'sees the vision splendid of the sunlit plains extended', and the urbanite, who must put up with 'the foetid air and gritty of the dusty, dirty city'. Published in 1889, the poem neatly sums up the Australian character - a nation of bush-loving city-dwellers.

By coincidence, one of the strongest defences of cities came out the following year. In his groundbreaking Principles of Economics (published in 1890), Alfred Marshall wrote that in cities, 'the mysteries of the trade' are 'in the air'. As a result, Marshall concluded 'if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas'.

Over the past decade, the most prolific urban economist has been Harvard's Ed Glaeser. Through dozens of empirical papers, Glaeser has analysed the interplay between urbanisation, economic growth and skills. Drawing mostly on US data, he finds that cities have historically grown more rapidly than rural areas - but the relationship is strongest for 'skilled cities', where more than one-quarter of the population have a degree.

In skilled cities, size matters. Double the size of a skilled city, and wages rise by about 10 percent. This relationship holds even after taking account of price differentials. It is true that house prices are higher in cities, but wages more than make up for this.

Studying the wage profiles of metropolitan and non-metropolitan workers, Glaeser and co-authors find that the wage profile of city workers is steeper than for non-metropolitan workers. City workers aren't smarter than their country cousins (in fact, those brought up in small towns have higher IQs than people raised in big US cities). But the productivity of city workers seems to rise more rapidly than their non-metropolitan counterparts. Partly this is because urban workers acquire job skills at a more rapid rate. Another factor is that it's easier to find the perfect employer-employee match in a big city.

A key feature of skilled cities, Glaeser points out, is their ability to reinvent themselves as new technologies come along. He gives the example of Boston, which provided sailors and fishermen in the early-C19th, became an immigrant-fuelled factory town in the late-C19th, and has now evolved into a university and technology hub. Skilled cities, Glaeser contends, help people adapt well to change.

But what about the environmental impacts of cities? While it is true that for much of human history, cities were the main source of dangerous emissions, the reverse is true today. Combining data on driving, public transit, home heating, and household electricity usage, Glaeser documents the fact that per-household carbon dioxide emissions in the US today are lowest in big cities. In San Diego and Los Angeles, each household is responsible for about 17 tonnes of emissions per year. At the other end of the scale, households Oklahoma City and Memphis account for around 29 tonnes of emissions per year. The relationship holds up even within cities: for example, Manhattan residents are more likely than people in suburban New York to catch public transport, less likely to drive long distances, and more likely to live in compact homes that are cheaper to heat and cool.

Glaeser's use of statistical tools has made him sceptical of some of the bolder claims made by other urban researchers. Reviewing Richard Florida's The Rise of the Creative Class, Glaeser takes the unusual step (for a book reviewer) of running a few regressions. He finds that across US cities, growth levels are not predicted by the share of the population who are gay or Bohemian. By contrast, a city's education levels are a powerful determinant of growth. Glaeser concludes: 'mayors are better served by focusing on the basic commodities desired by those with skills, than by thinking that there is a quick fix involved in creating a funky, hip, Bohemian downtown'.

The model of skilled cities has a simple policy recommendation: get education right. Fifty years ago, how many people would have predicted that computerisation would transform the labour market, that trade would reshape our manufacturing sector, and that the advent of air conditioning would spur population growth in Queensland? We cannot be sure what the shocks of the next half-century will be, but it's a fair bet that investments in new school buildings, teacher quality, and trade training will be essential to creating the skilled cities of the future.

Andrew Leigh is the federal member for Fraser.