Over the past few decades, large cities and metros have captured a disproportionate share of economic growth, while smaller places have seen significant economic decline. But what exactly accounts for such a divergent economic pattern?
A new study by economist Jordan Rappaport of the Federal Reserve Bank of Kansas City sees two very basic factors at work: the size and density of cities. On one hand, size (in terms of population and employment) is a huge advantage. Bigger places inexorably grow bigger. And this is especially true for relatively large cities (up to 500,000 people) with plenty of space to grow. For these places, their initially large populations beget faster growth over time.
But, on the other hand, density cuts the other way and can slow growth for very large places. This would seem to be at odds with urban theories from Jane Jacobs and others, that view density and clustering as an essential spur to innovation. But Rappaport finds that density generates diseconomies like traffic congestion or expensive housing costs, which limit growth.
Rappaport’s study collects data on population and job growth for more than 2,000 American communities, including more than 350 metropolitan areas, 554 micropolitan areas, and 1,300 “non-core” counties.
The chart below shows the way that current population shapes future growth. See how the line slopes upward: Population is slow for smaller places at the left side of the graph. More than half of places with populations of less than 25,000 saw decline, as well as more than 40 percent of places with populations of fewer than 50,000.
This doesn’t mean that all small places are locked in decline. Rappaport points out that some small cities with unique attributes like natural amenities (mountains, coastlines, and warm weather), colleges and universities, close proximity to major urban centers, or significant oil and natural gas deposits are still growing.
Population Growth versus Initial Population, 2000-2017
Population growth then speeds up as places get larger. Places with more than 500,000 people have considerably higher rates of population growth. The pattern holds until we get to the very largest places, at the far right of the graph above. Then, we see a dip as population growth slows for the very largest metros, like Chicago, Los Angeles, and New York.
Growth versus Initial Population, Medium and Large Metropolitan Areas
The graph above zooms into the far right side of the first graph. It demonstrates how not all places with more than 500,000 people are booming. Rustbelt metros like Scranton, Youngstown, Toledo, Dayton, Buffalo, Pittsburgh, Cleveland, and Detroit have all witnessed stagnation or decline, as seen below the dotted line.
This basic pattern has held true for more than half a century. Since 1960, population growth has dipped down for the largest places, as indicated by the blue line. More recently, decline sets in at an even larger population threshold, denoted by the orange line.
Historical Population Growth versus Initial Population
Rappaport finds that employment growth follows the same pattern. Smaller places lost employment, while larger ones gained much more, but with the same drop off in the very largest places.
Employment Growth versus Initial Employment, 2000–14
Rappaport summarizes the key takeaways this way: “Population growth is positively correlated with size up to a population of about 500,000, uncorrelated with increases in size from 500,000 to 3 million, and negatively correlated with increases in size above 3 million.”
So, why the fall off in growth for the very largest places? This is where density comes in. Density does bring many benefits in the form of increased clustering of businesses and ultimately increased rates of innovation and productivity. But it also brings significant costs, or diseconomies, like traffic congestion and extremely high housing costs which can limit growth.
“While strongly positively correlated with the level of population, population density appears to be more closely related to home prices, a key agglomerative cost, than does population,” Rappaport writes. “In particular, population density accounts for more than twice the variation in median home prices across medium and large metropolitan areas.”
Using a measure of population-weighted density, the study finds density to be negatively correlated growth with the largest places. “Population growth from 2000 to 2017 was negatively correlated with mean population density at high levels, likely reflecting a net increase in agglomerative costs such as housing prices and traffic congestion over the past few decades,” Rappaport continues. “Similarly, growth across medium and large metropolitan areas was strongly negatively correlated with population density measured at the 95th percentile.”
Growth versus 95th Percentile Population Density, Medium and Large Metropolitan Areas
Rappaport proposes that an economy is a spatial equilibrium: net flows of residents and employment slowly reach a balance. People may not be able to benefit by moving to a larger city because even with higher wages and more amenities comes a higher cost of living, higher housing prices, and other diseconomies. Businesses face similar problems, too. The combined effects of these flows of people and jobs accumulate slowly over time. The largest, densest places tend to see their growth falter and stall, while mid-sized places have more room to grow and can see their growth accelerate. Meanwhile, small places have lots of things that hold them back.
Rappaport’s findings have important implications for public policy. Smaller places which have assets like natural amenities, universities, and arts and culture should build on them to attract talent and spur growth. But for the majority of small places that lack these kinds of characteristics, “public policy may be more effective ameliorating the negative consequences of decline than reversing it,” Rappaport cautions. For large, dense places, the key is to deal with the diseconomies brought on by density by alleviating traffic congestion through investments in mass transit or congestion pricing; or by reducing housing prices by eliminating land use restrictions, building more housing, and providing more affordable housing.
Rappaport cautions against the use of large tax and financial incentive packages which confer targeted benefits to individual companies. He especially warns of the downsides of luring large employers, like Amazon’s HQ2, to superstar cities like New York, which are likely to exacerbate their already existing problems of high prices, traffic congestion, and other diseconomies of density. He argues that it makes far more sense to utilize economic development strategies that “broadly benefit local businesses and residents, both existing and new.”
Instead of incentive packages to lure in tens of thousands of new residents, Rappaport encourages policies that will spur economic growth for those who already live there.
CityLab editorial fellow Claire Tran contributed research and editorial assistance to this article.
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