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Does increasing the density of cities lead to better jobs?

Ryan Avent argues that when it comes to economic growth and the creation of jobs, the denser the city the better.

An essay, adapted from Avent’s book The Gated City, appeared in the New York Times:

…In 2009, the average Silicon Valley household earned about $85,000. Despite this, over 500,000 residents of the Bay Area moved elsewhere in the 2000s. Many of them left for places like Phoenix, which attracted over 500,000 residents from other American cities, despite wages 40 percent below Silicon Valley levels.

Factors like taste and taxes account for some of the migration, but the biggest reason for the shift is housing costs. The average Phoenix home is worth about 30 percent of the price of a house in San Jose. The difference in prices is mostly due to differences in building. In every year from 1992 to 2009, Phoenix granted permits for two to three times as many new homes as did the San Francisco and San Jose metropolitan areas combined. Around the San Francisco Bay, neighborhoods dead set against change successfully squeezed the housing supply, just as OPEC limits the supply of oil when it wishes to raise its price.

The “Not in My Backyard” philosophy sometimes, though by no means always, supports a high quality of life. Yet the effect is to raise housing costs and make rich cities more exclusive. Real trouble occurs when the idea-generators in cities with that NIMBY approach become so protective of their pleasant streets that they turn away other idea-generators, undermining the city’s economic role. And that is happening. Entrepreneurship rates in Silicon Valley were below the national average during the tech boom because firms couldn’t attract enough skilled workers.

Productivity and wages are rising in these growing Sunbelt cities, but not as fast as in the denser cities that workers are leaving. The average wage per job in Phoenix rose $10,700 from 2000 to 2009, while in San Francisco the increase was $14,500. But, while wages are growing in San Francisco, they would be growing faster if the city allowed the construction of more housing. More workers would be able to take advantage of the good job opportunities in the Bay Area, and the metropolitan and national economies would function better.

Density isn’t a magic elixir. One can’t create wealth just by crowding people together; otherwise the super-dense metropolitan areas in emerging Asian countries would be richer than American cities. Density simply facilitates interaction. Interactions translate into wealth when a population is educated and local institutions support private enterprise and entrepreneurship.

The world’s richest places tend to be dense, with well-educated residents and a free-market-orientation (or tax havens or oil-rich) — think of New York and the Bay Area, of Singapore, Hong Kong and the Netherlands. Without a stock of skilled workers and a relatively open marketplace, density’s impact on growth and productivity will be limited.

What is it exactly that dense cities are doing? Consider a simple example. Suppose that within a population one person in 100 develops a taste for Vietnamese cuisine, and suppose that a Vietnamese restaurant needs a customer base of 1,000 people to operate profitably. In a city of 10,000 residents, there aren’t enough people to support a Vietnamese restaurant. The only restaurants that can operate profitably are those appealing to considerably more than one in 100 people — restaurants offering less daring fare. In a city of 10,000 people, there is little room for specialization, and less for experimentation.

A city of one million people, by contrast, can support multiple Vietnamese restaurants. Not only will this larger city enjoy a specialty cuisine unavailable in less populous places, but its ability to support multiple producers of this cuisine allows for competition, improving the price and quality.

Ryan Avent is an economics correspondent for The Economist and author of the Kindle Single The Gated City, from which this essay is adapted.