About 3% of the land area of the United States lies in cities. However, that area produces more than 91% of GDP and has absorbed more than 100% of national population growth for a century.
More than 8 out of 10 Americans live in large metropolitan areas. Moreover, the average urban worker produces about 25% more goods and services each year than the average rural worker, making urban workers remarkably more productive and valuable to their employers.
This phenomenon inspires a few key questions. Why are urban places so productive, and what could public policy do to extend some urban benefits to more rural places?
On the face of it, cities are an unnatural place to locate a home or business. They are congested and relatively expensive. In the distant past, it might have made sense to cluster together for common defense, or to take advantage of port or other natural resources. In the developed world, at least, these reasons no longer matter.
After a century and a half of serious study, economists have circled around the belief that modern cities exist for two major reasons: Their size provides them with a productivity advantage and cities attract more productive workers.
Bigger places are more productive because the physical proximity of workers and businesses offers a magic juice to productivity, called “agglomerations.” There are many explanations for this phenomenon. Even with modern video teleconferencing, face-to-face contact provides enormous benefits to most work. This should be unsurprising because we’ve evolutionarily adapted to read facial expressions, body language and communicate in subtle ways that Zoom or a telephone cannot capture.
Businesses also benefit from proximity because they can access dense labor markets with more talent and experience. Workers benefit from those same dense labor markets because it offers them an opportunity to change jobs more readily.
Agglomerations also result in “spillovers” of innovation. For example, despite the marvels of modern information management, patent citations (secondary innovation) are more likely to occur from within the same city than outside of it. This happens because of human interactions.
Finally, agglomeration economies benefit from public goods and services. These include the availability of transportation, access to advanced telecommunications, the proximity of air service and most especially the availability of schools and research universities. The abundance of these in urban places are a magnet for talent.
Urban places attract a disproportionate share of highly skilled workers. We call this sorting. Research completed over the past couple decades suggests that sorting has become a lot more important than agglomerations in explaining wage and productivity differences between regions.
One way to illustrate that is to see how much educational attainment and population density affect wages in 1970, and again 50 years later—note, I use 2019 to dodge pandemic distortions. In both years, about half of wage variation between U.S. counties was explained simply by the share of adults with a bachelor’s degree and how many people were located per square mile in a county.
In both 1970 and 2019, population density improved wages of workers. But the difference in educational effects was stunning. In 1970, accounting for inflation, a 5% bump in college completion boosted overall annual wages by roughly $36 per year, or just over 0.5%. But, in 2019, a 5% bump in the share of adults with a college degree raised average wages by $2,810, or roughly 5.5%.
This result might stun a few folks, because it tells a story that is precisely the opposite of what we often hear about college degrees and wages. It is a paradox, that education becomes more important as more people become educated.
In the half-century after 1970, the share of American adults with a bachelor’s degree more than doubled. Yet the wage effects of increasing educational attainment within a county grew by more than twenty-fold.
Both for individuals and cities, a college degree is more important today than ever before in history. The regional benefits from even a modest boost in educational attainment have never been larger than they are today. So, what can more rural places do to take advantage of this?
The single, most obvious and oft-repeated advice, which appears in this column about every month, is to develop and fund an educational system that sends more people to college. A big portion of that is naturally how good the K-12 system is in preparing kids for post-secondary education.
Rural places are not especially good at this. In Indiana, about 1 in 5 school corporations, or close to half of rural corporations, fail to offer Advanced Placement classes in calculus, chemistry or biology. Students graduating from these high schools aren’t really prepared for most college curricula.
This shortfall is really a matter of funding. Until rural schools find resources to offer the classes that were routinely available to urban students a half-century ago, rural residents should expect to see a population decline for the next century.
The second thing rural places can do is make their communities places where educated people wish to live. This is an especially ripe opportunity now that broadband communications are nearly everywhere, and about a quarter of college graduates work from home.
High-performing schools are the No. 1 residential attractor, so well-funded, competitive local schools offer a two-for-one in improving educational attainment.
Urban places, particularly large ones, continue to dominate the American economy. They increasingly do so by attracting a disproportionate share of well-educated workers. This trend has accelerated throughout most of the last half-century and shows some signs of acceleration.
The good news for rural places is that the benefits of density or agglomerations matters a bit less than it used to, while education matters much, much more.
The bad news is that only about a third of states, and very few rural counties, are doing anything serious about this trend.
Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].
