Category Archives: Cities

Measuring Tax Capacity for Municipalities in Cook County

Illinois’s fiscal situation will likely require tax and revenue increases. How might we assess a municipality’s tax capacity, or ability to “absorb” a larger tax bill? In our previous blog, we reviewed various methods of assessing tax capacity. Now, we use the municipal-gap method to estimate tax capacities for Cook County municipalities.

The municipal gap is the difference between revenue capacity and expected expenditures. We estimate revenue capacity by multiplying the total equalized assessed property values (EAVs) in each municipality by a standard tax rate-the rate required to bring the total property tax revenues of Cook County municipalities in line with their total expenditures on non-school municipal services. Our measure of (own-source) revenue capacity excludes intergovernmental transfers. We predict expected expenditures based on estimates of each municipality’s socioeconomic and physical characteristics. Finally, we subtract expected expenditures from revenue capacity to get the municipal gap. A positive gap implies that a municipality has a larger tax capacity, and a negative gap implies a smaller tax capacity.

In practice, this analysis need not be restricted to municipalities located within one county. However, differences across counties in property assessment practices, as well as the quality and composition of services provided, may distort differences in the municipal gap. Restricting the sample to Cook County municipalities should limit differences due to these extraneous characteristics. To this end, we also exclude municipalities with smaller populations (those with populations below the 25th percentile for Cook County). Consequently, results from our analysis can be generalized to a subset of Cook County municipalities and expenditures, namely general government, which largely consists of public safety expenditures.

Data Sources and Calculations

Non-school municipal expenditures and EAVs were obtained from the Illinois Comptroller’s Fiscal Year 2014 Annual Financial Report.1 In the report, expenditures are categorized according to their reported functions (e.g., public safety) and governmental fund (e.g., general fund). We calculated non-school expenditures by combining all reported expenses across functions and funds. Revenue capacity was calculated by multiplying each municipality’s EAVs by a standard tax rate, which is the aggregate Cook County expenditures divided by aggregate EAVs; the resulting rate is 12.8%. Both expenditures and revenue capacity are normalized across municipalities by expressing them in dollars per capita.

Estimates of socioeconomic and physical characteristics were obtained from the Census Bureau 2014 American Community Survey 5-year estimates.2 We separated characteristics into two groups: environmental and control variables. Environmental variables are assumed to be more exogenous to the choices of local officials and are used to predict expected expenditures. They include the unemployment rate, poverty rate, population density, and population (logged). In contrast, control variables are assumed to be less exogenous, and either failing to control for these factors or using them to predict expenditures may bias our predictions of expected expenditures. Control variables include the percentage of the population ages 25 and older with a bachelor’s degree or higher, income per capita, the percentage of housing units that are owner-occupied, the median age of the population, and whether the municipality owns or operates a public utility company (this last measure comes from the Comptroller’s report).

Brief Data Summary

Table 1 provides descriptive statistics on expenditures, revenue capacity, and the environmental and control variables. On average, a municipality spends $2,545 per capita on non-school services. Cook County municipalities allocate, on average, 33% of non-school expenditures to public safety, and only 2% to social services. The large gap between average revenue capacity ($4,199 per capita) and average expenditures underscores the fact that we exclude a large portion of all expenditures municipalities face, such as those appropriated to overlapping governments. The sizes of standard deviations reflect substantial heterogeneity in the compositions of expenditures across municipalities, in particular for debt and capital outlay. The minimum value for the other expenditures/expenses category in part reflects reimbursements.

table1_descriptivestatistics

Calculating Municipal Gaps

We use regression analysis to derive expected expenditures. First, we estimate the effects of environmental variables on the dependent variable, actual municipal expenditures, while holding constant the control variables. Second, we predict expected expenditures using a municipality’s actual values of the environmental variables and the estimated effects.

Table 2 provides results from estimating the effects of environmental and control variables on non-school municipal expenditures. Altogether, we could find no evidence that the environmental variables affect municipal expenditures, controlling for additional factors. In addition, the adjusted R-squared value suggests that we explain roughly 40% of the variation in expenditures (around its mean). Table 3 provides an example of calculating expected expenditures for the City of Chicago (values were rounded to 2 decimal places). Multiplying a municipality’s actual values for the environmental variables by each variable’s corresponding effect results in that variable’s contribution to expected expenditures; summing all the contributions leads to expected expenditures. The final step in the analysis is subtracting expected expenditures from revenue capacity, resulting in the municipal gap.

table2_regression

table3_examplecalc

Results and Conclusion

Table 4 displays the results for municipalities with the largest and smallest gaps. Glencoe Village is assigned the largest positive gap, with an additional $15,846 in revenue per capita available after appropriating funds for expected expenditures. In contrast, Park Forest Village would require an additional $1,802 in revenue per capita to fund its remaining expected expenditures. How do the results of the municipal gap analysis using expected expenditures compare to those using actual expenditures? Table 5 provides findings for the latter scenario. Results for all municipalities included in our study may be obtained here.

table4_expected

table5_actualgaps

Mapping the municipal gaps illustrates the geographic discrepancies in tax capacity. Figure 1 displays the municipal gaps calculated using expected expenditures. For comparison, figure 2 displays the municipal gaps calculated using actual expenditures. Results are largely consistent between the two; one primary difference is that tax capacity is larger for several southern Cook County municipalities in the analysis with actual expenditures. Perhaps one unsurprising result is that, in general, northern Cook County municipalities have greater tax capacity than more central and southern Cook County municipalities. However, there are “pockets” of municipalities with smaller tax capacity located within regions that have greater tax capacity, and vice versa.

Figure 1: Gap with Expected Expenditures

weighted-municipal-gap

Figure 2: Gap with Actual Expenditures

actual-municipal-gap

In sum, identifying the ability for municipalities to absorb larger tax bills is becoming increasingly crucial to estimating local governments’ capacity to generate additional own-source revenues. Several methods exist that rely on comparisons between each government’s revenue and expenditures under hypothetical conditions. Here, we utilized the municipal-gap method to identify tax capacities for a subset of Cook County municipalities. Among the limitations of our analysis is the fact that we exclude important information on both the revenue and expenditure sides. Our analysis relies on non-school expenditures and property values to derive expected expenditures and revenue capacity. Local officials with more complete information on expenditures (e.g., for overlapping governments and schools) and revenues from additional sources (e.g., intergovernmental transfers) may benefit from estimating tax capacity using the municipal-gap approach, or one of the other methods we talked about in our previous blog.

  1. FY2014 Annual Financial Report data procured from the financial database website.
  2. U.S. Census Bureau; 2014 American Community Survey 5-Year Estimates, http://factfinder.census.gov.

What is Illinois’s Tax Capacity?

A recent study ranked Illinois 47th among U.S. states and Puerto Rico for its fiscal health.1 Particularly concerning was the report’s finding that the combination of total debt, unfunded pension liabilities, and underfunded other post-employment benefits amounts to 61% of total state personal income. In contrast, the same figure for other Seventh District states ranges from a high of 38% in Michigan to a low of 16% in Indiana. Given the magnitude of Illinois’s debt, any plan aimed at improving the state’s fiscal solvency will likely require both expenditure cuts and tax and revenue increases.

So what is the taxable capacity of Illinois? Two broad issues arise. First is the issue of fairness: Would further taxation violate society’s notions of imposing undue burdens on those who can least afford it? Second is the issue of impairing economic activity: Would further taxation discourage economic activity or otherwise drive out taxable wealth to an unacceptable degree?

In this blog post, we describe several methods for identifying a community’s tax capacity. In general, researchers have attempted to measure and compare capacities for specific places by calculating hypotheticals that rely on norms or averages across all places. For example, how much revenue might we expect to raise in a community if we imposed average tax rates there? And how much should a community be spending on public services, given its population characteristics and its need for services? And importantly, how do the two estimates differ? Are there obvious gaps between resources and needs?

Gordon, Auxier, and Iselin (2016)2 used such a representative revenue and expenditure approach to estimate this hypothetical gap in funds a state has available for government operations. The study documents that there is enormous variation in the amount of revenue states collect and what they spend on public goods and services. To drill down to tax capacity, the study measures what each state would collect in revenues and spend on government services if it followed national averages, adjusted for state-specific economic and demographic factors. Table 1, section (1) shows the actual gap, or the difference between actual revenues and expenditures, in FY2012, assuming that states rely only on revenues that they raise themselves through taxes and fees. The gaps are sizable, but adding in federal transfers largely erases the gaps. Turning to the hypotheticals as they relate to tax capacity, Table 1, section (2) compares representative revenues, or revenues that a state would raise if it had an average tax structure, to representative expenditures, or expenditures if the state had an average spending per capita. In contrast to the actual gap, the representative gap remains even after the addition of federal transfers in all of the Seventh District states other than Iowa. In this hypothetical case, if Seventh District states (other than Iowa) adopted a nationally representative tax structure, they would not have sufficient resources even after federal transfers to provide a representative level of public expenditures.

table1

Haughwout et al. (2003)3 developed a more refined analysis, termed the “revenue-hill” method, that estimates the deterioration in tax capacity that takes place as higher tax rates discourage taxable activity. The revenue hill builds a hypothetical schedule of tax rates and revenues that demonstrates how fully a city is utilizing its tax base. The goal is to build a “Laffer Curve” that allows policymakers to estimate the economic effects of the next tax dollar (e.g., effect on employment). The closer the measure is to the top of the hill, the closer the city is to exhausting its tax capacity. Once a city is over the top of the hill, increases in tax rates will become so unproductive that revenues actually decline. These measures can be constructed for each tax base a city might use. Therefore, while a city may have reached capacity for one tax base (e.g., sales tax), it may still have capacity in another (e.g., property tax). Haughwout et al. (2003) examined four cities—New York, Philadelphia, Houston, and Minneapolis—and found that only Minneapolis was “comfortably” below its revenue hill, and thus had additional tax capacity. In the case of Minneapolis, additional taxes could provide net benefits to property owners. New York and Houston were at the top of their revenue hills, implying that additional taxes would have a negative impact on employment.

Finally, Bo Zhao and Jennifer Weiner of the Boston Fed suggested the “municipal-gap” method for measuring tax capacities across municipalities in Connecticut, by recognizing that taxable capacity can only be measured in the context of a government’s particular needs and resource costs in providing adequate services.4  For example, limited tax capacity can exist when a community faces higher costs or fewer resources for providing public services (or both). In both cases, it can be driven by economic, topographic, and demographic factors specific to the community (e.g., a relatively high rate of poverty or significant risk of extreme weather).

First, one identifies revenue capacity. Revenue capacity is defined as the ability of municipalities to raise revenue from all of the sources they are authorized to tax, even if they choose not to tax a particular base. Capacity is calculated using the “representative tax system” approach, where all communities use a standard uniform tax rate against the tax base. The rate is determined by ensuring that the statewide rate raises enough revenue to cover existing expenditures. Second, one identifies expected expenditures–the average level of spending based on the municipality’s underlying socioeconomic and physical characteristics. This number is is calculated using regression analysis to predict a municipality’s expenditures based on actual values of the underlying characteristics. One purpose of deriving expected expenditures is to remove the variation in expenditures due to the choices of local officials who may favor particular government programs.

The study focused on the costs of providing largely non-educational local services, primarily public safety. It found that large fiscal disparities in Connecticut were primarily driven by their differences in revenue raising capacity. The uneven distribution of the property tax base coupled with the relative dependence on property tax revenues in the state meant that resource-rich municipalities had, on average, per capita revenue capacity eight times that of resource-poor towns. The cost of providing municipal services was less dispersed, with the highest-cost municipalities spending 1.3 times that of the lowest-cost towns. Importantly, the study also found that non-school revenue grants from the state had limited effect in reducing fiscal disparities.

What can tax capacity studies tell us about Illinois’s fiscal problems?

Illinois has a particularly difficult choice when it comes to future tax adjustments. First, the debt overhang at the state level is so large that any future tax increases will necessarily be directed to paying down debt rather than purchasing new services. Incremental tax increases will pay for services already consumed and, as such, it is difficult to see how future taxes will provide governments with resources to support programs that enhance growth. Second, capacity studies, such as Gordon et al. (2016), suggest that Illinois has already reached its capacity limits. While it would be a stretch to adapt this to the revenue-hill concept of actual declines in revenues in response to tax hikes, it does imply that Illinois has little room to increase taxes without reducing economic activity in ways that would be damaging. The depth of the problem increases when recognizing that many Illinois municipalities also face revenue gaps that would make the compound effects of a state tax increase coupled with a local increase that much worse. As these studies show, there tends to be considerable variation in both the level of expenditures and available revenues across any state when it comes to financing government services. The question then becomes what is the geography of tax capacity in Illinois?

In a second blog, we will apply local revenue capacity and service cost to Illinois municipalities. Stay tuned to see what fiscal disparities might exist for municipalities in Cook County.

  1. Norcross, E., & Gonzalez, O. (2016). Ranking the States By Fiscal Condition.
  2. Gordon, T., Auxier, R., & Iselin, J. (2016). Assessing Fiscal Capacities of States.
  3. Haughwout, A., Inman, R., Craig, S., & Luce, T. (2003). Local Revenue Hills: Evidence from Four U.S. Cities.
  4. Zhao, B., & Weiner, J. (2015). Measuring Municipal Fiscal Disparities in Connecticut.

Detroit and Chicago: Real Property Value Comparisons

Both Chicago and Detroit have become poster children for city government financial stress in recent years. Chicago’s city and school district alike have been running structural deficits, meaning that the government has been covering its normal operating expenditures by issuing or over-extending debt and running down its assets. Both Chicago’s municipal government and school district face large shortfalls in required contributions for the future pensions of current and retired employees. Both have raised local property taxes as partial steps toward balancing their budgets. In the case of Detroit, the city has only just emerged from Chapter 9 bankruptcy while its school district teeters on insolvency under state-mandated “emergency manager” operation.

Are these places comparable in terms of their outlooks and situation? The value of real property in each place offers one fascinating indicator of the resources available to their local governments, as well as a look into how private homeowners and commercial property owners perceive the general prospects of Detroit and Chicago.

Why examine real property values? In some sense, real estate and improvements are long-lived assets that are largely fixed in place. In the market for these properties, buyers and sellers must assess and incorporate the government fiscal liabilities and service benefits – present and future – attached to these properties in the prices at which they buy and sell. High (and rising) property values may indicate that home owners and commercial property owners expect that the prospects for value in these locations are good and that they will continue to improve. And from the local government’s perspective, high values indicate that there may be room for further imposition of local taxes to fund government services, if need be.

Nuts and bolts

The estimation of the value of real property—land and improvements– in a locality is far from an exact science. The actual sales prices of property can be thought of as one reflection of an individual parcel’s value. However, as we saw during the financial crisis last decade, sales transaction prices can be very volatile, and sometimes speculative. More practically, parcels of property do not turn over frequently, so that transactions prices of all property parcels are not observed in any one year. In practice, then, local public officials often rely on various estimation methods in assessing the value of property for taxation purposes, most of which involve using a sample of information from similar properties that were sold during a year. From the recorded sales price and a property’s particular features such as size, location, age, and configuration, the property assessment office infers the value of each property and, ultimately, the total value of property against which taxes are levied.1 These taxable values are often termed assessed values or sometimes equalized assessed values and often represent some fixed percentage of market or true value.2

In the charts, we draw on such data from the local and state governments of Detroit, Chicago, and Illinois to estimate the market or true value of real property in both Detroit and in Chicago.3 For Detroit, figures on total assessed property value are published in the city’s Comprehensive Annual Financial Report (CAFR). By law, assessed value must amount to one-half of true value in Michigan. And so, to arrive at our estimates of full value, we simply double the assessed value. We believe that this yields a far upper bound on the value of residential property in Detroit because there is much evidence that, following the steep plunge in Detroit’s property market over the last decade, assessments were not reduced to accord with actual market value in a timely fashion.4

Drawing on prices of homes that recorded sales, the following chart shows that average home prices began to fall in 2004, while assessed value did not begin to fall until 2009.Detroit_Assessed_HomePricesFor Chicago, a prominent local government “watchdog” and research foundation has long been using state and city data on recorded property sales by class of property to estimate full market values.5 The accuracy of these data is believed to be reasonable, though far from exact.6

What do we see?

Due to lags in data availability, the estimates below are representative through calendar year 2014. The charts display total property value across all types, as well as the largest category in both Chicago and Detroit, that being residential property.

As shown here, Chicago real property value rose dramatically during the early part of last decade before dropping off just as dramatically. Detroit’s property values remained flat. However, Detroit’s apparent stability belies the fact that assessed values of residential properties have not been allowed to fall off in tandem with actual market transactions price there. As measured by volume of sales, the market for residential real estate in the city of Detroit became almost nonexistent during this period.7 Few homes were sold using conventional financing; almost all of them sold for cash. By some estimates, prices of homes sold fell by many multiples during this time, though they have since been heading back up in parts of the city.

Even using generous measures, and with rising home prices in some neighborhoods, residential property value overall in Detroit have continued to drift lower in recent years. In contrast, following the steep decline, Chicago property values have begun to recover for both residential and commercial (not shown) property.

Most telling, at over $80,000 per resident, the value of overall taxable real property in Chicago remained markedly higher than that of Detroit as of 2014. By even our generous measure, Detroit’s property values were only about $25,000 per resident.Detroit_Chicago_PropValuesDiscussion

It would appear that, as measured by real estate values, Chicago’s economy and prospects remain much stronger than Detroit’s. And from a local government perspective, Chicago’s taxable resources with which to pay down liabilities and fund public services appear to be much larger. Of course, there are myriad political and institutional factors at play that render such a simple assessment of wealth inadequate to characterize the fiscal capacity of these cities. In both places, for example, property wealth is concentrated in a subset of places such as near the downtown areas and along the waterfronts. Accordingly, it may be difficult to tap available property wealth selectively because existing statute largely requires that tax rates be applied uniformly. And voters and their representatives may be reluctant to allow tax hikes at all. Similarly, there may be different levels of sensitivity to taxation in these two places and among different constituencies. For example, the imposition of new and higher taxation may cause economic activity and investment to decline more sharply in one place as opposed to another.

More broadly, we might ask whether property wealth is a good indicator of potential resources that local governments may draw on to fund services. A look at more U.S. cities may be helpful. The next chart undertakes the same exercise for the most populous cities. Here we see that Chicago continues to look fairly robust by this measure, though less so than the cities of San Diego, Los Angeles, Austin, and New York City.MajorCities_ProvValues

  1. Assessed value of property for taxation purposes is often a fixed percentage of market value across all property parcels, or else it is a fixed percentage across all parcels of a certain type or class such as residential, commercial or industrial. In turn, estimates of full value of all property can be made by taking sample average ratios of “assessed value/sales price” and applying these ratios to all parcels’ assessed values.
  2. Equalized assessed values refers to the practice of further adjusting the totalities of assessed value of property across jurisdictions so that each locale’s assessed valuation represents the same or “equalized” value in relation to (percent)  sales price or true value.
  3. The city of Detroit also taxes tangible personal property of commercial enterprises such as computing equipment and furniture; Chicago does not.
  4. Using sales price and assessed values for a sample of 8,650 residential parcels in 2010, Hodge et al find an average assessment to sales price ratio of 11.47, which suggests an average over assessment or property values many times over. See Timothy R. Hodge, Daniel P. McMillen, Gary Sands, and Mark Skidmore, 2016, “Assessment Inequity in a Declining Housing Market: The Case of Detroit,” Real Estate Economics.
  5. See https://www.civicfed.org/sites/default/files/Estimated%20Full%20Value%20of%20Real%20Property%20in%20Cook%20County%202005_2014.pdf
  6. Discrepancies arise because only sample values of real estate transactions are available in any one year. In addition, full value projections derive from the median value of property in each class. However, the median property value may not represent the entire distribution of property values.
  7. See http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000739-Detroit-Housing-Tracker-Q1-2016.pdf

Why Chicago is not Detroit

By William Sander and William Testa

Over the past decade, 17 of the 20 largest cities in the United States gained population. Recent academic studies on these trends have attributed them to changes in residential preferences, the location of skilled jobs, and cultural amenities. Both Chicago (third largest) and Detroit (18th) are exceptions to these trends. The population of the city of Chicago declined modestly from 2.9 million in 2000 to 2.7 million in 2010 after increasing during the 1990s. The population of the city of Detroit has declined more drastically over time from a peak of 1.8 million in 1950 to about 700,000 today; the city filed for bankruptcy in 2013. Since 2010, the population of the city of Chicago has increased modestly (1%), while Detroit’s population has continued to decline. Figure 1 shows population trends for Chicago, Detroit, and other Industrial Belt cities, which have traditionally depended heavily on manufacturing for employment. While Chicago remains much larger than the others despite recent sluggish growth, Detroit has seen a dramatic change in its position.

det_chi_fig1

Due to worsening fiscal problems and a rising homicide rate, Chicago’s prospects have recently been equated with Detroit’s, at least by the popular press. LeDuff1 writes in The New York Times “So Detroit files for bankruptcy…Pay close attention because it may be coming to you soon…Chicago.”  An Investor’s Business Daily editorial notes that “Chicago appears to be following Detroit’s lead to financial disaster.”2 An article in the Financial Times suggests that Chicago’s problems are not too different from Detroit’s.3 And so on.

For one, both places have been severely challenged by loss of manufacturing activity. Detroit and Chicago have lost over 100,000 and 300,000 manufacturing jobs, respectively, since the late 1970s; other midwestern cities (Milwaukee, Cleveland) have not been far behind. The inverse relationship between an historic MSA concentration of manufacturing jobs and subsequent growth from 1969 onward is evident for the most prominent Great Lakes metropolitan areas. More broadly, the growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Harvard’s Edward Glaeser.4 As evidenced in figure 2, manufacturing employment losses and depopulation within the central city were contemporaneous in both Detroit and Chicago.

det_chi_fig2

Declines in manufacturing jobs are a result of improvements in manufacturing productivity as well as the movement of production elsewhere including both suburban areas and overseas. For example, data for Michigan indicates that vehicle production in 2015 was at about the same level as 1990. However, employment in producing vehicles over this period declined by about one-half.

Suburbanization has taken no less a toll on central city manufacturing employment in both Chicago and Detroit alike. In the Chicago metropolitan area, only 9% of jobs are now in the manufacturing sector, while manufacturing accounts for 13% of jobs in the Detroit area. In the city of Chicago, only 6% of jobs remain in manufacturing and 10% in the city of Detroit. As reported by John McDonald for Detroit circa 1950, 61% of the Detroit area’s manufacturing jobs were to be found in the city, with another 13% in adjacent Dearborn, domicile of Ford Motor Company.5 The entire range of the city-suburb split in manufacturing jobs for both MSAs can be seen in figure 3. The advent of controlled access divided highways pulled manufacturing jobs outward within metropolitan areas to take advantage of lower land prices and lower shipping costs.

det_chi_fig3

Although both Chicago and Detroit lost a large number of jobs in manufacturing, it is also evident from figure 2 that the city of Chicago withstood the manufacturing exodus more robustly than Detroit. Unlike Detroit, its population did not decline apace with manufacturing from 1950 onward. Similarly, it did not experience the same degree of job declines. More recently, for example, over the 2000 to 2010 period, metropolitan Detroit experienced a 21.2% decline in employment, while the Chicago metropolitan area lost 7.7% of its jobs. Indeed, the past decade was disastrous for Detroit relative to Chicago. About one in four workers were unemployed in the motor city by the end of the decade. In Chicago, the unemployment rate peaked at a little more than one in ten workers (see figure 4).

det_chi_fig4

The resident population of the city of Detroit has also come to be characterized by a much higher degree of poverty and minority population. The share of households in poverty approaches four in ten in the city of Detroit, compared with 23% in Chicago. According to the latest decennial Census, the Detroit population overwhelmingly identifies as “black” (83%), up from 29% in 1960. Owing to the city’s economic collapse and to the suburbanization of (mostly white) population, by 1990 Detroit had become one of the most racially divided metropolitan areas in the United States. Social and economic issues arising from racial polarization since early in the twentieth century have been cited as a major constraint on the growth and development of Detroit and its suburbs.

det_chi_tab1

Chicago’s racial/ethnic groups also tend to be highly segregated; however, the overall composition of the city’s population is more balanced. Approximately 32% of Census respondents identify as black (including those reporting Hispanic background); 45% report as non-Hispanic white; and 28% as Hispanic. More than 20% of Chicago residents are foreign born. Despite the impression of a balanced population that such figures suggest, racial isolation in Chicago is very similar to that in Detroit when measured on a block to block basis.

Chicago bright spots

Although Chicago has many of Detroit’s problems and more than twice the number of residents living in poverty, Chicago also has many positive features relative to Detroit.

One of the reasons that one might be more optimistic about Chicago’s future is that, in spite of declines in population growth, the city of Chicago has become increasingly attractive to non-Hispanic white college graduates, while the inner-ring of suburbs of Chicago have become more attractive to African-American and Hispanic college graduates. Further, within the city of Chicago, household locations along Chicago’s lakeshore (particularly on the north side of the city), have become particularly attractive to more affluent, college-educated households. Studies indicate that the attractiveness of the city of Chicago to college graduates is at least partly related to growth in skilled jobs in and around the central business district.

Although there are recent indications to the contrary, Detroit has been less successful in attracting resident college graduates. Only 12% of the population twenty-five and older in the city of Detroit are college graduates. In the city of Chicago, 34% of the adult population has at least a bachelor’s degree. In popular areas of Chicago such as Lincoln Park, the vast majority of adults have at least a bachelor’s degree. Further, about half of the twenty-something college graduates in the Chicago metropolitan area live in the city of Chicago, while only 10% of college graduates in their 20s in the Detroit metropolitan area live in the city of Detroit. For college graduates with a school-age child, the percentage living in the city of Detroit is even lower (5%), versus 15% for Chicago. Of the college graduates working in the city of Detroit, only 22% live there. In the case of Chicago, the corresponding statistic is 61%.

Further, median household income in the city of Detroit is only a little over half of median income in Chicago. The poverty rate in Detroit is almost twice as high as Chicago’s, although the city of Chicago has almost twice as many poor residents. The city of Chicago employs about four times as many people as the city of Detroit. About 30% of the jobs in the Chicago metropolitan area are in the city of Chicago, while the corresponding statistic for Detroit is only 14%.

Why Are Chicago’s Prospects Brighter?

For one, Chicago began the era of de-industrialization with a more diversified economy with which to reinvent itself, especially in business services and financial services. In addition to its manufacturing (and goods transportation) prowess, Chicago has long been a purveyor of business and business-meeting services, retail, and financial services to the surrounding Midwest region and beyond. For example, Chicago’s large exchange-traded derivatives industry evolved from the city’s role as a nineteenth century market and wholesale distributor of grain, lumber, and meat. Its highly concentrated management consulting industry owes its twenty-first century success in part to the need of New York City financial houses to closely appraise the operations of Midwest manufacturing companies in the issuance of corporate debt. And the nexus of passenger railroad lines and (later) passenger air travel in Chicago cultivated one of the nation’s leading industries in business meetings and conventions. Accordingly, the profound exodus of manufacturing that occurred from almost all large U.S. cities did not devastate Chicago’s job base to the same degree as happened in Detroit and some other Midwest cities, although some parts of Chicago were hit hard. Admittedly, the Detroit area also maintains very strong business services industries, largely related to the auto industry, but for the most part these services are in suburban locations. In Chicago, many service businesses remain in the city.

Figures 2 and 3 show trends in population and manufacturing in Chicago and Detroit from 1900 to date. In both cities, one can see the spectacular rise in both manufacturing and population to 1950 followed by an equally spectacular decline. However, while population declines in Chicago have been profound, they diverge markedly from the Detroit experience. Nonetheless, much like Detroit, vast neighborhood areas of the city of Chicago were also impoverished by job and population flight to the suburbs, especially those neighborhoods that depended on the middle-income jobs associated with freight and manufacturing. Wages and jobs outside of the central area of Chicago have declined, even while the central area has prospered. Today, many Chicago neighborhoods find themselves challenged in the same ways as neighborhoods in Detroit and other industrial cities by poverty, violence, sub-standard housing, and a lack of immediate and accessible economic opportunities.

Chicago has arguably developed a stronger reputation as a city in which to do business than Detroit and some other midwestern cities. At the turn of this century, Chicago began positioning itself to be one of the emerging “global cities” that had successfully forged commercial connections to other cities of its kind around the world. Global cities are characterized by the most skilled occupations and activities in business services, finance, education, and technology; well-educated residents; forward-looking business leaders; and globally connected transportation and communications networks, among other attributes.

Owing to their strategic importance and global reach, corporate headquarters operations have become a hallmark of success for global cities. Early last decade, Chicago became the global headquarters of Boeing. Since then, the city has attracted Archer Daniels Midland, GE Healthcare, Oscar Mayer, and ConAgra, among others. Relocation of headquarters from the suburbs of Chicago to the central city has also taken place, including United (Air), Kraft Heinz, and Motorola Mobility.

In Detroit, both the IT software company Compuware and Quicken Loans have relocated operations from the suburbs to the downtown area (in 2003 and 2010, respectively). However, the scale of these moves falls far short of similar activity in Chicago.

Some argue that headquarters operations have downsized over time, representing far fewer direct jobs than in the past when headquarters often included back office, research, advertising, and payroll processing operations. However, the presence of headquarters is coincident with a much vaster nearby network of financial and business services, many of which are supported by colocation with the strategic headquarters of corporations.

The upshot then is that, even though the older industrial neighborhoods of Chicago share many of the same challenges as those of Detroit, Chicago has been better able to withstand the decline of industrial production. Whereas the city of Chicago has about four times as many people as the city of Detroit, Chicago has ten times as many jobs in finance, eight times as many jobs in professional services, six times as many jobs in education, and five times as many jobs in accommodation and food services. Since 1998, the Chicago area has gained almost 60,000 jobs in business services, while Detroit has lost over 35,000 jobs in the sector. During this period, Chicago also gained more than 20,000 jobs in colleges and universities, while Detroit gained none.

It is clear that Detroit needs to diversify its legacy industrial clusters as well as to build on them. This focus on industrial rebirth includes further specialization in the auto industry—especially R&D, as well as logistics and transportation, engineering and design, technology start-ups, and business services and finance. Indeed, diversification to a technology-oriented industrial structure has raised fortunes of old industrial regions elsewhere, with the Boston area being a prominent example.

We would note that a number of Rust Belt cities with about as many jobs as Detroit, including Cleveland, St. Louis, Milwaukee, and Pittsburgh have significantly fewer people living in them. This implies that Detroit’s population may not yet have reached a floor. Unlike Detroit, the city of Chicago remains an attractive place to work and live, especially for young college graduates. This could change over time if Detroit can reinvent itself and make further improvements in the delivery of basic public services, especially basic education and public safety. Chicago faces many of the same challenges in improving public services, and in putting its underlying fiscal affairs on a sounder footing.

William Sander, Professor of Economics, DePaul University, Chicago.

William Testa, President and Director of Regional Programs, Federal Reserve Bank of Chicago

A preliminary version of this paper was presented at Inner City Economic Development Summit in Detroit, September 2015.

  1. LeDuff, Charlie. 2013. “Come see Detroit, America’s future.” The New York Times, July 24.
  2. Investor’s Business Daily. 2013. “Emmanuel’s Chicago is on the path to be the next Detroit.” August 7.
  3. Sender, Henny, Stephen Foley, and Richard, McGregor. 2013. “Descent into despair.” The Financial Times. July 26.
  4. Glaeser, Edward, Jose A. Scheinkman, and Andrei Shleifer. 1995.”Economic Growth in a Cross-Section of Cities,” Journal of Monetary Economics 36 (1): 117-143.
  5. McDonald, John F. 2013. “What Happened To and In Detroit?” unpublished paper.

Children and Cities Redux

William Sander* and William A. Testa**

Central cities are not likely to regain their former population. However, some of them may have reached an important inflection point—people are moving back into some of the largest (and longest-declining) cities. For example, New York City’s population has increased by more than one million since 1990, after declining by about one million between 1950 and 1980. Over the past decade, nine of the ten largest (and 17 of the 20 largest) cities in the United States have gained population.

Many observers attribute the population turnaround to changes in the residential attractiveness of the city, although cause and effect are blurry since new residents themselves have instigated many changes to the urban landscape. Prominent urban researchers have described particular features of urban areas that have attracted households back to the core. These features include new housing in city centers, amenities such as specialized restaurants and night life, restoration of architectural gems, and myriad cultural activities. Such features are enticing increasing numbers of (mostly young) college-educated singles to call city centers home.

If one goes back in time, studies on urban household location tended to focus on the tradeoff in the cost of commuting from suburban areas and the lower price of land and housing in suburban communities. Research indicated that about half of the suburbanization in the post-World War II period was driven by higher income that increased the demand for suburban housing relative to city housing. It is still the case, that suburbanization is still partly driven for the demand for larger, detached houses that are more prevalent in suburban communities.

To be sure, amenities alone do not explain recent trends. Other studies have documented the ability of urban cores to foster jobs and businesses characterized by intense information exchange and creativity, thereby attracting college-educated workers to live in nearby neighborhoods. In a recent study, we show that central cities are an increasingly important work site for the most highly educated workers in all of the metropolitan areas that we examined, even bankrupt Detroit.[1]

Income, education, and human capital are all important elements in city revival. In a recent study, Alan Ehrenhalt calls the return to city living the “great inversion” that reverses trends present in cities since the mid-twentieth century. He hypothesizes that some American metropolitan areas are beginning to resemble nineteenth century European cities, where the more affluent lived in city centers and households of more modest means lived in the suburbs. Some of the reasons that he offers for the heightened attractiveness of many central cities as a place to live are the decline of manufacturing in cities (making them more livable); lower crime rates; growth in the single, never-married population; lower fertility rates; and a bulging cohort of relatively affluent and educated seniors.

Although many cities still have a disproportionately number of the poor, growth in poverty has become more suburban over the past decade. For example, the number of poor in suburbs of Chicago about doubled over the past decade. Thus, although the poverty rate in cities such as Chicago remains relatively high, it has declined relative to suburban areas.

Largely absent from recent discussion is the role and attractiveness of central cities for families with children. In the past, research and observation both indicated that suburbs provided families with cheaper land and housing, as well as safer neighborhoods and higher quality schools. The raw data suggest that little has changed in this regard even as upscale and educated singles and adult co-habitants have are re-discovering the bounties of city life. Some observers such as Joel Kotkin and Ali Modarres express concern that a failure to provide for children bodes poorly for continued urban revival, citing the historical correlation between cities’ decline of family activity and the “erosion of their cultural and economic vitality.”

In many MSAs, the central city’s share of college-educated adults approaches or exceeds the city’s share of all persons aged 25 and older, with the exception of some older industrial cities, such as Detroit, Milwaukee and Philadelphia (see table). But for educated adults with children, only Seattle and Charlotte buck the trend, or come close to it.

Click to enlarge.

Yet today, central cities undoubtedly have more to offer households with children. Many cities have made significant strides in improving their public safety, or they have simply benefitted from general trends toward lower criminal activity. However, with regard to public education, it is unclear whether most cities have achieved much traction in this regard, though efforts towards these ends are widespread. In the case of the city of Chicago, more affluent and educated families with school-age children continue to migrate to suburban communities. This has resulted in a 16.5% decline in the school-age population in the city of Chicago over the past decade.

Urban school improvement initiatives range from a host of teacher pay-for-performance reforms, to “small schools” reconfiguration, to charter school choice and high-achieving academies. In some instances, where highly educated parents with children have chosen to live in the city, parents have opted out of the public school system. For example, in Manhattan about 1 in 4 school-age children attend private schools. In the more affluent areas within Manhattan the percentage is much higher—about 1 in 2 children in families that live in either the Upper East Side or Upper West Side.

As they aim to encourage further population growth in city centers, policy leaders would do well to understand the residential choices being made by affluent and educated households with children and work to provide the amenities and services that are important to these families. They represent a population segment that may be significant in attracting jobs and building a tax base to provide public services for all city residents. Otherwise, working parents who must commute from suburb to city may demand higher wages as compensation for the additional time and cost of getting to work, thus having a negative effect on employment and investment in the city.

The recent influx of young (mostly well-educated) adult singles represents an opportunity for central cities. These urban homesteaders begin with a preference for urban living; policymakers might want to consider ways to keep them in the city as they marry and raise children.

In a current study, we are exploring the relationship between higher education, income, and the location of families with school-age children within a city-suburban area context for 15 large metropolitan areas in the United States, including Chicago, New York City, Philadelphia, and San Francisco.[2] In particular, we highlight the effects of various levels of higher education on household location and how education effects vary for different types of households. We compare our results with estimates for married respondents without school-age children and for never-married respondents without school-age children. Thus, we are able to highlight the heterogeneity in the effects of education on household location by household type and city-suburb location.

A key variable in our study is whether adults have at least a bachelor’s degree. In about half of the metropolitan areas we examine, educational attainment levels of householders are higher in central cities than in suburban areas. In some cases, the differences are relatively large—for example, the share of population with a college degree is 15 percentage points higher in the city of Seattle than in the suburbs. However, the share is 18 percentage points higher in the suburbs of Detroit than in the city.

But when it comes to college-educated parents, the apparent residential advantage of the city mostly evaporates. In most cases, college-educated parents with school-age children are far less concentrated in central cities relative to all parents with school-age children, with the exceptions of Charlotte, Pittsburgh, and Seattle. For example, 30 percent of college graduates in the Chicago MSA live in the city of Chicago, but only 16 percent of college-educated parents with school-age children live in the city. About half of these parents send their children to private schools.

On the face of it, the key reason that parents live in central cities is the location of their work. A high percentage of parents who work in central cities also live there. For example, 59 percent of parents with school-age children who work in the city of Chicago also live there. This declines to 43 percent for college-educated parents with school-age kids.

How do these numbers hold up to closer statistical scrutiny? To put them to the test, we conducted multivariate analyses with respect to individual household location in city versus suburb. We analyzed each of 15 city-suburb MSA pairs separately for the very recent past. Our study data are drawn from the Census Bureau’s American Community Survey for 2009. According to our results, the ongoing migration of educated, mostly young, adults into the city has not carried over into their child-raising years. Our findings are negative for higher education and income effects on living in a central city for families with school-age children for the largest cities within metropolitan areas in our sample, including Chicago, New York City, and Philadelphia. This contrasts with more positive higher education effects on living in cities for married and never-married respondents without school-age children.

In most of our study MSAs, households with high educational attainment lead the way in living in central cities, but the presence of school-age children negates this effect. Overall, having either a bachelor’s degree or a master’s degree has a negative effect on families with school-age kids living in a city, although there are a few cases where the effect is positive. Having very high levels of educational attainment (a professional degree or a Ph.D.) is negatively associated with living in a city only in a few cases, suggesting that parents with the highest levels of educational attainment tend to have a greater preference for living in cities than other college-educated parents.

To what extent should cities pursue households with children as a focus of strategic development? Clearly, the benefits of good schools and safe neighborhoods accrue to all population segments, so these are important goals for policy in any case. Social returns to education and safety are high; today’s children are tomorrow’s citizenry and work force. Now that more college-educated households are choosing to live in the city during their pre-child-raising years, city leaders may want to explore ways to entice more of them to remain in the city after they become parents.

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*Professor of Economics, DePaul University, Chicago. (Return to text)

**Vice President and Director of Regional Programs, Federal Reserve Bank of Chicago. (Return to text)

[1]William Sander and William A. Testa. 2013a. “Education and the Location of Work: A Continued Economic Role for Central Cities.” Annals of Regional Science. (Return to text)

[2]William Sander and William A. Testa. 2013b. “Parents’ Education, School-Age Children, and Household Location in American Cities.” Paper prepared for the European Regional Science Association Congress, Palermo, Italy. (Return to text)

Families and Central Cities

For central city economies like those of New York and Chicago, the 1970s were a low point as middle- and upper-income households in large numbers suburbanized out of older cities of the Northeast and Midwest. Since then, some central cities have been rediscovered, especially by younger and educated singles. Moreover, to a lesser extent, central cities have also been rediscovered by older (often retired) households with middle and upper incomes. Prominent researchers, such as Ed Glaeser, have described this return to central cities, along with the particular features of urban areas that have attracted households back. Some of the attractiveness of central cities has been attributed to such amenities as high culture venues, falling crime rates, lively night life, older architecture, and an active “marriage market.” Others note that highly skilled and educated workers have also found superior employment opportunities in central cities, and so, their decisions to reside in urban areas have often been affected by their locations of work.

But how have central cities (relative to suburbs) fared in attracting and keeping families with children? Since the 1970s and 1980s, many cities have been criticized for their poor quality of public schools, and in turn, many city officials have pledged to reform and improve cities’ educational offerings. Additionally, unsafe or crime-prone neighborhoods have been sometimes associated with central cities, although crime rates have generally been falling over time.[1] Lower-income children attending poor-quality schools and living in unsafe neighborhoods are perhaps most at risk, since their families may often be hard-pressed to provide them with the attention and resources necessary to build up their human capital and keep them safe.

That said, more telling insights on the city versus suburb location decision may be gleaned by examining households that have high educational attainment and high income. Such households are usually the ones that are most mobile and most able to choose—that is, they are the families who can “vote with their feet” and who aren’t constrained by a lack of household income, challenges in gaining access to information on outlying neighborhoods, and limited housing/neighborhood opportunities.[2]

It is further evident that households with high education and high income tend to choose communities based on criteria such as the quality of local schools, safety, and the education level of residents.[3]

For these reasons, residential choices of households with high levels of education and income may be an important bellwether for many families in identifying their preferred residential locations. So, too, the attraction and retention of such high educations households in central cities may be a keen public policy target. To repel highly educated, highly paid workers from living in central cities would impose real costs—indeed, without a pool of such workers readily available, cities might have greater challenges in attracting more businesses and jobs, as well as building up a strong commercial tax base.

Preliminary evidence suggests that, on average, cities have shown limited progress in becoming more amenable places in which to live for families with children. The table below, drawn from the National Opinion Research Center’s General Social Survey, indicates that since the 1970s, suburbs have maintained their edge over cities as the preferred locale of residence for families with children. For the 100 largest metropolitan statistical areas (MSAs) surveyed, the share of the total adult population living in central cities has declined in tandem with the share of those adults having children. Similarly, the share of the overall college-educated population residing in central cities has also declined in tandem with the share of such college-educated adults having children.

However, the General Social Survey data do suggest that college-educated adults have tended to suburbanize at a much lower rate than the overall population. Likewise, college-educated adults with children have also tended to move to the suburbs at a lower rate relative to the overall population with children.

Percentage of 25+ year olds living in central cities of 100 largest MSAs, 1970s and 2000s

Source: Author’s calculations based on data from the General Social Survey, http://www3.norc.org/gss+website/.

The table below offers a demographic snapshot of 16 large metropolitan statistical areas, with a focus on the population share living in the central city. The first column itemizes the shares of the MSAs’ total populations that live within central city boundaries. This column offers an important point of comparison among MSAs because city versus suburban land share (and population share) can vary widely across MSAs. Such differences stem from the fact that in many instances, city boundaries have been cut short historically because cities failed to annex population growth on their urban fringe.

The second column provides population shares of college-educated adults aged 25 years and older living in central city limits. Some cities, such as Boston, Minneapolis–St. Paul, San Francisco, and Washington, DC, rank highly as the chosen locations of residence for college-educated adults; indeed, this is indicated by their shares of living within central city boundaries being higher than that of the general population.

In the third column, cities are generally shown to be the domicile of far fewer college-educated parents with school-age children (relative what is seen for the total population and for the overall college-educated population). On average, these 16 central cities are home to 24% of their MSA populations, but only 14%% of their college-educated parents with school-age children. Even for cities with a relatively high share of all college-educated adults residing within them, college-educated parents with school-age children will tend not to follow their counterparts without children. For example, 16% of the college-educated adults in the Washington, DC, metropolitan area live within the District, yet only 5% of the college-educated parents of school-age children do. There are some exceptions: Central Charlotte and New York tend to retain a share of such college-educated parents in their respective MSAs roughly in proportion to college graduates who are not parents.

Percentage living within central city boundaries of the Metropolitan Area 2009

Source: Author’s calculations based on data from the U.S. Census Bureau, American Community Survey.

What explains these differences across metropolitan areas? As always, there are many crosscurrents to understand and account for. For instance, some cities may be more successful than others at hosting employers with job opportunities for highly skilled and educated workers, who, in turn, choose to live in proximity to their job sites. Additionally, some cities may attract highly educated (but childless) persons because of their amenities such as excellent night life and architectural preservation. Such features may not be very high priorities for parents (regardless of educational background) with school-age children. However, differences in schools and safety may matter greatly to families with children. Indeed, many complex factors go into the decisions of different demographic groups choosing to live in and out of central cities. Accordingly, over the coming year, Bill Sander and I will be further analyzing data while accounting for all of these considerations.

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[1]Crime rates in cities and in suburbs have fallen markedly (on average) since the 1990s, with city crime rates tending to fall more steeply but with suburban communities maintaining lower (average) rates of crime over a longer period. See Ingrid Gould Ellen & Katherine O’Regan and Elizabeth Kneebone and Steven Rafael.(Return to text)

[2]For data on the frequency of moves by demographic characteristics, see, U.S. Census Bureau, Geographical Mobility: 2010 to 2011. Households with higher educational attainment move more frequently for long distance moves. For local moves, this is not the case.(Return to text)

[3]See, for example, Julie Berry Cullen and Steven D. Levitt, 1999, “Crime, Urban Flight, and the Consequences for Cities,” Review of Economics and Statistics, Vol. 81, No. 2, May, pp. 159–169; this article shows that households with high human capital demand a safe environment, which make many suburban areas more attractive to such households. Additionally, see David Albouy and Bert Lue, 2011, “Driving to opportunity: Local wages, commuting, and sub-metropolitan quality of life,” University of Michigan, working paper, August 8, 2011, available here; this paper shows that households pay premia to live in those suburban areas and city neighborhoods having low crime and well-funded schools.(Return to text)

Chicago’s Center Leads the Way?

As central cities go in the Midwest, the city of Chicago is often held up as exceptionally successful, having experienced something of an economic renaissance since 1990. Much like other Midwest central cities, Chicago suffered acutely from population and manufacturing decline accompanied by sharp suburbanization during the 1970s and 1980s. The city’s population declined 10.7 percent during the 1970s and another 7.4 percent during the 1980s, which amounted to a population loss of 583,000 over the two decades. But a population turnaround unfolded in the 1990s when Chicago enjoyed a population gain of 4.0 percent—the first such gain since the 1950s. The trend proved to be short-lived, however, as the recent decade 2000-10 took back 6.9 percent of Chicago’s population.

Despite such mixed success, Chicago does stand out somewhat among large metropolitan areas in the Midwest region, boasting several elements of marked improvement since 1990. For one, the city has attracted a population of educated, mostly young, working adults. Owing to in-migration, the city’s 25-34 year old population now has a higher four-year college attainment rate than the suburbs. Residential neighborhoods in the city (and the downtown itself) have especially shifted toward young and college educated households, who have invested heavily in housing and housing rehab. In the process, Chicago’s manufacturing orientation has transformed to service jobs in the business services, finance, education, and health care sectors.

One indication of Chicago’s strengthening core can be seen by comparing the central city’s unemployment rate with that of its surrounding suburban area. Typically, owing to the tendencies of the urban poor to reside in some central city neighborhoods, average central city unemployment tends to exceed suburban averages in large U.S. metropolitan areas. As seen below, this also holds true for the Chicago area.

However, the unemployment rate of the city of Chicago has been converging with that of the greater metropolitan area since 1990 (below). In the early 1990s, the city’s unemployment rate exceeded the metropolitan area’s by over 2 percentage points. By the end of last decade, the gap had narrowed below a single percentage point.

Unemployment rates are measured for survey respondents according to where they live, not where they work. Accordingly, given the gains in educational attainment among those who live in the city, it is not so surprising to also find improvements in unemployment rates.

But what about the city of Chicago as a place to work? Has Chicago’s central city been providing increased employment opportunities? Data on payroll employment and wage income are available by zip code area, though the coverage excludes government workers and several smaller industry categories.

The chart below indexes payroll employment in the entire city from 1994 to 2008 (red line).[1] While job counts have been flat within the city boundaries, income generated by available jobs indicates steep earnings gains, possibly reflecting a more highly skilled or at least more highly compensated job composition. Price-adjusted average payroll earnings per employed worker have climbed very steeply since 1994–by over 50 percent by 2008! (blue line).

On further inspection, as it turns out, gains in both payroll employment and in payroll earnings have been confined to Chicago’s central area while, on average, both jobs and payroll have declined over the same period in the outlying city area. The charts below contrast the central area with the outlying city neighborhoods; the map that follows provides employment detail by zip code area within the city of Chicago. Aside from strength at the core, job growth is evident on the Northwest side as one nears O’Hare Airport.

Payroll jobs by zip code

In examining the four large central cities of the Seventh District, the central areas of the other three—Detroit, Milwaukee, and Indianapolis–have also generally outperformed their outlying city neighborhoods as both job and income-generating domiciles. However, in the case of central city Detroit, outperformance has still meant a 9.5 percent job decline over the period. The Milwaukee and Indianapolis central areas have performed better in this regard, though they have underperformed Chicago.

Central areas of large Midwest metropolitan areas continue to hold promise in contributing to the redevelopment of their broader city and metropolitan area economies. Led by Chicago, the central areas have been generating significantly more earnings from a moderately growing payroll job base.

Note: Thanks to Wenfei Du and Norman Wang for assistance.

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[1] Source: U.S. Department of Commerce, Bureau of the Census, County Business Patterns. (Return to text)

Exploring urban economic bases: Which types of people and industries are drawn to central cities?

This year the 2010 U.S. Census findings have started to become public. Thus far, these findings show that central cities of Midwest metropolitan areas, like Chicago and Detroit, experienced a rough decade. For example, the city of Chicago lost almost 7 percent of its population over the 2000s, although it had gained 4 percent during the 1990s. Indianapolis’s population continued to grow in the 2000s, but by 4.8 percent, down from 8.3 percent during the 1990s. Weakness in the general U.S. and Midwest economies over the decade explains much of the weakness. In addition, the housing boom through 2006 dampened cities in comparison to their suburbs. Although redevelopment and resettlement took place in some central cities, the housing boom generally propelled new construction in the urban fringe during the past decade.

Since most major housing markets remain depressed, decentralization of the metro area population from the central cities to their suburbs will likely abate. Still, the previous decade’s losses of population (and jobs) have left some city governments and schools systems, including those in Chicago and Detroit, with yawning fiscal deficits, which make it very difficult to sustain essential services. Services are financed through local taxes on residential property and consumer sales, which tend to fall along with population. At the same time, fewer households do not always translate into fewer public service burdens because physical infrastructure (schools, roads, bridges, and sewers) must be maintained; indeed, the delivery networks of public services do not easily or quickly scale down dollar for dollar.

City services are also financed from taxation of the job base and commercial activity. With regard to the job base of central cities, the U.S. Census Bureau has not yet released detailed 2010 Census data that can document job gains or losses in central areas. Yet, job declines usually accompany population declines. There are many reasons why such declines go hand in hand. For one, households spend locally on food, recreation, and home repair, so when people leave central cities to live elsewhere, workers with jobs tied to these activities may be let go. For another, most people want to reduce their costs spent in time and money getting to and from work. Accordingly, many employers have followed the people who have moved from central cities to the suburbs, especially if moving their operations translates into easier recruitment and lower costs

That said, the recent decline in home construction jobs are likely being felt been more keenly in the urban fringe, where much of new construction was focused earlier in the decade. Across the U.S., residential construction jobs have declined 44 percent since their peak in 2006. So, for the time being, construction does not appear to offer any positive prospects for suburban and central city economies alike.

As the economic recovery continues to unfold, central cities will be searching for avenues to rebuild their job bases. In statistical work being conducted by Bill Sander of DePaul University and me, we examine many characteristics of central city workers. Even after we control for where these workers live—city versus suburb—we find that the central city is a more attractive location for those jobs that are occupied by workers who have higher educational attainment. The reasons for this are difficult to disentangle. Some of the attraction to central cities for highly educated workers (and their employers) may be cities’ relatively greater density of highly educated workers. This density may facilitate better productivity, perhaps through easier face-to-face information exchange, which can generate new ideas or learning. Or, it may also be that firms in those industries that tend to employ highly educated workers find central location attractive for other reasons, such as proximity to their customers.[1]

During the course of our work, we constructed some charts of the relative location of city jobs versus suburban jobs for specific industry sectors (see below). The charts are revealing, but they do bear some explaining. The charts show the general tendency of jobs in specific industry sectors to be located in cities (versus the suburbs). A dot below the red line indicates a suburban concentration. For instance, construction jobs turn out to be more suburban-oriented than total jobs across all 15 metropolitan areas. Manufacturing and retail trade jobs show the same tendency.

Central City Share of Total Jobs in Metro Area versus Central City Share of Sector-Specific Jobs, 2004

Source: U.S. Dept of Commerce, County Business Patterns 2004 and U.S. Census Bureau, Census 2000 (Public Administration only)

Our charts clearly show that some industry sectors are more city-oriented than others. Industries that are more city-oriented industries are health care and social assistance; finance and insurance; arts, entertainment, and recreation; education services; and public administration. Other industries—such as professional, scientific, and technical services; transportation and warehousing; and management of companies and enterprises—vary across individual metropolitan areas.

No doubt, cities and suburbs alike will use such information to focus their energies and efforts to revamp their economic bases. For cities, information-rich sectors will continue to draw investment interest by employers of workers having high educational attainment. ______________________________________________________________________________________

[1] Those with higher educational attainment tend to occupy jobs in the city relative to the suburbs, even after controlling for the broad industry under which the jobs fall. That is, for example, workers in retail trade jobs tend to have higher educational attainment in the city versus the suburbs (in most instances). (Return to text)

A continued role for central cities?

Bill Testa and Bill Sander

The rapid flight of jobs and people from central cities, such as New York and Chicago, during the 1970s called into question what role, if any, they could play in metropolitan area economies. Today, many central cities of the Northeast and Midwest continue to be significant centers of commerce and employment in their metropolitan areas[1]. Over the past four to five decades, the manufacturing production sector has invariably shifted its activities from central cities to the suburbs (or moved away from metropolitan regions altogether). While doing so, this sector has shed many jobs. Yet certain important service sectors continue to find central cities to be desirable and hospitable locations in which to conduct their business. These include, for example, higher education, specialized medical services, and some types of government services that require face-to-face service delivery[2]. For such businesses, central cities remain accessible destinations for customers drawn from broad surrounding market areas. Customers are still willing to travel to service providers’ places of business located in cities.

In addition, a central city location can be highly productive for those businesses in which frequent face-to-face communication must take place among their workers or nearby business-to-business customers. The high density of central business districts can be very productive for such industries: Deals are struck, creative ideas are born, or temporary partnerships are formed as a result of frequent (and often unplanned) personal interactions that a central city facilitates. Such businesses often include law, financial services, advertising/marketing, public relations, management consulting, R&D, headquarters, and accounting (see figure below).

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Workers in these “city-centric” businesses are generally those who engage in creative, administrative, and highly skilled work activities[3]. In no small part, the rising share of high-skill jobs in the overall U.S. economy has helped to boost this economic role of central cities. As the rate of technological change has increased (and as global markets have become more open) over the past four decades, the wages and incomes of highly skilled and educated workers have grown considerably. More generally, a study by E. Glaeser and A. Saiz finds that, compared with other regions, “skilled cities” have been growing more rapidly for at least a century because they are more productive and also because they adapt more easily to economic shocks, such as changing industry fortunes.

Drawing on data from the U.S. Census Bureau’s American Community Survey (ACS), the table below presents the proportion of the city workforce with four-year college degrees (or higher) as compared with the rest of the metropolitan area (suburbs). The workers are reported here by their place of work although they may reside anywhere in the metropolitan area, be it city or suburb. Although educational attainment is far from a comprehensive measure of skill, it is a widely used measure since the level of educational attainment correlates strongly with wages and income. Generally, it is seen that the central city workers of the Northeast and Midwest tend to have greater educational attainment than their suburbs[4]; Detroit and Philadelphia are exceptions.[5].

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Although central cities tend to draw workers specializing in education-intensive occupations, the city’s share of such jobs in the metropolitan area, as compared with the surrounding suburbs, varies greatly. The first two columns of the table below show the shares of a metropolitan area’s college-educated workers employed in the city and in the suburbs. At one end of the spectrum, the city of Detroit accounts for only 12 percent of employed workers who have college degrees in the Detroit metropolitan area. At the other end of the spectrum, New York City hosts 50 percent of employed workers with a college degrees in the metropolitan region. In the industrial belt, central city Chicago leads with 38 percent; Milwaukee and Pittsburgh are not far behind. The central city of Detroit does lie far behind with 12 percent of the metropolitan area’s college educated workers.

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The choice of residential location by those adults who are college-educated also has important consequences for central cities because such households generally contribute heavily in their payment of local taxes. Older cities of the Northeast and Midwest often have a disproportionate amount of low-income households for whom public services such as education must be financed through local taxes. Having more highly educated, high-income households living in the city boosts the local tax base, providing more revenue for local governments to provide these vital public services.

And as shown by various studies, where workers choose to live can affect where they choose to work—and vice versa. Accordingly, by attracting more highly educated (and other high-income) households, a city can draw in employers that are searching for available high-skill workers. Recognizing these incentives, many central city mayors have fashioned public amenities and services, such as parks, public art, and high-quality schools, to attract highly educated, high-income households in recent years.

The final two columns of the table above show the shares of college-educated households in each metropolitan area residing in the central city and in the nearby suburbs. Although gentrified neighborhoods can be found in virtually all cities, some central cities—for example, Detroit and St. Louis—can be seen as having fared poorly overall at attracting residents with high educational attainment. In addition, there are cities that have performed well at attracting jobs requiring a high level of education, but have done less well at drawing highly educated, high-income households such as Boston, Pittsburgh, and Philadelphia. Chicago and Milwaukee are seen to be fairly balanced and successful in attracting both college-educated workers and households.

Central cities in the Northeast and Midwest continue to struggle to find new and sustainable economic roles within metropolitan areas. Almost without exception, the city’s economic base has historically centered on manufacturing production and goods transportation—industries that have since diminished or re-located to the suburbs or elsewhere. Meanwhile, the nation’s economy has been restructuring to favor occupations requiring highly skilled and educated individuals. Fortunately for some central cities, their high population density, among other amenities, provides favorable conditions for these types of jobs. Some cities of the Northeast and Midwest have been successful at not only attracting highly skilled jobs, but also at attracting highly educated, high-income households. In addition to boosting the local tax base, such success may be highly desirable because employers tend to follow the available local work force.

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[1] This is not to say that employment is centralizing. A recent study of 98 metropolitan areas by Elizabeth Kneebone (link) observes that employment decentralized in almost every major industry between 1998 and 2006. E. Glaeser and M. Kahn (link) find that, on average, less than 16 percent of metropolitan area employment locates within three miles of a city center. (Return to text)

[2] Tim Bartik and George Erickcek characterized the economic roles of these industries for central cities’ economies, see reference (link) (Return to text)

[3] One exception has been the centralization of entertainment and recreational activities in some central cities. Such activities—involving tourism, hotels, eating and drinking places, music and theatre venues, and sporting events– may not employ highly skilled or educated workers to the same degree. (Return to text)

[4]The ACS enumerates city-based workers by their place of work; it also separately estimates workers by place of their residence. (Return to text)

[5] Note that a city’s downtown or “central business district” often differs markedly in its share of college-educated workers, compared with the remainder of the city—this is illustrated by Manhattan versus the rest of New York City in table 1 . In addition, a study (link) by E.L. Birch of 44 selected cities from 1970 to 2000 finds that young and educated households are trending toward living downtown, but that downtowns are also often the domiciles of some of the most and least affluent population groups. (Return to text)

Groundhog Day for Chicago’s Economy?

Has the Chicago area lost its mojo? Given the poor economic conditions pervading so many regions of the United States, Chicagoans are not alone in asking whether their path of growth and development has gone off track. When the nation’s economy as a whole is down, it is especially difficult for individual regions to interpret economic signals concerning their long-term performance, but the tendency is to read them negatively. For Chicagoans, recent anecdotal evidence may also have shaded their views about the future of the wider Chicagoland area. For instance, Chicago lost its confident bid for the Olympic games this past fall in the first round; Oprah Winfrey announced the relocation of her iconic show to another locale—and, incidentally, from broadcast syndication to her own cable network; several large trade shows announced new venues or possible moves away from Chicago; and the planned mixed-use residential tower—The Spire—halted construction. Such events hardly settle the case; many positive developments mark Chicago’s past decade. In particular, Chicago’s two prominent financial exchanges—the Chicago Mercantile Exchange and the Chicago Board of Trade—moved successfully into the era of electronic trading; and they then merged into the world’s largest (CME Group), expanding even further by recently acquiring the New York Mercantile Exchange (NYMEX). The city’s Millennium Park opened to worldwide acclaim; Trump Tower was completed; and the famed Art Institute opened its Modern Wing—the largest expansion in the museum’s history. Additionally, Chicago’s design and architectural talent played an integral part in the completion of the world’s tallest building in Dubai.

Even with such accomplishments, Chicagoans have a more fundamental reason to pause when assessing their economic direction and performance. Following some very painful years of restructuring that took place during the 1970s and 1980s, the Chicago area economy and its central city experienced a surprising revival from the late 1980s through the 1990s. The revival led many local leaders to believe that the region had begun a new improved course of growth and development. The charts below first show the metropolitan area’s unemployment rates since 1980. Following the 1981–82 national recession, when the local unemployment rate had soared to above 11 percent , the unemployment rate began to fall steeply; it rose again during the 1990–91 recession, but it then continued to fall to just above 4 percent by the year 2000. By comparing the Chicago area’s unemployment rate with the nation, we can see that Chicago’s labor market tightness exceeded the nation’s during the mid to late 1990s, before rising above the nation’s once again over the recent decade to date. Was Chicago’s strong economic performance during the 1990s an aberration?

Click to enlarge.

Click to enlarge.

Chicago’s turnaround following the 1980s was remarkable in that a fundamental restructuring supported it. Specifically, though the metropolitan area shed much of its manufacturing base, its work force shifted increasingly into professional and business services. In response, many Chicagoans crafted a new image of their metropolitan region: Instead of being a “hog butcher for the world” and the regional locus for manufacturing and transportation, Chicago (at least in the mind of its citizens) was moving into a new role as a global city, one whose economic connections were being forged with other world business capitals. Chicago was seen as a city casting off its roots for something better.

During this time, a central city revival contributed greatly to the wider metro economy. For example, Chicago became a magnet for young educated workers who occupied jobs in the rapidly growing business and professional services sectors. The central city’s quality of life and amenities reputedly brought in “knowledge workers,” in turn attracting companies or those parts of companies that desired access to the young, highly skilled labor pool. The number of central area jobs in professional and business and financial services grew robustly; and the city’s unemployment rate improved, gaining ground on that of its suburbs from the early 1990s onward. The central city gained population during the 1990s for the first time (counting the decade’s total) since the 1940s, although immigration of lower-skilled workers from Central America accounted for a majority of the gains.

Chicago’s performance in the current decade looks much less sanguine. As seen in the charts above, the metro area’s unemployment rate rose rapidly during both recessions of the 2000-09 decade, lingering above the national average for much of the first several years. Shortly after the 2001 recession, a gap of one-half percentage points or more opened up to Chicago’s disadvantage, and it did not dissipate until 2006. And over the past year or more, the Chicago unemployment rate has once again been running 0.5 percentage points or more above the nation’s.

Were some especially negative but transitory factors at play earlier in the 2000s’ decade that would suggest that the outlook for the coming years should be revised upward? Yes, to some degree. Chicago’s sizable manufacturing sector declined disproportionately compared with that of the nation in the early part of the recent decade. In part, the Chicago area’s manufacturing base was steeped in telecommunications equipment, which was especially hard hit nationally. Although the current national downturn in manufacturing is also very steep, Chicago’s manufacturing job base is weathering the recession modestly better than the nation’s.

The post-9/11 fallout in travel and tourism also left Chicago vulnerable earlier in the decade. And while the current economic environment has also been very challenging for the travel-related segments, these segments have fared better than earlier in the decade.

Chicago’s lagging post-recessionary recovery earlier in the decade can also be traced to its hefty professional and business services sectors. After 2001, Chicago’s payroll job growth in these sectors lagged the end of the U.S. recession by two full years. Many of these industries behave like investment or capital goods (e.g., real objects owned by individuals, organizations, or governments to be used in expanding production and sales of other goods or services). That is, during post-recessionary periods companies do not begin to expand their purchases of capital goods until their existing capacity begins to strain and the prospects for market expansion become buoyant. Looking forward, this means that these important business sectors for Chicago may once again experience a sustained period of growth. But the current economic signal is unclear as to whether the Chicago area economy is in a lull, or whether its long-term growth prospects have dampened.

Hindsight does give us some perspective as to the degree to which the Chicago metro area economy has truly divorced itself from its regional business roots to connect with a newly emerging structure in global markets. One chart below shows a ratio of broad economic activity—namely, per capita income—for the Chicago region to that of all other metropolitan areas over the past four decades; the other chart shows the ratio of per capita income of the Chicago area to that of the industrial Midwest states of Illinois, Indiana, Wisconsin, Michigan, and Indiana. First, in comparing Chicago’s per capita income to that of all other U.S. metropolitan regions, Chicago’s relative income is seen to fall modestly in the 1970s and then steeply over the first half of the 1980s. But then, from the mid-1980s throughout the 1990s, per capita income gained steadily on the U.S. average; by this metric, Chicagoans were correct about their economy’s performance: It had truly been on the rise over that period.

Click to enlarge.

Click to enlarge.

However, it is more difficult to draw the conclusion that the Chicago area had successfully restructured its jobs base away from its surrounding region to become a global city. Whether Chicago had become more of an interconnected global financial and business center, such as New York or London, is still an open question. As seen above, for much of the 1990s, the Chicago region’s per capita income made little if any gains on the Great Lakes region. Rather, by way of explanation, the surrounding Midwest region was also experiencing a comeback of the same degree [1]. Domestic automakers were well on their way to profitability in producing energy-hungry passenger vans and sport utility vehicles. Meanwhile, rapid growth in the developing world supported Midwest production of capital goods machinery, such as farm and construction equipment. The Chicago regional economy continued to restructure toward high-skilled service provision, but its linkages may have remained somewhat parochial. That is, the Chicago area’s own growth appears to have been achieved through the provision of professional and transportation services to its traditional Midwest business partners.

In reappraising the era of the 1990s (especially in light of the Chicago region’s recent subpar economic performance), Chicago leaders and analysts may be motivated to look more carefully at possible directions for the future. Relative to some other Midwest and Northeast cities, the Chicago area has many assets, such as its prodigious base of professional services and a vibrant central city, which may provide ample opportunities for growth. Yet the future of Chicago’s economic direction and structure remain somewhat murky.

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[1]In the current decade, Chicago’s gain on the surrounding region largely reflects rapidly falling incomes and economic activity in Michigan. (Return to text)