Why Denser Cities Are Smarter and More Productive

The Atlantic Cities – It’s clear that density plays an important role in economic growth. Density brings people and firms closer together which makes it easier to share and exchange information, invent new technologies, and launch new firms.

But the question remains: How exactly — in what ways and through which channels — does density make our cities more productive?

Journal of Regional Science – Productivity and the Density of Human Capital Detailed statistical models are used to gauge more precisely the effects of density and human capital, separately and together, on productivity of more than 350 metro areas.

1. Doubling density increases productivity by an average of two to four percent.

2. Density plays a bigger role in cities where levels of skill and human capital are higher. Metro areas with below average levels of human capital realize no productivity gains from density, the study finds, while doubling density in metros with above average human capital gain productivity benefits that are roughly twice the average.

3. The effects of density to be even more substantial in industries with high levels of knowledge and creativity. The authors find clear evidence that both the effects of density per se and the density of skilled people are highest in knowledge-based and creative industries. This is particularly true in the information, arts and entertainment, professional services, and finance industries where “the exchange of information and sharing of ideas are important parts of the production process.

ABSTRACT – We estimate a model of urban productivity in which the agglomeration effect of density is enhanced by a metropolitan area’s stock of human capital. Estimation accounts for potential biases due to the endogeneity of density and industrial composition effects. Using new information on output per worker for U.S. metropolitan areas along with a measure of density that accounts for the spatial distribution of population, we find that a doubling of density increases productivity by 2–4 percent. Consistent with theories of learning and knowledge spillovers in cities, we demonstrate that the elasticity of average labor productivity with respect to density increases with human capital. Metropolitan areas with a human capital stock one standard deviation below the mean realize no productivity gain, while doubling density in metropolitan areas with a human capital stock one standard deviation above the mean yields productivity benefits that are about twice the average. These patterns are particularly pronounced in industries where the exchange of information and sharing of ideas are important parts of the production process.

The graph above, from the study, shows the wide variation in productivity across U.S. metros. The most productive metro generated $114,798 in average output per worker, more than three times that of the least productive ($35,867).

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