Lunchtime Must-Read: Chang-Tai Hsieh and Enrico Moretti: Growth in Cities and Countries

Chang-Tai Hsieh and Enrico Moretti: Growth in Cities and Countries: “We use a Rosen-Roback model of urban growth…

…to show that a summary statistic for the aggregate effect of local growth (decline) is whether it shows up as an increase (decrease) in local employment or as an increase (decrease) in the nominal wage relative to other cities. Differences in the nominal wage across cities reflect differences in the marginal product of labor across cities which, ceteris paribus, lower aggregate output. We show that the dispersion of the average nominal wage across US cities increased from 1964 to 2009 and may be responsible for a 13% decline in aggregate output. Changes in amenities appear to account for only a small fraction of this output loss, with most of the loss likely caused by increased constraints to housing supply in highly productive cities. We conclude that welfare gains from spatial reallocation of the US labor force are likely to be substantial…