NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Education Level Drives City Growth

"A good skill base allows cities that have been hit by negative shocks to reinvent themselves."

Possessing or attracting a large population of skilled, educated workers appears to be the key factor in determining whether declining urban areas -- such as the infamous "Rustbelt" manufacturing centers of the 1980s -- chart a path back to prosperity or remain relatively stagnant. In the Rise of the Skilled City (NBER Working Paper No. 10191), NBER researchers Edward Glaeser and Albert Saiz conclude that the percentage of workers with college degrees is a "powerful predictor of urban growth."

Initial skill levels predict the growth of urban populations, house prices, and wage levels, but the effects of skills is much stronger in declining regions than in areas that are growing already. The fact that skills predict growth in New England and the Midwest, but not in California or Arizona, supports the "reinvention hypothesis" -- the idea that a good skill base allows cities that have been hit by negative shocks to reinvent themselves.

In a separate analysis, "Reinventing Boston: 1640 to 2003" (NBER Working Paper No. 10166), Glaeser presents the city as a stellar example of how well developed human capital can consistently overcome economic adversity. He traces this phenomenon to Boston's early days when its large population of skilled mariners allowed it to make the transition from declining seaport "likely to become a nostalgic backwater" to a thriving base of global shipping and fishing operations. More recently, he points out, Boston has leveraged talent in financial services, high tech, and higher education to evolve from "dying manufacturing town" to its current incarnation as vibrant "information city."

"Boston's experience suggests that human capital is most valuable to a city during transition periods when skills create flexibility and the ability to orient towards a new urban focus," he writes. Glaeser notes that its commitment to cultivating a population of skilled workers also explains why Boston has consistently bounced back from crises while urban areas such as Detroit and Syracuse have never really recovered from the hard hit they took two decades ago.

In their broader analysis of the relationship of worker skills to a city's economic performance, Glaeser and Saiz acknowledge that skills are not everything. Most notably, warm, dry weather and an influx of immigrants can be key ingredients for growth. But for cities lacking these attributes -- that is, the relatively wet and cold urban areas of the Northeast and Midwest -- the impact of skill levels is particularly pronounced. Glaeser and Saiz observed that as the "number of college graduates per capita doubles, the expected growth rate over the decade rises by roughly 4 percent."

Again, the Boston example looms large. Consider that in 1980, Boston and Detroit looked a lot alike: formerly great cities with shuttered manufacturing plants, declining populations, falling real estate prices, and long, cold winters. Yet, as Glaeser observes, instead of "continuing along its sad path toward urban irrelevance" twenty years later, Boston ends up looking more like sunny San Jose, California in terms of its economic vitality (if not weather) than Detroit. The population drain has stopped and the housing market is hot, even if well into April the weather is not.

It's no coincidence, he writes, that as this latest renaissance was in full bloom, a 2000 survey showed that half of Bostonians between 25 and 34 had college degrees. "This extremely high level of education predicts that Boston should have done well over the past 20 years and indeed it did," Glaeser writes.

Both studies offer a number of observations on why "skilled cities" such as Boston can stage such impressive comebacks. Overall, Glaeser and Saiz speculate that "skilled workers may react more speedily to painful economic shocks and educated workers find it easier to switch techniques."

For Boston, there are a number of factors at play. A history of industrial diversity, for example, has allowed it to shift from a dying industry into a lively one without having to invent the newly dominant economic motor "from scratch." And, though it may not have the temperate climate of a San Jose or Phoenix, there are a sufficient number of people who like to live in Boston and, when times get tough, would rather look for opportunities to stay rather than leave.

But, as Glaeser notes, "human capital has been critical," even if its accumulation is sometimes serendipitous. In the late 1800s Boston may not have accomplished the transition from maritime city to industrial center had it not amassed a large population of future factory workers in the form of Irish immigrants who chose Boston as a refuge from the potato famine for the simple reason that it was the cheapest and closest port of entry into the United States.

Glaeser and Saiz say their analysis implies that "city growth can be promoted with strategies that increase the level of local human capital." They assert that economic revitalization efforts should concentrate on "basic services, amenities, and quality public schools that will lure the most skilled," and on boosting the education level of local residents.

Cities also need to consider whether certain policies repel growth and skilled workers. For example, Glaeser observes that Boston's future growth could be inhibited by policies that make "new construction extremely difficult." In good economic times, these restrictive policies have caused housing prices to rise as new home construction fails to keep pace with population growth. That's why today "Boston faces extraordinary housing prices."

"Boston's limits on new construction were relatively costless in an era of urban decline," Glaeser writes. "But as the area thrives, these barriers to construction pose the largest barrier to new growth and may well create large social costs for Bostonians and would-be Bostonians. The regulation of construction is surely the most important policy area facing Boston today."

-- Matthew Davis


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