III.  Urban Problems and Policies

A.  The Urban Labor Market

1.  Supply of labor

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• Positively sloped because increased wage makes city more attractive, causing migration from other cities

• Factors causing shifts in labor supply

a. Amenities

• Ex. - Environmental quality, consumer goods

• Increased amenities => increased migration, increased supply of labor

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b.  Disamenities

• Ex. - Crime

• Increased disamenities => decreased migration, decreased supply of labor

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c. Residential taxes

• Increased taxes => city less attractive, decreased supply of labor

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d. Residential public services

• Increased services (or quality) => city more attractive, increased supply of labor

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2. Demand for labor

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• Downward sloping because of:

- Substitution effect - other inputs substituted as wage increases

- Output effect - quantity consumed and production decrease as wage and prices increase

- Agglomeration effect - decrease in quantity of labor demanded reduces agglomeration economies

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• Factors causing shifts in labor demand

a. Demand for exports

• Increased demand => increased export production, increased demand for labor

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b. Labor productivity

• Increased productivity => production costs decrease, prices decrease, more output (including exports) sold, increased demand for labor

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c. Business taxes

• Increased business taxes => increased production costs, decreased output, decreased demand for labor

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d. Industrial public services

• Increased industrial public services => decreased production costs, increased output, increased demand for labor

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e. Land-use policies

• More land made available => more firms willing to locate in city, increased demand for labor

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3.  Equilibrium

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4.  Economic growth

a.  Increase in demand

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b.  Increase in supply

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c.  Impact of environmental quality

• How will programs to improve environmental quality affect urban growth?

• Suppose a pollution tax is imposed

- Higher production costs, reduced output, reduced demand for land

- City more attractive, increased supply of labor

• Net effect could go either way:

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d.  Who gets the new jobs?

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5. Public policy

a.  Taxes

• Affects location decisions

- Look at elasticity of business activity with respect to tax liabilities

- Interstate location decisions - elasticity = -0.20

- Intrastate location decisions = -1.5

• Manufacturers more sensitive than other firms

• High taxes on business property repel capital-intensive firms and attract labor-intensive ones

• Impact of taxes depends on what taxes are used for - positive if for public services, negative if for redistribution programs

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b.  Tax incentive programs

• Tax abatement - new firms exempt from taxes (usually property) for a period of time

• Tax credits - credit against taxes for employment or wages paid

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c.  Geographically targeted subsidies

• Empowerment zones, enterprise zones

• Low taxes, subsidies for worker training, exemption from local regulations

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d.  Other policies

(1) Government loans and loan guarantees

• Money loaned to firms or local government guarantees loans by private firms

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(2) Site development

• Local government buys land, clears site, builds infrastructure, then sells land at a fraction of cost to private firms

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• Relatively small effect

• Bidding wars can result

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e.  Professional sports

• Do stadiums and professional sports teams  increase employment?

• Most studies show little impact - depends on whether money is attracted from outside region

• Most spending is by locals

• Impact of mega events is relatively small due to:

(1)  Local substitution - money spent on event instead of elsewhere in local economy

(2)  Crowding out - activity crowded out by event 

(3)  Leakage - money goes to people who live outside the metropolitan area

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