August 2, 2012
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. 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.
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.
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.
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.
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)
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)
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)
July 11, 2011
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). 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.
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.
February 25, 2011
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.
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
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. ______________________________________________________________________________________
 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)
August 4, 2010
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. 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. 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).
Click to enlarge.
Workers in these “city-centric” businesses are generally those who engage in creative, administrative, and highly skilled work activities. 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; Detroit and Philadelphia are exceptions..
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.
Click to enlarge.
 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)
 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)
 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)
February 1, 2010
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?
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.
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 . 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.
In the current decade, Chicago’s gain on the surrounding region largely reflects rapidly falling incomes and economic activity in Michigan. (Return to text)
October 22, 2009
Chicago: Tall and Striving
The autumn season brings full tilt to Chicago’s convention and tourism activity. Out on the sidewalks of downtown Chicago, office workers such as me find themselves dodging out-of-towners who are gazing upward at the tall buildings. This year, sidewalk hazards of this sort are especially abundant. The professional building gazers of the world, otherwise known as the Council on Tall Buildings and Urban Habitat, are meeting here in Chicago to contemplate the purposes, construction, and financing of tall building projects throughout the world. They have asked me to address their conference in October on the role of tall buildings in Chicago’s economy.
Economists have long analyzed the purposes and benefits of high density living and working. And since high density cannot be achieved without tall buildings, many of the reasons to why we build so high can be found by considering density’s relationship to urban productivity.
Looking back over human history, transportation of goods and people has presented a costly impediment to beneficial manufacture, trade and travel. For this reason, the land area surrounding natural “nodes” of easy transportation such as water ports and harbors, and later railroad hubs, became very prized. That is to say, the transportation costs of accessing transportation nodes could be economized by intensively using surrounding land. And so, land rents rose there; and buildings for warehousing, factories, trade, and finance mounted as far skyward as the building technologies would allow.
Chicago’s economic history reflects these forces in some very special ways. As documented in two books about Chicago’s economy in the nineteenth century, Nature's Metropolis and City of the Century, wealth creation in the small area surrounding the mouth of the Chicago River literally exploded. Here, a unique node of transportation was developed at the nexus of two vast waterway systems, the Great Lakes-Erie Canal to the east and the Mississippi River Basin to the west. Later in the century, some timely investments in railroad added another important transportation hub to Chicago.
On Chicago’s land, markets were made in grain, livestock, and lumber. Materials were further processed, warehoused, manufactured, and shipped to markets, both domestic and abroad. Marketing and financing were arranged. Specialized retailers evolved to serve western farmers and ranchers, as did machinery makers.
A special Chicago role in building technology was spurred by its rapid economic growth and the intensity of activity on the land surrounding its ports and railroads. In response to the urgency and high cost of downtown land, many innovations in constructing tall buildings emerged here. The innovation of first iron, and later steel, frames and skeletons supporting skyscrapers allowed developers to build higher and stronger, as did the technologies of “floating foundations” that allowed construction of skyscrapers on Chicago’s soft and shifting soils.
Today, the importance of materials movement and manufacturing to Chicago have eroded somewhat . Still, the tall buildings and the attendant high density of work, play, and residence remain and, in fact, they have multiplied to serve other economic sectors. For the most part, the high density and proximity that tall buildings facilitate serve to allow people to communicate in highly efficient and often creative ways. While advances in electronic and digital communication such as the internet and cell phone are very helpful to business communication, they are incomplete. The modern economy has become more “information intensive,” not only in the communication of bulk, digitized information, but also in the face-to-face transmission of ambiguous information. In business meetings large and small, in organized forums and in random networking and social activities, information is created, debated, and transmitted. Workers hatch ideas, learn new concepts, cut business deals, and organize initiatives through such interactions. The “office meeting” has not died. And arguably, the chance encounters from which new ideas often arise have become more important than ever.
The “globalization” of trade and commerce which has taken place in recent decades has also raised the value of inter-personal communication. Globalization has increased the complexity of business transactions as well as increasing the variety of human cultures in which trust and understanding must be established in order for business to flourish.
Certain large and diverse cities, often called global cities, help to meet the requirements of global service exchange and deal making. Chicago definitely fits the bill. Its dense urban core and other features have vaulted Chicago to prominence as a global business center . The metropolitan area now hosts 29 Fortune 500 headquarters offices, and ten Fortune global headquarters. Chicago’s presence in professional and business service is both sizable and closely aligned with business headquarters. Prominent companies in advertising, financial exchanges, research and development, human resources, management consulting, accounting, law and logistics serve businesses in Chicago and around the world. Chicago ranks among the top three U.S. metropolitan areas in the hosting and staging of business meetings and conventions. Top-flight universities add to the mix, including two of the world’s top five graduate business programs at Northwestern University and the University of Chicago. There are over 1,500 foreign-owned firms in Chicago and 30 international chambers of commerce.
Economists usually refer to the added productivity that comes along with high density, large scale population, and a broad scope of (inter-connected) activities as “economies of agglomeration.” What this really means is that the whole of related activities amount to more than the sum of the parts; in Chicago, the co-location of the activities above add up to heightened economic productivity and wealth creation.
What are the interactions and transactions of co-location that give rise to heightened productivity? Some examples would be Chicago's headquarters gathering superior and cost-effective services from local professional service firms; professional firms finding customers at the city’s many international trade shows; recruitment by local firms of graduates from Chicago's outstanding universities; and ample continuing education opportunities for workers at all levels.
In addition, in contributing to agglomeration economies and a successful global city, businesses in the Chicago area also benefit from the city’s important and unique infrastructure, including an international airport. As more companies establish a global presence, they need more frequent face-to-face interactions with their counterparts and customers around the world. Chicago’s O’Hare and Midway airports offer nonstop or direct flights to 148 North American destinations and serve an additional 68 foreign destinations. This scale and reach of travel options are sustainable because of the extensive use of the facilities by (otherwise unrelated) local industries and, thanks to Chicago’s mid-country location, because of additional business from connecting traffic.
The judicious and well-planned configuration of tall buildings in Chicago's downtown is a necessary condition for co-location of the aforementioned activities. And it is well worth noting that ground transportation and easy circulation are equally necessary to achieve a density that works well. In most instances, the intent of vertical infrastructure is to economize on horizontal transportation costs. Overly congested roadways or poor public conveyance could easily undo these vertical advantages. While average travel times to work in the Chicago area are among the highest in the nation, six-hundred thousand workers do converge on Chicago’s central area each working day, of whom 55 percent of whom use mass transit  .
The conference attendees of the CTBUH will be considering such issues of tall buildings and urban habitat as they meet in Chicago. These issues may even provide welcome relief from a business environment which has, in many instances, left the financing of extant and prospective tall building developments in precarious condition.
 Although Chicago’s manufacturing concentration registered one-third greater than the nation during much of the twentieth century, that sector is now about on par with the nation. However, owing chiefly to national railroad convergence in Chicago, the metro area remains the nation’s premier location for inter-modal surface freight transportation. (Return to text)
 It is Chicago’s core area that is most notable for its density of tall buildings. Over 50 percent of the metropolitan area’s office space can be found in the central area. Nonetheless, employment sub-centers with dense commercial configurations are an increasing phenomenon in large cities. In the Chicago metro area, Dan McMillen’s study finds that such sub-centers grew from 15 in 1990 to 32 by year 2000. (Return to text)
 While we tend to associate tall buildings with large and densely populated cities, it is interesting that we sometimes see tall buildings in rural areas where horizontal travel costs are low (and land rents are cheap). As analyzed by urban economist Arthur M. Sullivan, the logic of such buildings owes to their specialized functions in which people circulate frequently within such buildings to designated sites so that a single multi-story building becomes optimal. For this reason, we may see tall hotels, dormitories, and hospitals even in rural areas. (Return to text)
August 24, 2009
Waukegan's Economy and Development
By Emily Engel, Senior Associate Economist and Britton Lombardi, Associate Economist
Waukegan, IL, has responded to the challenges of a diminished manufacturing base by looking to its assets and opportunities. Over the past decade, the U.S. has experienced steep declines in manufacturing jobs, especially in Midwest towns—the heart of the industrial belt. Many of these same towns have come to recognize that manufacturing may never be what it once was for them. Therefore, while continuing to tend their remaining industries, they have also been making plans to integrate themselves into the growing knowledge-based economy. In developing workplace and residential amenities, these towns are now targeting a new “creative class” of workers who can possibly revitalize these once manufacturing-dependent areas.
Waukegan, IL, with a population of 92,066 , lies 40 miles north of Chicago, on the coast of Lake Michigan in Lake County. Over the past 40 years, Waukegan has seen a sharp decline in its manufacturing sector. In 1972, Waukegan had 10,100 manufacturing jobs; approximately 15.5% of its total work force. By 2002, manufacturing employment numbers had dropped down to 4,780, making up only about 5% of Waukegan’s work force . During the 1970s and 1980s, Waukegan experienced a number of plant closures, for example U.S. Steel’s mill, which took away a few thousand jobs. Another plant closure was that of Johns-Manville—at the time an asbestos manufacturer. Another local manufacturer, Outboard Marine Corporation (OMC), began downsizing its operations over the past few decades until it filed for bankruptcy in 2000, laying off 7,000 employees from all of its plants. While OMC’s assets were acquired from the bankruptcy court by Bombardier Corporation which moved manufacturing operations north to Pleasant Prairie, Wisconsin, the research & development operations are still located on Waukegan’s lakefront.
Such economic changes have meant, not only diminished employment opportunities, but stresses on the local tax base to finance school and municipal services. At the same time, public service requirements have grown along with the city's swelling population. Waukegan's population expanded by 27% in the 1990s decade alone. As seen below, the most significant change has been the rapid growth of its foreign-born population, which increased 148% between 1990 and 2000. Most of these immigrants are recent arrivals to the U.S. (within the last ten years).
In appraising its opportunities for redevelopment and growth, it appears possible for Waukegan to link its economy to the surrounding prosperity. Towns in Lake County and in nearby Kenosha County have generally enjoyed rising prosperity. As seen below, Lake County has registered consistently higher annual per capita personal income relative to that of the Chicago metropolitan area. The trend seems to show a continued growth in the income gap, as it widened to just over $12,000 in 2007. The second chart below shows that the pace of total employment in the Lake County/Kenosha area has been positive on a year over year basis since 2002, whereas the pace of total employment in the Chicago Metro area only turned positive between 2003 and 2004. The Lake County/Kenosha area’s growth rate reached a plateau in 2005 at 2.0%; although this fell to 0.8% in 2006, it has been steadily rising since then. Even with its own decline in manufacturing jobs, Lake County, between 2001 and 2007, has seen a consistent growth in the number of total jobs; its manufacturing job losses have been offset by new jobs in other sectors.
Accordingly, some Lake County towns are actively transforming themselves by expanding their residential amenities for the workers who occupy emerging jobs throughout the broader region. Nearby towns with a similar manufacturing heritage to that of Waukgean (e.g., Kenosha, WI) have already started implementing development plans emphasizing such amenities—e.g., by building condominiums on the lakefront (namely, HarborPark) and creating city parks along the lake. Besides the growing job base in Lake County itself, Waukegan and other towns throughout the county may be able to attract workers from Chicago and Milwaukee. Waukegan is situated between these two large and prosperous job markets. With appropriate development, greater numbers of new and existing Waukegan residents could one day find themselves commuting to these larger job centers.
So what types of projects is Waukegan undertaking to attract knowledge-based workers? For starters, Waukegan is currently in the process of a large multi-million dollar downtown and lakefront revitalization project. Waukegan seemingly has a myriad of opportunities to build up the community by enhancing currently underutilized resources. The town has 1,400 acres of property and 3.5 miles of Lake Michigan coastline to work with—one of the last remaining underdeveloped lakefront areas in the Chicagoland area. The city already has established assets, too. It boasts two harbors—one built as recently as the mid-1980s and substantially upgraded within the last year. Together, these harbors can hold nearly 1,000 boats of a variety of sizes, and both are relatively quiet and peaceful. Other marina-based businesses nearby offer further amenities for recreational boaters. In addition, the Genesee Theatre, which was the start of the city’s plan to transform the downtown area, finished its renovation in 2003, after being vacant for more than a decade. The total cost of the renovation was $23 million, but now the Genesee Theatre has become a destination spot, drawing attendees from both Illinois and Wisconsin.
In the process of its revitalization, Waukegan has created a master plan to guide its development, which focuses on two main things: being a great city and having great places. The master plan’s guiding principles include an emphasis on transit-oriented development; connections between the downtown and the lakefront; protecting, restoring and enhancing the ravine and park system; ecological restoration to create recreational amenities; improving the transportation framework to provide clear access and establish civic places. As part of its redevelopment effort, the city plans to build up to 3,700 new residential units along the lakefront to take advantage of this vital asset which has been long underutilized. They are looking to restore the facades of the historical buildings in the downtown to bring back the ambiance they once provided; for the most part, Waukegan will maintain their distinctive appearance, but also retrofit their facilities to modern use. The town plans to use tax incremental financing (TIF) dollars to help subsidize these changes, and several projects have already been completed. Along with the buildings, Waukegan has begun improvements to the downtown area by adding 16 blocks of streetscape, and Waukegan Park District has developed a new veteran’s memorial park as a public open space in the downtown. In addition, Waukegan plans to enhance its lakefront area that gives it a distinctive advantage over other cities, especially since it boasts a commuter rail, Metra stop, within walking distance of the lakefront and downtown. Rather than build up all the area around Lake Michigan, the city wants to design a large open space for community use and entertainment similar to Chicago’s Millennium Park, but on a smaller scale,as well as maintaining a public open space along much of the lake shore.
In conjunction with the city’s revitalization, steps need to be taken to clean the Waukegan Harbor further. The harbor was classified as an area of concern (AoC) in 1975 when toxic polychlorinated biphenyls (PCBs) were found in the sediments of the water related to the past industrial uses along the lakefront. During 1993, OMC completed environmental remediation by cleaning up the sediments in and around its property, removing about 1 million pounds of contaminated sediment. According to the environmental protection agency (EPA) website, OMC is not alone as other major remedial actions have been undertaken at Waukegan Manufactured Gas and Coke, Johns-Manville Company, Waukegan Paint and Lacquer, North Shore Gas North Plant, and the Waukegan Tar Pit.” If such actions continue, the goal would be to get the harbor off the AoC list, which would help advance Waukegan’s plans to revitalize the lakefront.
In sum, Waukegan’s city planners want to revitalize and transform Waukegan as a place for people who desire the amenities that a lakefront offers, but perhaps at a more affordable price. Their efforts might make Waukegan also appealing to those who prefer the quieter suburban lifestyle or those who can commute easily to jobs in Lake County, Milwaukee, or Chicago. Waukegan is hoping to rebuild its community and bring residential interest, commercial activity, and people back into a once booming industrial town.
August 12, 2009
City-Suburban Population and the Housing Bust
Demographer William H. Frey calls to our attention a striking turnaround in population growth in the central cities of metropolitan areas. Since the 2005-06 peak of the housing construction boom in the United States, the growth rates of central cities have begun to gain ground on surrounding suburban areas. Beginning with 2005 and ending with population estimates reported by the Census Bureau for mid-year 2008, Frey illustrates a convergent city-suburb trend for U.S. metropolitan areas having a population over one million. These trends hold for all four major U.S. regions—North, Midwest, South, and West. (The 12-state Midwest population performance is shown below).
Similarly, Frey reports that these gains “are not confined to the very largest American cities. Among the 75 cities with populations exceeding 200,000, 41 grew faster in 2007-08 than in the preceding year, and 54 grew faster than in 2004-05.” We show the population trends for such cities by region below. Once, again, we can see that the turnaround has taken place, on average, in all Census regions of the U.S.
Within the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin, growth has also tended to rebound in cities over 200,000 in population (below). For the year ending in the middle of 2008, six of seven cities exhibited positive population growth. However, the City of Detroit is an outstanding exception with an accelerated decline in the mid-year ending 2008.
On average, Seventh District cities shifted from zero or negative growth in 2005 to an annual growth rate of 0.5 percent for 2008. The largest swings in performance were registered by Des Moines, with a swing from minus 1.3 percent in 2004 to plus 1.2 percent in 2008, and Chicago, with a swing from minus 0.7 in 2005 to plus 0.7 for 2008.
Click to enlarge.
At this point in time, the reasons for this shift toward central cities remain open to speculation. But given the timing, there are strong reasons to believe that the housing bust lies behind much, if not most, of the reversal. A general rise in demand for housing, such as that which occurred earlier in this decade, exerted a magnified impact on the fringe of urban areas. Given the lower price of land on the fringe and the ease with which larger single family homes can be constructed there (rather than tear-downs closer in), both population and housing generally shifted towards the periphery. Construction jobs related to fringe development likely bolstered the trend, as some households followed job opportunities to the suburbs. And now we may be seeing a reversal of such trends as home demand and employment have fallen off.
William Frey also attributes the urban population resurgence to the nature of the urban economies, citing “broad economic diversity at a time when smaller cities … are vulnerable to economic shocks” and the “resiliency of large urban centers that are economically and demographically diverse.” There may be some wisdom in thinking that this is so. In pursuing economic development, central cities have been trying to attract and grow “Eds and Meds,” (education and health care). As measured by George Erickcek and Tim Bartik of the Upjohn Institute, health care and hospitals, along with colleges and universities have been a bulwark of the economic base of many cities. These sectors of the U.S. economy have tended to grow and expand consistently, and cities have benefited. From the 2000 Census, Bartik and Erickcek report that earnings derived from the education sector are, on average, 36 percent more concentrated in the principal cities of the nation’s 283 metropolitan areas. Health care earnings are 12 percent more concentrated.
Nonetheless, with the release of the next mid-year Census estimates (for 2009), it will be interesting to see if central cities are able to sustain their momentum of population growth in relation to suburban areas. Beginning with 2009, the influences of the sharp U.S. recession and related job declines may become important.  Favoring central city economies, the education and health care sectors are steady performers even in recessions. So too, many central cities no longer host manufacturing production, which tends to be hit particularly hard during recessions. However, in many cities other elements of the economic base are both concentrated and highly sensitive to economic downturns. Such sectors include professional and business services, law, tourism/business travel, and especially the financial sector, which has been buffeted by the recent financial crisis.
Little evidence is available so far concerning the differing impact of the two national recessions, 2001 and the current one, on city versus suburb. However, in a recent report by the Metropolitan Policy Program at Brookings, Elizabeth Kneebone and Emily Garr report on year-over-year unemployment rates for city versus suburbs in the nation’s 100 largest metropolitan areas. They find that “in contrast to the last recession,” when city unemployment rates rose more sharply versus their suburbs, “unemployment has increased at nearly equal rates in cities and suburbs.”  The table below excerpts the year-over-year rise in unemployment rates for cities and their suburbs for several Seventh District cities and their suburbs and for the four major regions of the United States.
Note: Thank you to Emily Engel and Matt Olson for assistance.
The difference in the gap between the two recessions is not large. Year over year changes in unemployment rates in cities rose by 1.9 percent in primary cities versus 1.4 percent in suburbs from May 2001 to May 2002. For May 2008 to May 2009, year-over-year rates rose by 3.9 and 3.7 percentage points, respectively, for cities and suburbs. However, city/suburb unemployment rate differences in level are wider currently than in the 2001-02 period.(Return to text)
May 21, 2009
What are the opportunities in central cities?
Since at least the 1960s, central cities of large metropolitan areas have experienced challenging times. In many cases, large shares of the population and jobs have shifted from these central cities to their suburbs. More recently, over the past two decades, central cities’ travails have eased somewhat; the declines in the number of households and jobs have abated, and in some instances, these negative trends have reversed. Understanding the reasons behind these trends can be helpful in fashioning public policies to encourage the redevelopment of central cities.
The Chicago metropolitan area's experience may be especially helpful in informing policy throughout the Midwest states. While the Chicago area has shared a common course of development with its neighbors in the Great Lakes region, its central city has outperformed its counterparts over the past 20 years. The population of the Chicago area’s central city has grown by an estimated 1.9%, or 53,000, since 1990. In comparison, the central cities of the eight remaining largest Great Lakes metropolitan areas have clocked a 9% loss. As for employment located in the central cities, from 1990 through 2004, the Chicago area’s city lost 4.6%, while those of the other areas lost 6.5%.
Why have central cities such as Chicago and the Twin Cities experienced some rebound? Two major reasons have been advanced. For one, it is clear that there has been a reawakening of interest in living in central cities that relates to their unique amenities and features. Gentrification in many cities has focused on those neighborhoods that contain interesting architecture and history—not to mention lively entertainment scenes. In addition, big city mayors have capitalized on renewed interest in city living by lavishing attention on amenities such as outdoor recreation, lively shopping and arts districts, scenic streetscapes and waterfronts, and urban festivals.
In a recent study of residential location in the City of Chicago versus suburban areas, Bill Sander and I document the specific characteristics of urban denizens versus suburbanites for both 1990 and 2000. The importance of city services to households is apparent from our findings concerning their demographic characteristics. For example, with an eye on the quality or reputation of city schools, household adults with children of school age are much more likely to choose the suburbs over the city. As for the general importance of amenities, diversity, and built environment, we find higher educational attainment to positively affect households’ decisions to choose central city residence. In 1990, those with a four-year college degree were no more likely to live in the city; by year 2000, such householders were 4% more likely to live in the city rather than the suburbs.
The education-related aspect of urbanization is evident in the changing composition of Chicago’s residents. In 1990, 19% of all working age adults living in the city had attained a college degree. By year 2000, this proportion had grown to 26%. Gains among the younger adults were most striking. As shown below, for adults aged 25–34, the college attainment share had grown to 39% by 2006. Growth since 1990 in college attainment of young adults living in the city reversed the suburban advantage of 1990. On average, by 2006, college attainment of young adults in the city exceeded that of their counterparts in suburban areas. The number of those with a bachelor’s degree residing in the city grew by over 50% over the 1990s (not shown) .
It is a mistake to attribute too much of the rising urbanization of college-educated householders to the siren call of city lights, museums, and lakefront parks. That is because job location also strongly pulls along residential location (and vice versa). Through a job channel, the rising importance of information exchange in the U.S. economy may be the second vital large force that may be reviving central cities. New ideas, their dissemination, and the coordination of a complex worldwide economy have come to dominate economic output in developed nations; therefore, the siting of jobs and meetings of workers in dense configurations, some have argued, augments productivity and value generation. Central city location of work has become more desirable, which has pulled some jobs back toward the center of metropolitan regions.
There is some evidence of this renewed role of central cities. At the same time that many central cities have shed some types of routine production jobs, gains have been made in occupations and industries that are steeped in workers who engage in information exchange and interaction. While the City of Chicago has been shedding manufacturing jobs—one of its historic mainstays—it has largely replaced such jobs with those in nonmanufacturing sectors. As shown below, city job losses are largely accounted for by the manufacturing sector alone; in fact, the city has experienced overall growth in employment net of manufacturing. More specifically, (not shown) over the period from 1991-2002, central city Chicago realized strong job gains in such industry sectors as business services (+34.4 percent), securities and commodities brokers (+61.8 percent), educational services (+25.1 percent), and engineering and management services (+13.6 percent).
In our recent investigation of household preferences for city versus suburban residence in the Chicago metropolitan area, we account for the proximity of households to their place of work. Once we statistically account for those city residents who also have found employment in the city, our estimates of the importance of educational attainment on household location in the city are somewhat smaller than we originally estimated. More importantly, "place of work" statistically explains much of the central city residential location decision. For this reason, we should not put too much emphasis on the importance of household amenities to central city living, nor perhaps should policymakers; jobs and job-attracting features continue to be important.
At this point, not much is known about the extent to which the changing economic structure of central cities is actually generating new jobs in related fields and transforming economic bases. And so, leaders and analysts in other Great Lakes cities are looking at the Chicago experience for insights as Chicago pursues policies to refashion itself as a “global city,” in both its residential amenities and in its attractiveness to highly skilled service industries that trade in world markets. Research initiatives that can discern the importance of the city as a job location from a residential location will be especially helpful to city mayors and other policy makers.
Not all of these gains reflect shifting preferences toward the city. Gains in overall educational attainment of the general population, especially young adults, enlarged the population of those adults that were, in turn, more likely to choose urban residence. (Return to text)
January 8, 2009
Growth and Great Lakes Cities
For half a century or more, the industrial belt of the Great Lakes and Midwest has lagged counterpart regions in much of the South and West. Large midwestern metropolitan areas arguably offer the best prospects for relief from this historical pattern. The reasons are rooted in a fundamental restructuring of the global economy that favors cities. In underdeveloped countries, rapid urbanization and the emergence of large cities have gone hand in hand with economic growth and progress. And in developed countries on all continents, two factors have lifted growth opportunities for large cities. Foremost, technological gains in transmission of information have intensified the productivity of cities because of their role as meeting places. Face-to-face communication complements digital information flows. As business people can more easily transmit and receive information via electronic devices, their time has been freed so that they can engage more intensely and broadly in in-person dialog and social interaction. In other words, carrying one’s office in the palm of one’s hand allows one to leave the physical office to better explore opportunities and ideas. Cities tend to maximize these encounters in person. Enhanced and cheaper air travel lends a helping hand.
A second factor, the opening of global trade and capital markets, has increased the possible scale and opportunities for large cities. Cities tend to function best in managing and administering far-flung markets. More open and intensive global trade has tended to broaden the reach and scale by which successful cities can perform such functions in finance, advertising, research and development, law, and company management. For this reason, some analysts believe that they can identify the emergence of “global cities” that have succeeded in such opportunities.
To date, large cities of the Great Lakes have not fully benefitted from these “new economy” trends. Migration to regions with warmer climates has slowed these cities’ work force and population growth—a trend also reflected throughout the remainder of the region. But more fundamentally, many if not most of the region’s large urban economies were built not on the service industries that benefit from the ongoing global changes, but rather on the manufacture of goods and associated freight transportation. These cities’ transition to services and knowledge-based economies has proven difficult because manufacturing-oriented places must overcome and replace larger portions of their economic base. Manufacturing-oriented income in the region has withered because of global competition, falling real prices for manufactured goods, and technical advances that have allowed goods to be produced with less labor. To these obstacles, technical changes in the production processes themselves may be added: Such changes have made the more-densely populated parts of large cities especially difficult places in which to manufacture, compared with those far suburban and rural places, where land is cheap and the transportation of materials is more convenient. The growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Edward Glaeser.
Have the relative growth rates of midwestern metro areas coincided with the degree of their original manufacturing orientation? The charts below display employment concentration in manufacturing for the eleven largest metropolitan areas in the industrial belt on the vertical axis. The horizontal axis displays each metropolitan area’s total job growth on the first chart and real per capita income growth on the second chart. The inverse correlation of economic well-being with initial manufacturing concentration is quite evident. A simple correlation between job growth from 1969 through 2006 and the manufacturing orientation in 1969 is a strongly negative 0.8. Similarly, the correlation between manufacturing and per capita income growth is -0.7.
What might be some other reasons behind varying performance of these metropolitan areas? For one, even within the manufacturing sector, industry mix (and related performance) varies markedly. For example, the Twin Cities’ manufacturing base included emerging medical instruments and computer equipment during this time period, while Detroit hosted sagging domestic auto production.
Other observers wonder about the role that the metro core or central city has played in its relative growth and development. Due to marked suburbanization within metropolitan areas, and fixed central city boundaries, some cities such as Cleveland and St. Louis became relatively small islands of population; today, the city population accounts respectively for only 20.9% and 12.5% of these two metropolitan areas. As such, cities such as these were left largely alone to provide public services to low-income populations—and to do so with a rapidly diminishing tax base. Accordingly, some researchers speculate whether growth and development suffered as a result of this trend—not only in the city but in the entire metropolitan area. In contrast, central city Columbus and Indianapolis began with a broader geography and richer tax base with which to provide public services and development-oriented infrastructure.
While Midwest cities have many challenges to overcome, there are also assets on which to build. As widely shown and increasingly recognized, the most important overall determinant of regional growth performance has been the educational attainment of its population and work force. This is not surprising given the structural changes that have taken place in the emerging economy—changes which place a greater emphasis on information exchange and the development of creative ideas. For Midwest metro areas, and as discussed by Timothy Dunne in a recent Economic Commentary, educational attainment may be more important than for other regions. To succeed in overcoming the shocks that rocked their industrial bases, educational attainment in Midwest metro areas may have been most helpful in adaptation and re-invention. Tim Dunne displays charts similar to those above which indicate a weaker correlation between educational attainment and growth in warm weather metro areas as compared to cold weather climes. In considering educational attainment of the populations, the table below displays the ranks of Great Lakes metropolitan areas among 118 metropolitan areas in 1970 and 2006. The two local leaders in 1970 college attainment, Columbus, Ohio, and the Twin Cities also experienced the fastest employment growth. While Pittsburgh ranked low in college attainment in 1970, its gains in this metric since then have been the most rapid. Perhaps not accidentally, Pittsburgh’s growth in per capita income also outpaced other cities in the region.
As for policy, while the region’s goods-producing industry mix has left behind a legacy of a slow-growing industrial base, the region also boasts top-notch colleges and universities. With regard to elementary and secondary education, the region maintains a healthy income base with which to support its schools. Similar to most other parts of the country, the region’s educational challenges are to have its students to perform much better, especially in central cities and lower-income communities.
Note: Vanessa Haleco-Meyer contributed to this weblog.
October 30, 2008
Chicago Business Cycles--Now and Then
Downturns in economic conditions often come as a surprise. In fact, time lags between statistical releases and the conditions that they reflect can mean that economic slowdowns are not known until months after they have begun. Statistical information covering individual reasons tends to be worse in this regard.
Today there is, however, a widely held view that the U.S. economy has slowed sharply and that economic conditions will not immediately improve. Broad-based measures of national economic activity, such as the Chicago Fed National Activity Index (CFNAI), indicate that U.S. economic growth is well below its historical trend. As a result, observers in regions such as the Chicago metropolitan area are preparing for hard times. And they are asking whether they are likely to feel the worse for this apparent slowdown—and how long it will last.
In the Chicago area, memories are becoming dim of those days when the pace of the local economy fell sharply in response to national economic downturns. However, the chart below should remind us or inform us anew of the fact that Chicago’s economy often experienced sharp swings in employment. In the past (especially before 1990), Chicago’s employment base had been steeped in durable goods manufacturing industries, such as machinery and steel, which experienced layoffs and downsizings when the national economy turned downward. Twice during the 1950s, Chicago area payroll job declines approached 5 percent on a year-over-year basis as national job declines reached 3 and 4 percent on those two occasions. Chicago fared little better during the recessions of 1970–71, 1974–75 and 1981–82.
Click to enlarge.
Given this track record, it may seem pointless to ask how the region’s economy will fare in the months ahead. However, the question is well considered both because the economic structure of our economy is always changing and because no two economic downturns are alike with respect to their causes and impacts on industries.
Chicago’s economy is continuing to restructure in several important ways. Most dramatically, the region’s employment structure no longer concentrates directly in manufacturing. As recently as 1969, 30% percent of the Chicago metropolitan statistical area’s employment could be found in manufacturing in comparison with 24% for the overall U.S. By 2005, manufacturing’s share of employment had fallen to 9% percent and it had converged with the U.S.’s percent share. At least this element of sensitivity to national business swings seems to have partly abated.
At the same time that manufacturing has waned, the Chicago area has also restructured into higher-order professional services, business meeting and travel, and financial services. (The chart below indexes the Chicago area payroll employment by major industry sector. An index value greater than 1, for example, indicates that Chicago’s employment base in that sector exceeds the national average.) Especially during the 1990s, the metropolitan area experienced very rapid growth in these industry sectors. This expansion was thought to have been accompanied by geographic changes. In particular, while Chicago’s services industries had historically grown and developed through its local trade linkages with Midwest goods producers, business and financial services were now thought to have strengthened and lengthened their ties with international and U.S. cities and regions. If this were actually the case, the traditional patterns in which Midwest manufacturing production declines are strongly transmitted through Chicago’s services industries would have weakened.
To the contrary, the subsequent experiences of the recessionary period of 2001 and its aftermath tend to suggest that Chicago’s restructuring into business and financial services has not buffered it from national business downturns. As measured by total payroll jobs, the Chicago area’s decline of 3 percent in 2001 was at twice the pace of the national average (see chart below). And if the professional and technical services sector has become Chicago’s new bellwether, its performance during the past downturn is not encouraging. From a year-over-year growth peak of 7 percent in 1999, Chicago jobs in the professional and technical sector fell by over 8 percent during 2002. Though we may not think of these services as being sensitive to the general level of business activity, their responsiveness to business swings is much like producers of investment goods and capital equipment. That is, firms tend to expand their purchases of professional services such as advertising, marketing, business meeting travel/convention, and management consulting when they are expanding their markets and investing, but they tend to retrench their purchases of such services when they are retreating.
More generally, although Chicago has broadened and diversified its economy, many of its hallmark sectors remain sensitive to swings in the overall economy. According to the chart above, Chicago remains concentrated in manufacturing. So, too, Chicago remains a goods transport and distribution hub for manufactured goods that are both domestically produced and internationally traded. While many of the area’s services such as education and health are somewhat impervious to general slowdowns, many of its business services are volatile, depending on the fortunes of Midwest goods-producing sectors and, increasingly, on the prosperity of national and international customers.
Chicago also maintains high job concentration in financial and insurance sectors. Unlike the job bases of the New York and Los Angeles metropolitan areas, Chicago’s job base is not greatly exposed to the most adversely affected subsectors of financial services—namely, investment banking, securities dealers, and mortgage finance companies. That said, the remaining financial services subsectors are not expected to be sources of net job growth in the months ahead.
Note: Thanks to Emily Engel for assistance.
September 11, 2008
By Graham McKee and Bill Testa
It’s very clear by now that wages and incomes have risen sharply for U.S. workers who have attained greater education. One recent study indicates that the premium of hourly wages of college graduates over those with only a high school diploma has climbed from just over 30% in 1950 to over 60% today. This lesson has not been lost on recent high school graduates. The U.S. Bureau of Labor Statistics reports that in October 2007, 67.2% of the class of 2007 high school graduates were enrolled in a postsecondary educational program.
So, how have rising returns to education affected the economic growth and well-being of places? Not surprisingly, eminent scholars have proffered that those local economies having highly educated work forces have outperformed as measured by relative income and employment growth. In particular, research papers by Edward Glaeser (and others) provide documentation that a large initial work force share having a college degree in a metropolitan area tends to give rise to strong subsequent growth in jobs and income.
Metropolitan areas and other local areas in the Northeast and Midwest have taken especial note. Here, the economic performance of many cities has been hampered by an industrial composition steeped in traditional manufacturing. While the skill and educational requirements of factory jobs have been notably climbing as of late, the economic structure of many Midwest places has not developed from a strong base—that is, one having the advanced business, finance, and professional services that tend to employ highly educated and highly compensated workers.
One place in the region where we still might expect to observe the propulsive power of educational attainment would be in the Midwest’s college and university towns. Both nationally and regionally, colleges and universities have enjoyed rising demand for their services—both research and teaching. Per the graph below, enrollments as a share of the U.S. population continue to rise during the current decade, reaching almost 6.5%—a level of 18 million by October 2007 (versus 8.2 million in 1970). So, too, research and development (R&D) performed by colleges and universities has also climbed over same period, rising from a 9.2% share of all U.S. R&D in 1970 to a 13.7% share in 2006. More recently (measured in nominal dollars), university R&D rose by 50% over the period 1999–2006.
Such trends have driven direct employment in academia higher. According to surveys conducted by the American Association of University Professors, over the past three decades, “while the number of tenured and tenure-track faculty has grown 17 percent, the ranks of contingent faculty (both part and full time) and full-time nonfaculty professionals have each tripled, and the count of administrators has doubled.”
In addition to direct employment, university research has often acted as a catalyst for growth in the private sector. Technology transfer from university labs to start-ups and early stage firms has become a growing activity. Moreover, many such firm start-ups take root locally in university towns themselves. The emergence of industrial research parks adjacent to or close by universities offer testament to this phenomenon—with those in proximity to Stanford University and the Massachusetts Institute of Technology (MIT), as well as the Research Triangle Park in North Carolina, being the prominent prototypes.
To identify those Midwest metropolitan statistical areas (MSAs) in the Great Lakes region where universities make up a large share of economic activity, we look at the R&D expenditures of all universities in each MSA in seven states—Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, and Wisconsin. On a per capita basis, the top ten metropolitan areas by R&D expenditures for 1979 are reported in the graphs below (by rank from highest to lowest). How did these metropolitan areas subsequently perform as measured by population growth and per capita income?
In answering this question, it must be recognized that much more than university activity has transpired in these metropolitan areas. Even metropolitan areas that we tend to associate with major universities (e.g., Lafayette, Indiana, with Purdue University) are major manufacturing and commercial centers in their own right. And so, we cannot then simply attribute their relative demographic and economic growth over the past few decades to university presence with much confidence. Nonetheless, on the whole, it is interesting to note that these metropolitan areas outperformed the seven-state region, on average, over the 1979–2006 period. As shown below, average population growth of university towns (see black vertical line below) has easily outgrown the average population growth of all metropolitan areas in the region (see horizontal maroon bar). The per capita income performance of university towns has not been as sharp (below).
The comparative growth of these Midwest university towns, as shown in the graphs, perhaps reveals the local benefits from higher educational activity. Still, the questions and issues related to the economic development of such places remain difficult. How can university locales best leverage local universities for growth? Host cities have been active along a number of fronts. To name a few, localities have developed complementary real estate adjacent to campus to stimulate retail and residential attractiveness. Universities have also partnered in commercial parks and ventures to stimulate private business investment and further research activity, and in some instances, the region has partnered with a local university to train the local work force in specialized areas or to develop technology and know-how into a local industrial specialty.
Given these observations, more challenging questions remains. How can the positive effects of university R&D spillovers benefit states and even multistate regions? (That is, how can such spillovers in university towns spill over more widely?) And even if such spillovers were realized, how much and what types of public support should be proffered to colleges and universities? And if colleges and universities are to receive subsidies based on the impact of their economic development on broad regions, how should the costs of public support be allocated among the various subregions who share in the subsequent benefits?
August 13, 2008
Energy Prices and Where We Live and Work
For those of us who are aged 50 and older, it is easy to forget that younger generations did not experience the energy crunch of the 1970s nor the many (often failed) public policy responses to the OPEC oil price run-ups. With today’s similar developments in energy markets, it is fascinating to compare the two eras. In some ways, history repeats itself. In other ways, it does not.
The auto industry upheaval appears to be repeating the 1970s. As then, domestic automakers (and their fuel-consuming fleets) are suffering dearly from the sudden hike in gasoline prices; foreign-domiciled automakers, not so much. In both the 1970s and today, the vehicles of Asian automakers tend to be smaller and more fuel-efficient. Unlike the 1970s, however, today even Toyota is paying for its lurch toward large vehicles such as its large pickup truck, the Tundra.
Another apparent similarity between the eras is that some analysts are predicting that rising fuel costs will reshape our patterns of living and working toward more compact urban forms, to the detriment of far suburban and rural areas. However, the actual shifts that took place in the landscape of America surprised us somewhat during the 1970s and early 1980s.
The U.S. was already well-suburbanized by the mid-1970s. But in response to higher fuel prices, it was commonly thought that beleaguered central cities were in store for some respite from the population flight that they had been experiencing. With their denser housing patterns, high job concentrations, and well-developed public transit systems, large cities would offer shelter from high gasoline prices. In suburban and rural areas, where driving distances were long, residents would pay the price. The pace of suburban sprawl would slow, the pace of rural shrinkage would accelerate. For those of you too young to remember, these predictions did not come to pass.
These same predictions are being made today as gasoline prices have doubled. In a recent study, Joseph Cortright offers evidence that shifts toward more compact cities are already underway, as households eschew housing on the urban fringe where commuting distances are long. Indeed, in large metropolitan areas like Chicago, housing prices in closer-in neighborhoods have been holding up relatively well over the past year. The era of urban sprawl has been pronounced dead, with households and employers expected to favor greater density as a way to economize on energy-related travel costs.
However, the contrast between expectations in the 1970s and what actually came to pass may give us pause in assessing today’s predictions. Just the opposite took place in the 1970s era. Central cities of large metropolitan areas, especially in the Northeast and Midwest, experienced their worst decade of the century. Population tended to flee to the suburbs, especially middle and upper middle income residents. The apparent reasons for flight included rising crime, school desegregation, and the near-completion of an interstate highway system that funneled homeowners to cheap and abundant housing on the perimeter.
While rural areas in some areas of the U.S. did continue to decline, on the whole the 1970s was hailed as the decade of the “urban to rural turnaround.” The charts below indicate population growth over past decades for metropolitan versus nonmetropolitan counties. Though energy expenditures were higher on average for rural households, rising energy prices for coal, natural gas, and petroleum raw materials spurred a boom in exploration and mining in many parts of the U.S. Rural rebound was also spurred by a resurgence in prices and exports of agricultural commodities and processed foods. The falling exchange value of the dollar against world currencies following the dollar’s detachment from gold in 1971 was accompanied by favorable prices for U.S. foodstuffs on global markets. Faltering agricultural production in some foreign nations such as the former Soviet Union contributed to rising U.S. farm income. So too, thanks in part to the interstate highway system, some types of manufacturing began to discover rural areas as hospitable sites for production.
Click to enlarge.
Will these surprising patterns repeat themselves in the current era of high prices for energy materials? Rural areas are once again finding themselves amidst an energy and food commodity boomlet. Surging agricultural demand from developing nations has contributed to rising U.S. exports and commodity prices. The falling value of the U.S. dollar since 2002 has also contributed, as have the U.S. legal mandates and subsidies for the use of corn-based ethanol as a transportation fuel. In the Seventh District, the growth pattern in farmland prices looks much like the late 1970s and early 1980s, rising at double digits annually through the decade.
In other regions, coal mining and energy exploration activity are buoyant.
However, this time around, conditions would seem to favor central cities versus rural and far suburban areas more than in the 1970s. Rates of crime declined over the 1990s in most major U.S. central cities. Central city schools continue to struggle to educate and graduate low-income students, in particular. Yet, most such school systems enjoy greater financial stability, and many have innovated and expanded their offerings to serve populations who are diverse culturally, as well as economically. Rather than shunning large cities, many highly educated households are finding the older architecture, diverse community, and rich array of amenities in central cities attractive. To some degree, employers have followed educated employees back into central cities; or they have found that the density of the central city makes for more productive business activity in the “new economy,” which rewards face-to-face contacts in conjunction with sophisticated telecommunications. Should these recent trends continue, higher gasoline prices may only add one more advantage to the higher density of older central cities.
These trends may leave some suburbs on the fringe as the losers in the current era. The map below illustrates the average commuting time for suburban areas of the Chicago metropolitan area. Many households who buy or rent in suburban areas choose the low housing prices that such areas offer at the expense of longer trips to work. The sudden rise in gasoline prices may have left many such households with larger shocks to household budgets than their more urban counterparts. The Center for Neighborhood Technology in Chicago has constructed neighborhood maps of U.S. metropolitan areas which estimate average household expenditures for commuter travel. For Chicago and most other metropolitan areas, these estimates show that average household energy expenditures climb on the fringes of metropolitan areas. Even as measured as a share of household income, far-suburban households are more severely affected by rising fuel costs.
Some revisionist interpretations of the 1970s experiences of “urban to rural” turnaround have also been made by analysts such as Paul Gottlieb. And it seems that the turnaround of that period has been overstated by an inherent bias of measurement—the tendency to overstate the population growth of nonmetropolitan counties during periods in which household growth is robust nationally. In such periods, population growth in nonmetropolitan counties can flip their defined status from nonmetro to metro, thereby inflating the measured pace of growth in consistently defined “nonmetro” counties.
Given the experience of the 1970s, it is difficult to draw firm and rapid conclusions concerning whether an era of higher fuel costs will reshape our urban, suburban, and rural landscape and, if so, how. To be sure, higher fuel costs have changed the desirability of work and residential locations. But we also know that households and businesses can adapt to such marked price shocks in other ways than moving. In particular, as today’s fleets of autos and trucks wear out, they will surely be replaced by more fuel-efficient vehicles, thereby allowing many long commutes and delivery trips to resume at moderated cost. Such was the case following the energy price shocks of the 1970s.
Note: Thanks to Vanessa Haleco-Meyer, Bill Sander, and Graham McKee for comments and assistance.
May 29, 2007
Seventh District Housing Market Update
For several years running, the national pace of investment in housing greatly exceeded historic norms. Accordingly, housing market observers speculated that strong rates of home building and price appreciation would falloff markedly at some point in the near future. Nationally, real residential investment growth averaged 9 percent from 2003-2005; average home prices rose by 6.8 percent in 2003, 10.7 percent in 2004, and 13.1 percent in 2005.
During the first half of last year, the pace of home construction and home price appreciation finally slowed. Since then, home building activity and sales have declined sharply and, by some measures, changes in home prices are now running in negative territory. Since the fourth quarter of 2005, U.S. residential investment has been declining, averaging over 11 percent on an annualized basis. The growth of the OFHEO measure of national average home prices has slowed to 5.9 percent year-over-year for the last quarter of 2006 (new data will be released on May 31).
During the current decade, home prices appreciated in the Midwest as well, though less so than in the nation and much less so than several southern and coastal markets such as San Diego, Las Vegas, and many parts of Florida. For this reason, during the years of strong price appreciation, some observers believed that the Midwest would be spared the eventual price and building falloffs that would unfold in other regions. So far, this does not seem to be the case. Most major residential real estate indicators currently show the Midwest region with comparable or weaker fundamentals than the national average. The chart below illustrates the pace of new home construction starts in the Seventh District states versus the U.S. Measured on a year-over-year basis, home starts in the Midwest have been running below the nation since early 2006.
For the most part, the weaker Midwest economy lies behind its weaker housing markets versus the national average. The current slowing of the U.S. economy has been accompanied by a marked slowing in manufacturing which has, in turn, softened the housing market in many local Midwest communities. In addition, ongoing structural upheaval in automotive-oriented communities is reflected in several housing market indicators including home purchases, home prices, and in foreclosures of existing properties.
Residential real estate market conditions are highly local. The maps below juxtapose home price appreciation and unemployment rates in Seventh District metropolitan areas. Looking at the top map, unemployment rates in many Michigan communities are notably higher than the general pattern in the other Seventh District metropolitan areas. Retrenchment in domestic automotive assembly operations and suppliers in Michigan has resulted in significant work force upheaval. Automotive-oriented communities in other states of the Seventh District—such as Kokomo, Indiana—have had similar experiences. After Michigan, Indiana is the second most automotive intensive state in the Seventh District.
The second map (above) displays year-over-year house price appreciation for the same metropolitan areas. To some degree, areas with a slack labor market are experiencing less home price appreciation. This is especially evident in Michigan and Northwest Indiana where the domestic automotive industry troubles are centered.
The linkage in these states between the local economy and the housing market is consistent with available information on home loans. The pace of loan delinquencies and mortgage foreclosures in both of these states are now running higher than both the nation and other states of the Seventh District.
Home price appreciation is stronger in Chicago and in many other metropolitan areas in Illinois and Wisconsin. In the Chicago area, job growth in business services, travel-tourism, and financial services industries have continued to expand. In other metropolitan areas to the west of Indiana and Michigan, manufacturing tends to be concentrated in more buoyant product lines, such as construction and farm machinery or food processing. As a result, home prices are generally holding up better in those areas.
Labor market conditions fare well in many Iowa metropolitan areas. Yet, average home price appreciation there is generally tepid. To some degree, home price appreciation has been very steady in Iowa over many years and the current pace of appreciation does not differ markedly from the norm of the past 15 years (see below).
Nationally, residential real estate activity continues to adjust downward to align with its rapid expansion of recent years. In particular regions and communities, the extent of adjustment varies with both the stock of existing housing and with local trends in economic growth which drive the demand for housing. Generally, new construction activity and price appreciation have softened in the Seventh District but local conditions can be seen to vary with local economic indicators.
May 14, 2007
Congestion tolling and privately operated roads—An idea whose time has come?
As our roads become increasingly congested, tolling and privatization of highways will be increasingly important lifelines, especially for large urban economies. The idea that motorists should pay tolls when driving on congested highways has long been advocated by economists. Conceptually, the “public” part of highway transportation is limited to the necessary intervention by public authorities to strategically acquire land for transportation and assure that all have access to travel freely in pursuit of commerce and recreation. However, the individual’s use of a roadway is often “private” in that it imposes congestion costs on other drivers (and some pollution as well). That is, in the motorist’s decision to use a road, the individual driver does not consider the congestion costs imposed on other drivers, thereby leading to the overuse of limited public roadway capacity. As a remedy, congestion tolls bring these individual driving decisions back into line with the greater public good. As the degree of road use (and congestion) varies by time of day and by day of the week, so should the amount of tolls vary accordingly.
After a long hiatus, interest in congestion tolling and privately operated roads has been climbing. European and Asian cities have made innovative headway in congestion fees. Both Stockholm and the City of London have implemented motor vehicle charges for the privilege of access to their central area; so has Singapore. Most recently, New York City has proposed to charge auto motorists $8 for the privilege of driving around Manhattan during peak traffic hours, with higher fees for those driving trucks.
Such actions are largely being spurred by rising congestion—which did not materialize overnight. The Texas Transportation Institute (TTI) creates a “travel time index” that indicates the relative change in travel time from peak traffic to free-flow traffic. In a TTI report, Chicago in 1982 had a travel time index of about 1.2, meaning that given a 40-minute commute during a free-flow period, a person driving during peak hours would drive about 48 minutes (20% longer than it “should” take). This had climbed to 57 percent longer by 2003. In four major cities of the Seventh District, the added time to a commute during peak hours has increased from 14% in 1982 to 46% in 2003.
Click to enlarge.
Prior to the recent spate of toll programs, some highway authorities experimented with non-price-rationing measures such as “high occupancy vehicle” (HOV) lanes. To curtail congestion, HOV lanes set aside and dedicated freeway lanes to those vehicles, including cars and buses that have multiple occupants. Unfortunately, the results were sometimes disappointing in relieving congestion because HOV lanes merely attracted vehicles that already contained multiple occupants, without prompting a significant number of single-passenger motorists to carpool. So, too, the dedicated HOV lanes, while often uncongested, tended to push even greater congestion onto unrestricted lanes of the highway.
In response, the so-called “high occupancy toll” or HOT lanes have sometimes been called into action. HOT lanes are essentially HOV lanes that allow single-occupancy vehicles to motor in them—but for a price.
What has brought us to this state of affairs? Under the best of circumstances, motorists prefer to drive when and where they choose at no charge. But Americans’ penchant for driving has far outrun our financial ability to build roads. Lifestyle changes have tremendously raised the miles traveled in cars by U.S. households. Rising household incomes have lifted the desires for ever larger houses and lots, which are, in turn, often satisfied by homes located quite far from work sites. In addition, owing to the desire for residential privacy, homes are often built on dead-end or nonthrough streets, which has aggravated traffic on the major arterial roads surrounding residential communities.
Also, the rising trend of two-earner households makes it difficult for both earners to simultaneously live near their workplaces. More generally, there are extensive logistics (and driving miles) for today’s American family to coordinate their many trips for work, shopping, education, and recreation. By one estimate (DOT), highway travel miles climbed 23.4% from 1995 to 2005 in comparison to a population increase of 11.4%. To accommodate such rising traffic, road expansion has climbed by only 2.6% over the same period.
Many observers recognize that improved community land use planning could help curtail our appetite for driving. For example, allowing developers to build high-density apartment-type residences around existing commuter rail stations would allow at least one of a household's commuters to keep a car parked during the workday commute. So, too, stronger community planning efforts to assure that households of modest means can find affordable housing could help curtail the need for very long commutes. In the Chicago area, for example, policy think tanks such as Chicago Metropolis 2020 and the Metropolitan Planning Council spearhead efforts and programs that promote such community planning. Still, however sensible such planning may be, there has been very little of it implemented in many U.S. cities to date, and so, the increased commuting has often overtaken existing roadway capacity.
In past decades, state governments have often tried to keep pace with rising demands for driving and for far-flung housing by building more roads, including freeways. Several forces are now conspiring to slow such construction, especially tight fiscal conditions. The primary source of highway grant assistance to states, the Federal Highway Trust Fund, is replenished from the federal tax on gasoline. But the tax of 18.4 cents per gallon has not been raised since 1993 so that while revenues do rise somewhat along with vehicle miles traveled, they do not keep pace with rising gasoline prices and higher milage automobiles. Meanwhile, the revenue resources of state governments have also been besieged. Many state gasoline taxes are themselves imposed on a stagnant "cents per gallon" basis, and the voting public strongly resists the raising of gasoline taxes—especially as motor fuel prices have put increased pressure on household budgets over the past three years.
This leaves state government officials in a quandary, since the costs for competing public services, especially health care, education, and prisons, are concurrently squeezing state budgetary funds. State and local governments are hard pressed to even maintain existing highways, let alone fund expansions to curtail growing traffic congestion.
In addition to charging tolls, elected officials are also responding by increasingly turning to the private sector to assume responsibilities that include the financing, planning, marketing, construction, operation, and pricing of roads and bridges. Many combinations and arrangements of these functions are being attempted, from simple outsourcing of management and toll collection of highways to the all encompassing long-term leasing of highways as a publicly regulated private business entity.
Increased congestion and financial stress are not the only reasons behind the privatization and tolling of transportation infrastructure. New and improved technologies for payment of highway tolls have recently come to the fore. In contrast to the driver of yesteryear who had no option but to deal with the delay-plagued coin and cash toll booths, today’s driver can often make payment with little or no slowing down. Toll payments can be made online by transponders carried within vehicles or offline by remiote reading of license plates.
Seventh District initiatives lie at the recent epicenter of these movements in the U.S. In particular, the City of Chicago entered into a 99-year lease to a private consortium in 2005, turning over operational responsibility for and revenue returns from an 8-mile stretch of toll highway called the Chicago Skyway. By many accounts, the City benefited greatly from this transaction, while the public interest of drivers was also well served by enhanced operational efficiencies. The City of Chicago used income from the deal to retire existing debt on the Skyway infrastructure, and with the remaining revenue, it also set up a trust fund and purchased a sizable annuity that will help finance the city’s general operating funds well into the future. The driving public now enjoys rapid roadway maintenance and toll collection and eased congestion, albeit with prospective increases in toll fees.
Following Chicago’s lead, the Indiana Finance Authority leased its east–west toll turnpike for $3.8 billion in 2006. In large part, Indiana will use the proceeds to fund and maintain highway infrastructure throughout the state.
Meanwhile, in an effort to reduce rush-hour congestion around the Chicago area, the Illinois Tollway Authority introduced differential time-of-day pricing for only trucks in 2005. This program also doubled tolls for drivers in autos who choose to pay by cash at toll booths rather than by electronic transponder as they drive through rapidly. Revenues from these schemes are being used for repairs and expansion of the tollway system; they are also being used for the capital costs of new and reconfigured “open road” (or no-stop) toll collection system, which enables vehicles to pay tolls while traveling at highway speeds.
As the Illinois Toll Authority and other examples show, privatization and tolling of roads are separable actions. But in some ways they reinforce one another. Turning one’s operations over to private companies may provide one way to overcome the public’s resistance to congestion pricing, especially in contrast to government authorities who may be encumbered or distracted by non-transportation responsibilities or political constraints (i.e., the lack of political will to appropriately price use of the asset). Privatization potentially may also allow the operational authority to change pricing regimes and payment technologies more quickly in response to changing roadway conditions. Also, cost efficiencies and service quality are presumably improved when private agencies are watching the bottom line, though this has not always proved to be the case.
Still, the issues inherent in privatization schemes are contentious with respect to both purported operational efficiencies and sound fiscal management by governments. In awarding operational and pricing autonomy to private companies, it is not always clear whether the public interest is less than optimally served in favor of the profitability of the private operator. In particular, monopoly-type pricing by a private operator may be worse than publicly directed underpricing of congested facilities. Similarly, the data collected from the publicly rather than privately operated system may be more readily available for systemic public land use and transportation planning across entire metropolitan areas. For these reasons, as they enter into such partnership arrangements, elected officials must carefully craft contract terms and then follow up by monitoring the private companies during the terms of the contract.
Other concerns center on the behavior and actions of governments when they first enter into such agreements. Upfront revenue windfalls from the leasing of public infrastructure may cloud the judgment of governments and elected officials. Without proper disclosure and oversight of government by the public, the sale and leasing of transportation infrastructure to private buyers may pander to the near-sighted proclivities of elected officials. To plug current budget holes, or to plump up current spending for self-motivated reasons, public officials may unwisely commit large revenue streams immediately received from the sale or lease, while concurrently widening future budget deficits by eliminating public revenue streams. As always, the voting public and their representative think tanks must be on guard to oversee the terms of public–private partnership arrangements.
Elected officials must also represent and protect the public’s interests in matters of fairness and equity. Lower-income households are those who will be disproportionately burdened to pay for the use of less-congested roadways. In many ex-urban and suburban places, lower-income households must travel long distances to access their workplaces. Equity concerns are often compelling, since these workplace commutes are often lengthened by land use restrictions undertaken in high-income communities that limit the availability of affordable housing near work sites.
In response to equity concerns, some states and localities are adding capacity and subsidies to public transportation—both light rail and buses. When funding is short, as it usually is, governments often earmark part of highway toll revenues to such dedicated purposes.
However, for many households, public transportation is not an option. According to the 2000 U.S. Census, only 4.7 percent of workers currently use public transportation. The table below shows average usage of public transportation for Seventh District states. Public transportation is, of course, more viable in densely populated places, including large cities such as Chicago. Since large cities also coincide with highway congestion and tolling practices, the use of tolls to fund public transportation subsidies will work better there.
The use of congestion pricing, privatization, and new payments technologies remain in their infancy. Yet, because of the ever-increasing demand for driving, accompanied by little highway expansion and poor land use planning, heavy congestion will soon be a reality in many communities. For this reason, the Federal Reserve Bank will hold a one-day workshop this June to understand how pricing schemes, public–private partnerships, and emerging payment mechanisms can be used to address congestion and efficiency in commuter networks.
February 12, 2007
Sports Franchises and Urban Development
Are there worthwhile benefits to large urban economies from professional sports franchises and events? Critics are especially hostile to the idea of tax breaks, incentives and other public subsidies to sport franchises and events. At best, they claim that local spending on sports events displaces local spending on other activities, with no net impact on expenditure or income. Worse, they claim that public monies spent or foregone to subsidize sports franchises or events could have otherwise been more productively spent on enhanced public education or the like.
In rebuttal, there is another school of thought that posits that the changing nature of urban economies has heightened the value of recreational amenities as a draw for coveted workers. As the productive basis of city economies has shifted away from the manufacturing and distribution of goods, and towards a greater focus on information exchange by skilled and educated workers, some policy analysts argue that the successful workplace location is now driven by where people want to live rather than by its strategic location for moving materials.
In some instances, major league sports teams and professional sports events, such as the Super Bowl, can be counted highly among cities’ “public goods” amenities that attract and retain productive workers. In this, sporting events may be among several amenities whose sum total is more than the some of the parts because a large city’s varied restaurants, museums, cultural diversity, arts, and sports all go into making it “an interesting and exciting place to live.”
The measurable evidence on this effect is sparse, but several statistical studies have found favorable impacts. A thorough and balanced review of studies has been conducted by Mark Rosentraub. No doubt that many subsidies are ill-conceived. But Rosentraub concludes that the net value of a sports investment by the public sector rests on its context and the particular outcomes for the city and county making the investment. For example, the placement of publicly-subsidized stadiums in downtown areas have been found to help enliven and revive struggling downtowns. Another study found that Indiana residents valued the intangible benefits of having the Indianapolis Colts sufficiently to justify public subsidies. And in a statistical study across metropolitan areas, Jerry Carlino and Ed Coulson found that households tend to pay higher housing rents in metropolitan areas that choose to host sports franchises. Apparently, the value of nearby sports activity affects land and housing congestion that arises as greater population is attracted to such sports-minded places.
Among the most intangible, most difficult-to-measure benefits attendant to sporting events are the advertising or marketing values associated with the opportunity to re-cast a city’s image to a national or international audience. Places whose images become distorted or unfairly known due to their past travails may especially view large sporting events as valuable in setting the record straight.
In particular, an enhanced image may be helpful as businesses consider investment decisions and as workers consider various recruitment offers. The City of Detroit, for example, went to great pains and took great pride in successfully hosting the Superbowl XL in their new stadium situated amidst extensive downtown renewal.
This year’s two Super Bowl contestants, Chicago and Indianapolis, likely welcomed the media coverage of their cities deriving from both the Miami telecast and from national pre-game media hype. Chicago has been working to boost its image as a national and global city having superior amenities and functionality. In fact, it is one of two U.S. cities still vying to host the 2016 Olympic Games.
Meanwhile, Indianapolis has been pursuing sports-minded economic development for quite some time. During the 1970s, the city began to boost its support for amateur sports facilities and events, meeting some success in hosting the Pan American Games in 1987 and, among other things, it is now the headquarters locale of the National Collegiate Athletic Association. During times when high-profile events are not taking place in Indianapolis, its sports facilities are often in use by young athletes who come to town (often with their families), patronizing the city’s hotels and restaurants.
Despite scoldings by the majority of public policy analysts, many of which are well-founded, some cities still see gold in them thar’ games!
January 22, 2007
Chicago's Pursuit of the Global Prize
Policy and business leaders in Chicago continue to advance the metropolitan area’s prospects as a global hub for professional and financial services. This initiative arises from both necessity and opportunity. Chicago’s traditional markets, principally in the surrounding Midwest, are not growing rapidly. At the same time, however, the Chicago economy specializes in advanced producer service sectors that are increasingly traded more broadly and, in many cases, internationally.
As the business service center of the Midwest, serving regional markets and industries, Chicago companies’ prospects for growth are somewhat limited. That is so largely for two reasons. First, the Midwest economic base centers on agriculture and manufacturing. Since productivity growth is so very high in these industries, and competition keeps commodity prices low, income and revenue (and attendant jobs) grow slowly. The second reason is climate. As the U.S. economy restructures toward information industries and knowledge workers, service production is being pulled toward locations where workers prefer to live, often milder climes.
However, globalization of the economy has also brought new opportunities to populous information-based cities like Chicago. Large cities often have wonderful amenities that are not dependent on climate, such as sports, restaurants, museums, and cultural diversity. But more fundamentally, it is because expanding global trade in goods, services, and capital requires the complex and specialized functions and industry sectors that are concentrated in large cities, including legal services, logistics, distribution, finance, insurance, business meetings, R&D, and professional business services.
Chicago has been developing such sectors almost since its inception. Today, Chicago features world-leading risk exchanges, universities, business meeting and personal air travel firms, legal services, headquarters facilities, and management consultancies.
During the 1990s, the growth of Chicago’s professional services was robust. According to the data reported on payroll employment, the Chicago metropolitan area added a net 80,000 jobs in the sector from 1990 to 1999, more than the Los Angeles metropolitan area and more than New York City.
However, since then, job performance in Chicago has often been much weaker, raising doubts about whether the city’s economic structure has divorced itself from the surrounding region as much as previously believed. The chart below displays year-over-year growth in the professional, technical, and R&D sectors. Employment growth experienced year-over-year declines for most of the 2002-2004 period, before reviving in 2005.
How much of Chicago’s business service economy has expanded to global markets or even to other large U.S. cities in the global network?
We know very little about the geography and changing geography of these hallmark industry sectors. However, one informative study by Peter J. Taylor and Robert E. Lang of the Metropolitan Policy Program at The Brookings Institution measures the prominence of major global service companies among large cities in the world.
Taylor and Lang examine 100 global companies drawn from the business or producer sectors of accounting, advertising, banking/finance, insurance, law, and management consulting. For each city, the sum presence of their offices (weighted by size and function) determines a score for a city’s commercial presence and ties to the global city service network.
According to the Taylor-Lang study, Chicago scores high in its global connectivity, both relative to other U.S. cities and relative to the world’s major cities. Among U.S. cities, Chicago ranks second only to New York. Among world cities, Chicago ranks seventh, behind London, New York, Hong Kong, Paris, Tokyo, and Singapore.
The Taylor-Lang study scores Chicago’s connections with domestic cities such as Atlanta and New York in the same way it scores connections with international cities such as Sydney. This seems correct. International borders can be arbitrary. And to otherwise score border-crossings might bias the results toward cities located on continents where national boundaries are near each other, such as Europe.
The study does provide a separate “hinterland” scale for each city, which tries to measure the degree to which a city’s global connectivity relies on nearby national trading relations. Here, with the exception of New York City, U.S. cities tend to be less international than those on other continents. However, Chicago again scores well. It places third among U.S. cities, behind New York and Miami.
How this relates to Chicago’s recent growth performance and prospects is not clear. The construction of the Taylor-Lang study is creative, clever, and somewhat revealing, but it provides more impressionistic than definitive evidence of global linkages among producer services. Those who would like to draw their own conclusions from the evidence should take a look at the authors’ map of each global city’s linkages, including Chicago. Outside of North America, for example, the map suggests that Chicago's economy links strongly with Zurich, Switzerland, and Sydney, Australia.
Chicago’s employment in business-professional services is once again growing strongly, at a 3% annual year-over-year pace. If the recent period of weak performance reflects some unusual and fleeting conditions such as a post 9-11 falloff in business travel and related business service activity, then perhaps Chicago’s march to global success will now continue.
December 15, 2006
A Chicago-Milwaukee Region?
Could cities located near one another, Milwaukee and Chicago for example, enhance their respective growth and development through closer linkages? Why might a greater Chicago–Milwaukee metropolitan area want stronger ties, and what policies, if any, might be considered to bring about such a union?
There are several reasons why larger metropolitan areas are generally leading U.S. economic growth. In recent decades, larger metropolitan areas have typically become more specialized in managerial and technical occupations, while smaller metropolitan economies have become more specialized in production activities. For example, one recent article found that those U.S. metropolitan areas having a population above 5 million had increased their concentration of management to production workers to 39 percent by 1990 from 10 percent in 1950. In part, this increasing concentration in larger cities is due to advances in communication and transportation that have allowed companies and organizations to administer and manage from a central location or to travel easily to multiple production locations.
In this light, it is understandable, then, that larger cities have also tended to grow more rapidly in terms of income and/or population. That is because specialized professional and managerial occupations tend to pay more than production. Moreover, since at least the late 1970s in the U.S., economic returns to labor, including wages and salaries, have generally been growing faster for managerial, technical, and other occupations attendant to higher educational attainment.
A second reason for such shifting specialization and growth owes much to the growth in work force participation of women. In the U.S., the labor force participation of working age women rose from 37.7 in 1960 to almost 59.6 percent today. Moreover, the educational attainment of women has also been rising such that it now exceeds men among the younger age cohorts. Since young singles tend to marry someone with similar education, this has given rise to growing numbers of “power couples” who often must find not one, but two, specialized jobs in the same labor market. Because large metropolitan areas have both deep labor markets and more specialized occupational opportunities, these places have become magnets for such “power couples.” In turn, firms respond to the greater labor supply of professionals by siting their establishments in larger metropolitan areas, and thereby transform local economies.
There are several reasons to keep an eye on the greater Chicago and Milwaukee areas to examine the prospects that they will someday become a single labor market and benefit from the attendant economies of larger scale and scope of such a merger. The Chicago and Milwaukee areas are only 86 miles apart, as measured from city center to city center. The Chicago metro area is more populous at 9.4 million as compared to 1.5 million in Milwaukee, but together they yield a population of 11.0 million.
Historically, Chicago–Milwaukee work force linkages have been limited. Only 13,000 Milwaukee residents commute to Chicago, daily, as of year 2000, up from 1,600 in year 1990. The reverse commute is even smaller. However, commuting in both directions is growing rapidly.
Still, a closer look at some important subsectors of professional industry workers is suggestive of the greater work force that may soon arise from combination. The chart below combines industry employment for Chicago and Milwaukee metro areas across several professional, management and business service sectors. As combined, for example, employment in the Chicago–Milwaukee “computer systems design” sector would rank second to New York, allowing Chicago to bypass both the San Francisco and the Los Angeles metro areas. Other sectors of mutual benefit in Chicago and Milwaukee can be seen at the Midwest Economy website.
While such stronger within-industry labor markets might be advantageous, the additional attraction across multiple sectors may be greater still. For households with members having differing but specialized occupations, the possibilities for a multiple match of people with jobs in a combined Chicago–Milwaukee metro area labor pool could be great. This would enhance companies’ ability to attract and retain skilled labor in both regions.
So too, not all jobs within the professional and business services sectors require the very highest educational attainment. For example, according to recent estimates of the U.S. Bureau of Labor Statistics, office and administrative support jobs comprise one-third of all employment in the combined professional services, finance, and management of companies when measured in industry sectors. So too, spin-off employment would also generate a wide range of local employment as the spending of added service professionals ripples through the local economy. This feature is especially important since job needs are great for lesser-skilled labor in both markets.
How might Chicago and Milwaukee push along their destiny as a combined metropolitan area? One low-cost way is to publicize their mutual proximity in marketing each region to prospective employers and to job recruits. Both Chicago and Milwaukee are highly active in economic development marketing. Of course, private sector employers and employment intermediaries may also be effective in spreading such information about the greater breadth of employment opportunities.
Another policy avenue may be greater investment in transportation between the metro areas that would facilitate commuting flows. Both interstate highways and train transportation are now in service. The possible labor market advantages of easier and more dependable auto and passenger train travel might weigh significantly in the consideration of any future roadway/rail expansion and maintenance decisions. Combined efforts in applying for federal transportation grant monies to serve a large and more closely-integrated Chicago–Milwaukee market might also be effective—for both personal travel and for freight transportation including railroad.
Milwaukee’s major airport is also located between downtown Milwaukee and downtown Chicago. At a time when the Chicago area’s air travel capacity is strained, better access to Milwaukee’s Mitchell field could be advantageous.
Other cooperative ventures and ideas have yet to be identified. The absence of organized efforts to do so is a bit puzzling in the Chicago–Milwaukee corridor. In contrast, the advent of the trade agreements between Canada and the U.S. has sparked any number of private and private-public associations to promote natural trade flows across the border within local corridors. As the chart below shows, the progress of employment growth has not been especially robust in either metropolitan area over the past 15 years. Perhaps a little détente along the Illinois-Wisconsin border might be advantageous to all.
November 14, 2006
Seventh District Cities: Their Business & Professional Services Sectors
Large Midwest cities, especially Chicago, are highly attentive to the opportunities that accompany globalization. Many large cities, such as London, Los Angeles, Paris, Hong Kong, and New York, are benefiting from heightened globalization. This is because big cities operate on a global scale, especially with respect to business and professional services such as international export, finance, law, business meetings and travel, entertainment and tourism, accounting, advertising, public relations, R&D, and management consulting. Accordingly, large Midwest cities would like to extend the global reach of their business and professional services as a way to revitalize their economies.
What is the industry base and recent performance of business and professional services for large Midwest cities? Let’s look at the varying depth and breath of these sectors in each of the largest cities in the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.
A common yardstick for these sectors combines various business and professional service industries into a single “professional services” index, including information and communications (NAICS 51), finance and insurance (52), business and professional services (54), and the management of companies (55). The index further indicates a city’s concentration of business and professional services as compared to the overall U.S. economy. The index is constructed as a ratio of the business and professional services’ share of employment in a particular Midwest city to the same share for the nation. For example, and index value of 1.52 for a particular city would indicate that its concentration of professional services employment exceeds the overall nation by 52 percent.
Such indexes are shown below for each of the largest metropolitan areas in the Seventh District states of Iowa (Des Moines), Wisconsin (Milwaukee), Illinois (Chicago), Indiana (Indianapolis), and Michigan (Detroit).
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We might expect that large urban economies would be concentrated in these services because such sectors are highly specialized in nature and can only be supported by the large and varied market and work force that big cities offer. In this respect, we see that the relative concentration of these service industries among the five cities does (roughly) correlate with population size. The larger metropolitan areas of Chicago and Detroit are more concentrated in professional services than the less populous metropolitan areas of Indianapolis and Milwaukee. As an exception, however, Des Moines, with a population less 600,000 (the Chicago area is 15 to 16 times more populous), leads the five metropolitan areas with a service concentration that is 70% to –80% higher than the overall U.S.
The relative size and contribution of individual service industries among Midwest cities is varied. For example, the figure below displays many of the particular business and professional service industries in the Des Moines area, both their relative concentration (horizontal axis) and their absolute levels of employment (vertical axis). Des Moines’ extremely high concentration of insurance carriers (4.8 times the nation) contributes greatly to its high overall concentration.
Similar charts for the remaining metropolitan areas can be found on our Midwest Economy web site. The Chicago area economy is strong in advertising and management consulting services. Detroit is a leader in engineering and testing labs. Milwaukee is highly concentrated in the establishments that manage and administer companies.
Though Indianapolis’ population and work force ranks third largest of the five metropolitan areas, its overall business and professional service concentration ranks last. However, Indianapolis is catching up in this regard. Since 1990, employment in this broad sector has climbed by almost 40%, which is double the pace (or more) of Chicago, Detroit, and Milwaukee.
Click to enlarge.
Indianapolis is diversifying into service sectors. At the same time, many of the rural areas and smaller cities surrounding Indianapolis are becoming more concentrated in manufacturing—a sector that is not generally generating as many additional local jobs and income of late. The overall effect is that Indianapolis is having an easier time of it than many of its neighboring communities.
October 30, 2006
Population Ranks of Midwest Cities
Have you ever heard of Zipf’s Law? I’ll bet you haven’t. Zipf’s Law states that there typically appears to be a numerical regularity between the population size and population rank of cities within any particular region or nation. Specifically, within a region or nation, multiplying any city’s population size by its rank among cities will yield a constant number throughout the distribution. For instance, if the most populous city in a nation has a population of 10 million, the constant should be 1.0 multiplied by 10 million; the second largest city should have a population of 5 million so that 2 times 5 million yields 10 million once again; and so on.
As a fun way to display the size distribution of metropolitan areas in the Great Lakes, we tried to fit Zipf’s Law to the size distribution of metropolitan areas for the (census) year 2005. Guess what? We found that Zipf’s Law nailed it.
For the statistical trial, we chose the Great Lakes region which is defined by the Bureau of Economic Analysis as the states of Ohio, Michigan, Indiana, Illinois and Wisconsin. As it turned out, and as shown in the chart below, Zipf's regularity applies very closely to the population distribution of Great Lakes metropolitan areas.
My prior thinking was that this region, which we think of as the industrial belt, was a cohesive economic region with close ties among firms and workers. In fact, there is no economic theory at all behind the Zipf’s Law and its relationship between population size and rank. Yet, in choosing a region, I thought it to be a promising trial to choose a region in which we might expect to find the statistical regularity if it was undergirded by economic linkages.
In the rank distribution, the Chicago metropolitan area leads the pack with approximately 9.4 million. The Detroit area comes in second with, as might be expected, a population of one-half of Chicago’s at 4.5 million. The third metropolitan area, Cleveland, does not quite fit, dropping down too far with a population at just over 2 million. Still, the remaining distribution fits well enough so that G. K. Zipf’s regularity retains our fascination.
Perhaps it is only the statistical geeks among us who love this sort of analysis. Still, almost everyone loves a good horse race. So, for the rest of you, here is a comparative graph of the population growth for the top 10 most populous Great Lakes metropolitan areas from 1990 to 2005. And the winner is … Indianapolis, with a population growth of 27 percent , 346 thousand. What a town!
September 20, 2006
Midwest housing market update
Following unprecedented home price appreciation nationwide in recent years, homeowners are much concerned about price reversal. In their current Economic Perspectives article, Chicago Fed economists Jonas Fisher and Saad Quayyum find that, on average, much of the recent surge in housing can be attributed to fundamentals such as rising income and favorable demographics, as well as innovations in home lending markets that have allowed renters to become homeowners. (Many of these innovations—such as interest-only loans and adjustable rate mortgages—were discussed in detail at the Chicago Fed's Bank Structure Conference this spring. The proceedings of the conference were summarized in the September issue of the Chicago Fed Letter.)
While such arguments may provide some comfort to those who worry about the possibility of a bubble in average U.S. home prices, experiences and current conditions differ widely from place to place. Should Midwestern homeowners be more or less concerned about the cooling of residential real estate markets?
Senior Business Economist Mike Munley has been tracking home price developments in the Midwest. Mike reports that, on September 5, the Office of Federal Housing Enterprise Oversight (OFHEO) released its estimates for home price appreciation in the second quarter of 2006. The report included data on the national average of home price changes as well as state averages.
Home prices for the U.S. increased at a 4.8% annual rate between the first and second quarters, the slowest quarterly appreciation since the end of 1999 and just below the average since 1980. As measured year over year, U.S. home prices were up 10% from the second quarter of 2005, which was also slower than the rate of appreciation has been—it topped out at 14% in the middle of 2005.
Recent home price appreciation here in the Midwest has also slowed noticeably, and the long term back drop has been much less robust. For the most part, home prices in the Seventh District states have been increasing more slowly than the national average of home prices (see figure 1). On a year-over-year basis, price appreciation in every District state lagged behind the national average in the second quarter of 2006, and Michigan had the lowest appreciation of any state in the nation. In comparison to the first quarter, home values in Indiana and Michigan actually declined. (Maine, Massachusetts, and Ohio were the only other states with declines.) However, home values in Iowa managed to rise slightly faster than the national average.
The city-level data told a similar story. Of the District MSAs (Metropolitan Statistical Areas) covered by OFHEO, only Michigan City-La Porte, IN, showed year-over-year appreciation (10.6%) faster than the national average. Of the bottom 20 MSAs in the U.S., 14 were in the Seventh District, and Ann Arbor, MI, was at the bottom with home prices, down 1.3% from a year ago.
The OFHEO home price data is only one of several sources of information about home prices for the U.S. and some cities. The National Association of Realtors (NAR) releases data on the median sale price of existing single-family homes. In general, the two data series tend to tell the same story—that is, the trends in both data series are similar over time. But, their results are often different in a given month (for regional and national data) or quarter (for city data). The NAR data tends to be more volatile. The NAR data set measures exactly what it sounds like: it is the price of the typical home sold during that quarter. Still, the median price depends on the mix of homes sold during that quarter. If, for example, a large number of inexpensive, starter homes were sold in the second quarter, this would lower the median sale price. By contrast, the OFHEO index is designed to track how the value of an individual home changes over time. OFHEO looks at the appraised value of homes each time a new mortgage is taken out—it is updated when a home gets sold or when the homeowner decides to refinance. OFHEO looks at the value of a large number of homes and is able to estimate the index quarterly. One drawback to the OFHEO index is that it only looks at home mortgages serviced by Fannie Mae and Freddie Mac, and those agencies only service mortgages that are less than $417,000—so the OFHEO index excludes most luxury housing.
The NAR publishes price breakdowns for regions and select metropolitan areas (but not states). In the second quarter of 2006, median home prices nationally were up 3.7% from a year earlier, while median sales prices in the Midwest (which includes the Seventh District, Ohio, and some plains states) were down 2.0%. Of the 24 District MSAs covered by the NAR, five (Chicago, Champaign, Milwaukee, Peoria, and Waterloo, IA) beat the national average, and 14 saw home sale prices down from a year ago. Although the NAR data are more volatile, this data series does confirm that home prices in the Midwest have been increasing more slowly than prices nationally.
There are a couple of reasons why home values have been rising more slowly in the Midwest than the rest of the country. Looking over the long term, the Midwest has generally seen slower home price appreciation since the early 1980s. As shown in figure 1, home values nationally have increased an average of 5.4% per year since then, whereas average appreciation in the District states has ranged from 3.5% in Iowa to 5.1% in Illinois. In part this difference reflects the slower population growth in the Midwest than in the rest of the nation. Since 1980, the U.S. population has increased an average of 1.1% per year, while population growth in Seventh District states has averaged only 0.4%. It follows that demand for housing in the District is not growing as rapidly, which in turn puts relatively less pressure on prices.
Regional differences in home prices also arise from the supply side of the market. In many metropolitan areas, available land for home building is limited by natural barriers such as mountains and waterways. In the face of rising demand for housing, such barriers to expanded supply tend to drive up land and home prices, especially for single-family homes. Further, some areas have chosen to place legal restrictions on home building by imposing growth boundaries or strict zoning requirements and building codes. In some cases where regulations are not well-crafted, evidence suggests that the effect is the same; rising demand for homes is met by rapidly rising prices rather than by expansion of the housing stock. A recent survey report of land use regulations verifies that the Midwest is not especially noted for manmade barriers to housing expansion. Over the long term, the elastic nature of home building in the Midwest region has likely contributed to less pressure on home prices.
More recently, much of the relative weakness in home prices can further be explained by the relatively sluggish economic growth in the region. As I discussed in my recent Mid-Year Jobs Report, job growth here has lagged behind national job growth. That limits income growth in the Midwest, which in turn restricts demand for housing. So while the U.S. has seen a sharp rise in home price appreciation in the past several years, the run-up in the District was less extensive or non-existent. (See figure 2.)
Among states, home price appreciation has recently been running in direct relation to the pace of economic growth. In particular, appreciation has been lowest in Michigan and Indiana, the two states with economies weighed down by structural change in automotive industries.
The figure below illustrates home price appreciation over the past year among metropolitan areas. Those metro areas experiencing depreciation tend to be found in Michigan and in central Indiana. A look back at the metropolitan area map of auto industry job concentration in figure 1 of last week’s blog shows a fairly close correlation between auto-intensity and weak home price appreciation.
The relative stability of home prices in some Midwest locations is a double-edged sword for the region. Homeowners in other parts of the country were able to cash in on the sharp increases in the value of their homes and use those funds to support their spending. Midwesterners weren't able to cash in as extensively, limiting growth in retail sales locally.
On the plus side, given all of the popular concerns about a home price bubble, steady appreciation helps abate those worries here. If a sharp run-up in prices is a warning sign of a potential bubble, that sign is largely absent in the Midwest. But this is not to say that the Midwest is immune from the risk of a slowdown in appreciation or price declines going forward. Certainly, overall economic conditions will feed into home prices, as they have in parts of Michigan.
Less appreciation in home prices can also be advantageous in that it keeps homes here more affordable. According to the NAR's affordability index, homes have historically been affordable in the Midwest in relation to other regions and recently this affordability advantage has improved. Midwestern cities can use this attribute to help attract new businesses and workers.
August 16, 2006
Business services as a growth sector for Great Lakes cities?
As manufacturing activity shrinks and relocates, large cities of the Midwest look to another staple of their economic base, business and professional services. Large cities everywhere typically serve as centers of finance, communication, governance, and varied business services. In the Midwest, business service specializations in cities originally derived from goods production, as surrounding farms and factories looked to cities for financing, advertising, management expertise, product design, legal services, and engineering, as well as computer systems advice, more recently.
In the past few decades, agriculture and manufacturing activity have been shrinking in the Midwest, at least in terms of nominal personal income arising from manufacturing firms. In the overall U.S., for example, personal income derived from manufacturing activity has fallen from 32.9 percent to 15.5 percent from 1969 to 2004. This falloff is especially prominent in large Midwest cities, where manufacturing once thrived due to urban freight transportation advantages and the intense workforce needs of mass production.
Can advanced business services help fill the void in Midwest cities’ economies? There are several reasons to focus attention on these industries. First, there is already a pronounced urban location propensity for business services, so prospects for this sector in large cities are perhaps better than for others; also, in the overall U.S. economy, the business services sector has recently been a growth leader. Finally, many business services employ highly skilled occupations, and they tend to generate high levels of wages and income that may directly and indirectly buoy large city economies.
On the latter point, as formally defined by the North American Industry Classification System (NAICS), the “professional and technical services sector,” NAICS sector 54, tends to employ an above-average share of highly-educated (and highly paid) workers. As described by federal government statistical agencies (Census and BLS), the sector’s industries employ many executive and technical occupations, namely those found in research and development, legal services, management consulting, accounting, advertising, engineering, public relations, and product design.
In the analysis that follows, a focus on the NAICS 54 sector is advantageous because its services are almost exclusively sold to other businesses rather than to households, and many of these services can be sold to customers located far away. In thinking about regional economies, such tradable services may offer a wide scope for possible growth and development. Moreover, data covering employment in the sector are available for geographic regions as small as metropolitan areas.
Rapid growth characterizes the business services sector. The chart below illustrates that as a share of total payroll employment, “professional and technical services” has expanded from 4.2% to 5.3% from 1990 to 2005. The sector’s average annual growth of 3.0% per year easily exceeds that of total payroll job growth (1.3%), adding 2.5 million jobs to the U.S. economy since 1990.
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Business services’ urban orientation can be conveniently described by an index of employment. The concentration index is the ratio of two shares. For the ratio, the numerator is the business services sector’s share of total jobs in a particular region. The denominator is the business services sector’s share of total jobs in the overall U.S. And so, for example, if the sectoral share of total jobs in a particular region is equal to the sectoral share of jobs in the U.S., the index will take on a value of one. To the extent that a region’s share of jobs found in business services exceeds the nation’s, the index takes on a value greater than one, and so on.
Such a concentration index is constructed below for the most populous metropolitan areas in the U.S. The top five metropolitan statistical areas (MSAs)—New York, Los Angeles, Chicago, Washington, D.C., and San Francisco—are, taken as group, more than 50 percent more concentrated in business services jobs than the overall U.S. Moreover, an hierarchy of this concentration by city size is evident as we expand the index to include less populous metropolitan areas. Though still well above parity with the nation, the indexes of the top ten and top 20 most populous metropolitan areas lie below the concentration of the top five most populous metropolitan areas.
Time trends in business services employment also tell us some important economic features. Most prominently, the concentration of business services employment in large urban areas has been falling (i.e., business services jobs have been spreading out toward smaller cities) in the U.S. since 1990. Apparently, the greater ability and lower cost to communicate electronically over time has allowed smaller cities, as well as other nonurban settings, to win out over large, densely populated cities that more easily facilitate face-to-face interactions.
It has been observed that business services employment dipped more than the overall employment during the recessionary periods of the early 1990s and 2000–03. Such cyclical sensitivity to the general economy has long characterized so-called blue-collar and production employment, but its emergence for occupations in business services was somewhat novel during the recession of 1990–91 and its aftermath, when labor market restructuring of mid-level managers and other white-collar occupations took place. In the more recent recessionary period, white-collar employment declines in business services were associated somewhat with the slackening of investment in information equipment and associated services. More generally, many business services may be characterized as “investment goods” by companies, meaning that their purchase tends to slacken during recessionary and subsequent recovery periods, when firms no longer need to expand their own production capacity.
Midwestern metropolitan areas have generally followed these national trends and characteristics of NAICS 54 employment, although there have been some exceptions. For one, as shown below, some of the region’s large metropolitan areas are generally less concentrated in business services as measured against the national employment structure. In part, this follows from the higher manufacturing intensity of Midwest cities; by construction, if a region’s employment base is high in one sector, that concentration must be offset in the others. And so, although Des Moines, Milwaukee, and Indianapolis are centers of business services in relation to the surrounding Midwest areas, their employment base is less concentrated in business services (as narrowly defined) than is the U.S. employment base.
The Chicago and Detroit metropolitan areas register as the most concentrated in business services among large metropolitan areas in the Midwest, with Columbus, Pittsburgh, and Minneapolis–St. Paul also registering concentrations well above the national average.
Owing to its reputation for automotive manufacturing, it will surprise some to find that the Detroit metropolitan area claims the largest concentration in business services. In fact, in this regard, Detroit leads the Chicago area, which is generally renowned as the region’s services and financial capital.
A closer look at the employment structures within the general category of business services raises some interesting and serious questions about the growth prospects of business services for large metropolitan areas in the Midwest. The bar chart below displays the concentration indexes for each detailed business services category, comparing the Detroit MSA with the Chicago MSA.
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Chicago and Detroit specialize in different sectors of business services. The Detroit MSA scored highest for “architectural and engineering services,” while Chicago scores lowest in this category. This specialization’s high score in Detroit reflects the product engineering completed for the automotive industry, much of which is driven by local demand by domestic automakers. However, some of Detroit's business services have evolved to serve global customers as well. Another one of Detroit’s employment concentrations, scientific research and development (R&D), also largely reflects Detroit’s reputation as a global research and design center for the world’s prominent automakers. Toyota, for example, has recently announced a new $150 million R&D facility to be built near Ann Arbor, Michigan.
The Chicago MSA’s most significant specialization is “management and technical consulting.” The Chicago area is the domicile of major offices of world-renowned management consulting firms, including Accenture, Booz Allen Hamilton, McKinsey & Company, and A.T. Kearney. Facilitated by the strong air travel connections at Chicago’s O’Hare International Airport, these firms’ consulting operations are able to serve clients throughout the region, the nation, and the world.
As the Midwest’s historic industry specializations decline in size, especially manufacturing, such business and professional services will be increasingly important in maintaining the region’s size and high household incomes. But to what degree are such industries derivative and dependent on local manufacturing itself? If sales to local firms dominate these sectors, then the prospects are possibly dimmer because productivity gains in goods production continues to shrink the nominal share of income derived from manufacturing and agriculture.
The recent employment performances in business services in Detroit and Chicago offer some clues regarding the degree to which business service firms in the Midwest have expanded their customer base beyond the immediate region. The evidence suggests that business services in these cities do continue to depend on midwestern customer demand in an important way. Midwest employment growth has been lagging significantly since the 2001 recession. At the same time, as the chart below suggests, local employment in the professional and technical services category has also dipped to a greater degree than the national employment, suggesting that the demand for these services derive from local rather than national or global markets. Moreover, further analysis of the employment data suggest that these cities' steeper-than-national-average declines did not result from any unfortunate mix of industry subsectors in Chicago and Detroit. In particular, had Detroit's individual industries under the NAICS 54 category each grown at the national rate from 2001-2004, the larger sector's decline would have totalled only 2.1 percent rather than the actual 7.3 percent decline. And similarly for Chicago, rather than the actual 9.7 percent decline over the period, the NAICS 54 employment decline would have amounted to only .8 percent. And so, though the evidence is not definitive, it appears from this performance that the NAICS 54 sector in Chicago and Detroit continues to serve regional markets to some considerable degree.
Professional and technical services continue to be important national growth sectors that merit a close watch by Midwest economic analysts. Nationally and regionally, these sectors continue to grow as goods producers and other businesses expand their use of such specialized services and as they outsource some business services that were previously conducted in-house. Regionally, given the slower pace of business expansion in the Midwest, the growth prospects for large Midwest cities, such as Detroit and Chicago, would probably be more robust should their business services firms expand their markets throughout the nation and the world.
July 6, 2006
Manufacturing exit tough on Midwest central cities
If current trends continue, manufacturing activity will soon become extinct as a part of central city economies. The reasons for this exodus are largely the result of shifts in the technology of many types of production activity. Central cities—especially in the Midwest and Northeast—are generally densely populated and somewhat congested. Such conditions are not ideal for production activity. Many central cities vigorously attempt public policies to preserve manufacturing jobs, but the opposing forces appear to be very strong.
At one time, many central cities were the preferred locale for manufacturers. The reasons can be boiled down to two, transportation of laborers and transportation of materials.
As for labor, factories were once teeming with laborers. But due to labor-saving productivity gains, today’s factories are sparsely populated even though they produce many times more output. Senior Business Economist Bill Strauss calculates that today it takes 200 U.S. manufacturing workers to produce the same amount of product as 1,000 workers in 1950. Accordingly, during those earlier labor-intensive times, the transportation of manufacturing workers to the job site figured much more heavily into the factory cost equation. Transportation efficiency once was served by factory neighborhoods in central cities where workers could more easily commute by walking, driving, or by public transportation. The higher living density of central cities also meant that public services such as education and sanitation could be delivered cheaply to workers. Of course, it is not only manufacturing technology that changed. Better highways and rising standards of living (translated into higher car ownership) have also contributed to the ability of factories to staff their factories with (fewer) workers who live farther away. In turn, this opens up factory sites in suburban and rural areas.
Better highways, road vehicles, and logistics technology have also made the transportation of production material to central cities less attractive in comparison to areas of lower population density. Economically, railroads once dominated long-haul truck transportation of materials and components used in manufacturing, as well as the shipment of finished goods to other final markets. The technology of rail favors convergence into a central location (i.e., central cities) rather than the dispersed locations that are served by the crisscross pattern of our now ubiquitous highways. Over time, construction of divided highways and the advent of trucks having features such as refrigeration, trailers, and easily transferred containers have facilitated factory sites served by roads rather than by rail. Accordingly, factory sites can now better take advantage of the low land costs of rural and suburban areas rather than being restricted to those of the central cities.
The City of Chicago exemplifies the central city experience with manufacturing jobs. The chart below shows that, by one reckoning, manufacturing jobs in the city have declined from 367,000 in 1976 to under 100,000 today—a loss of approximately 10,000 per year. In contrast, the employment experience of Chicago’s suburban areas has been much milder.
The experiences of other central cities has been somewhat similar to Chicago’s, even some of those cities located in the faster-growing Sunbelt regions. The table below, drawing on data from the Census of Manufactures, describes the manufacturing job changes from 1977–2002 of the 10 most populous U.S. cities (as of 1980). Over the period, manufacturing jobs in these 10 cities dropped by 62%, which is more than double the pace of manufacturing job loss in the overall U.S. Although the job gains of San Diego and the slight loss by Phoenix seem to be exceptions, they are not. Rather, their experience reflects the fact that the land area of those cities has expanded by 2.5 times and 4 times, respectively, through annexation since 1980. At the same time, Midwest city boundaries have remained essentially fixed.
So too, as shown by the table below, the city of Chicago’s experiences are mirrored closely by the central cities of the industrial Midwest. The high population density of places such as central city Milwaukee and Cleveland came about during a different era than the more recent growth of low-density (and expanding) cities of the West and Southwest.
Many central cities of the Midwest owe their original existence to manufacturing, so the steep loss of manufacturing jobs in central cities has typically been painful. In response, these cities often attempt to combat manufacturing decline through public policies. For example, some policy initiatives to make manufacturing activity more competitive in cities include clearing land, cleaning up environmental hazards, preserving or setting aside land exclusively for manufacturing purposes, or easing freight transportation congestion. However, so far, the allure of suburban and ex-urban manufacturing locales has been too strong to overcome.