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Beautiful City (Third Quarter 2009 Business Review)

Beautiful City (Third Quarter 2009 Business Review)

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Proponents of the City Beautiful movement advocated for sizable public investments in monumental spaces, street beautification, and classical architecture. Today, economists and policymakers see the provision of consumer leisure amenities as a way to attract people and jobs to cities. But past studies have provided only indirect evidence of the importance of leisure amenities for urban growth and development. In "Beautiful City," Jerry Carlino uses a new data set on the number of leisure tourist visits to metropolitan areas to examine the correlation between leisure consumption opportunities and population and employment growth in metropolitan areas during the 1990s. His study suggests that leisure amenities are important for an area's growth, even after controlling for other characteristics, such as climate or proximity to a coast.
Proponents of the City Beautiful movement advocated for sizable public investments in monumental spaces, street beautification, and classical architecture. Today, economists and policymakers see the provision of consumer leisure amenities as a way to attract people and jobs to cities. But past studies have provided only indirect evidence of the importance of leisure amenities for urban growth and development. In "Beautiful City," Jerry Carlino uses a new data set on the number of leisure tourist visits to metropolitan areas to examine the correlation between leisure consumption opportunities and population and employment growth in metropolitan areas during the 1990s. His study suggests that leisure amenities are important for an area's growth, even after controlling for other characteristics, such as climate or proximity to a coast.

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Published by: Federal Reserve Bank of Philadelphia on Jan 19, 2011
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10 Q3 2009
Business Review 
www.philadelphiafed.org
 Jerry Carlino
is asenior economicadvisor andeconomist inthe ResearchDepartment of the PhiladelphiaFed. This articleis available freeof charge at www.philadelphiafed.org/research-and-data/publications/.
P
BY GERALD CARLINO
Beautiful City*
*The views expressed here are those of theauthor and do not necessarily representthe views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
1
“City” and “metropolitan area” are usedhere to designate a metropolitan statisticalarea (MSA). In general, MSAs are statisticalconstructs used to represent integrated labormarket areas. They typically are geographicareas combining a large population nucleus withadjacent communities that have a high degreeof economic integration with the nucleus.
roponents of the City Beautiful movementadvocated for sizable public investments inmonumental spaces, street beautification,and classical architecture. Today, economistsand policymakers see the provision of consumer leisureamenities as a way to attract people and jobs to cities.But past studies have provided only indirect evidence of the importance of leisure amenities for urban growth anddevelopment. In this article, Jerry Carlino uses a newdata set on the number of leisure tourist visits tometropolitan areas to examine the correlation betweenleisure consumption opportunities and population andemployment growth in metropolitan areas during the1990s. His study suggests that leisure amenities areimportant for an area’s growth, even after controlling forother characteristics, such as climate or proximityto a coast.
The City Beautiful movementof the late 19th and early 20thcenturies advocated city beautificationas a way to improve the livingconditions and civic virtues of urban dwellers. Proponents of themovement advocated for sizablepublic investments in monumentalpublic spaces, street beautification,and classical architecture, with anemphasis on aesthetic and recreationalvalues. The Benjamin FranklinParkway in Philadelphia with itsmany public buildings (for example,the Philadelphia Museum of Art, themain branch of the Free Library of Philadelphia, the Franklin Institute,and the Rodin Museum) exemplifiesthis movement.Today, economists andpolicymakers see the provision of consumer leisure amenities as a wayto attract people and jobs to cities.But most amenities, such as pleasantweather or scenic views, are notstandard goods that are traded invisible markets, making it difficult toquantify the contribution of a city’squality of life to its growth. Paststudies have provided only indirectevidence of the importance of leisureamenities for urban growth anddevelopment.My 2008 study with Albert Saizmakes the point that since leisuretourists are attracted by an area’sspecial traits (such as proximity tothe ocean, scenic views, historicdistricts, architectural beauty, andvariety in cultural and recreationalopportunities), the number of leisuretourist visits to a city can serve asa fairly comprehensive proxy forthe quality of life the city offers.Put differently, some of the verycharacteristics that attract tourists tocities also attract households to citieswhen they choose these places as theirpermanent homes.
1
Using a new data set on thenumber of leisure tourist visits tometropolitan areas, Albert Saiz andI looked at the correlation between
 
 
Business Review 
Q3 2009 11
www.philadelphiafed.org
leisure consumption opportunities andpopulation and employment growth inmetropolitan areas during the 1990s.We found that, all else equal, duringthe 1990s, population growth wasabout 2.2 percentage points higher andemployment growth 2.6 percentagepoints higher in a city with twice asmany leisure tourists as another city.The extra growth associated withleisure amenities is not trivial whenone takes into account that during the1990s, population grew 12 percent inthe typical metropolitan area in oursample, while employment grew 20percent. Over a long period of time,even relatively small differences ingrowth rates translate into relativelylarge differences in population andemployment growth. Among the forcesSaiz and I considered in our study, ourleisure measure was the third mostimportant predictor of populationgrowth in the 1990s.Cities around the world (suchas Barcelona and Bilbao; Glasgow;and Oklahoma City, Camden, andSan Antonio) have used publicinvestments in leisure spaces andcity beautification in an attempt tospur economic development. Mystudy with Saiz suggests that leisureamenities are important for an area’sgrowth, even after controlling for anarea’s proximity to a coast and for itsclimate. This is an important finding,since if people are largely attractedby an area’s natural advantages, suchas coastlines or nice weather, thesetypes of amenities are not somethinglocal policymakers can reproduce.Instead, my study with Saiz providespolicymakers with evidence thatspending public funds to providepublic goods that are oriented towardleisure activity (such as museums,waterfront parks, and open-airshopping centers) yields a return onthe investment in terms of a city’seconomic growth. The associationbetween leisure amenities and growthmay occur because such amenitiesdisproportionately attract moreproductive workers. 
WHY ARE PEOPLE AND JOBSCONCENTRATED IN CITIES?
Although metropolitan areasaccount for less than 20 percentof the overall territory of the U.S.,they contain about 80 percent of thenation’s population and almost 85percent of its jobs. Why are peopleand jobs so spatially concentrated?Economists have developed the notionof agglomeration economies — that is,the benefits that firms and householdsreceive from locating near one another— to explain this concentration.The two main types of agglomerationeconomies are described below.
 Business Agglomeration Economies.
Cities offer numerousadvantages to business firms, andoften, the larger the city, the greaterthe advantages. Agglomerationeconomies constitute an importantsource of a firm’s productivity.Increases in productivity due toagglomeration economies depend noton the size of the firm itself (internaleconomies of scale) but rather on thesize of a firm’s industry in a particularcity or on the size of the city itself. Forexample, firms in large cities are betterable to find workers who possess thespecific skills the firms require thanif they were in much smaller places.Also, firms can reduce their costs bylocating in large cities and sharingspecialized inputs. For example, manyfirms are too small to have a full-timechief financial officer but big enoughto have some of the same problemsthat confront larger companies.However, by locating in a large city,a small firm will be able to find alocal business that provides financialmanagers who spend part of each weekdoing what CFOs are supposed to do:prepare budgets, project sales, andnegotiate with banks. A similar storyapplies to other types of specializedbusiness services, such as access tolegal services and advertising agencies.
Consumer Agglomeration
 
 Economies.
Cities also offer numerousleisure consumption opportunities tohouseholds, and the larger the city,the greater the opportunities.
 
Largeconcentrations of population canprovide consumers with a greatervariety of goods and services. Ourlargest cities can support professionalsports teams, theater, opera, and asymphony orchestra. If consumersprefer a large variety of goods andservices and there are substantialeconomies of scale in providing them,economic welfare will depend on thesize of the local market. For example,studies by Joel Waldfogel and byWaldfogel and Lisa George have shownthat larger cities have more and betternewspapers and more and better radioand television stations.From a social point of view, largercities make it easier for people to makewider social contacts and to have amore diverse set of friends. Alongthese lines, larger cities appeal to younger, more highly educated workers
Cities also offer numerous leisure consumptionopportunities to households, and the largerthe city, the greater the opportunities.
 
12 Q3 2009
Business Review 
 
www.philadelphiafed.org
because large cities better facilitatedevelopment of professional and socialconnections. Dora Costa and MatthewKahn note that power couples (bothpartners have bachelor’s degrees) areincreasingly locating in larger citiesbecause they offer better labor-marketoutcomes for working couples.It’s important to recognize that anarea’s quality of life depends on morethan the variety of goods and servicesthat increase with city population size.People are also attracted by an area’s“natural” amenities, such as its historiccharacter, architectural variety, naturalscenic beauty, nearness to the ocean,or climate. Richard Florida has alsopointed out that people are payingincreasing attention to the provision of public goods that are oriented towardleisure activities, such as museums,waterfront parks, open-air shoppingcenters, and other public spacesenjoyed by families and individuals.But increased urbanization bringsnot only greater productive efficiencyand greater variety of cultural andleisure activities but also costs, suchas congestion, that take the formof long-distance commuting andhigher housing prices. These costseventually balance the gains from thevarious amenities. The higher cost of housing as cities get congested reduceshouseholds’ purchasing power andlimits the inflow of people.
2
WHAT’S THE EVIDENCE?
Until recently, the vast majority of studies have looked at the relationshipbetween business agglomerationeconomies and city growth. As I’vepointed out in previous articles,technical improvements, especiallyin transportation, mean that, today,businesses are freer to locate whereverthey want, and, unlike before, theirchoice of location will depend onwhere their workers choose to live.
3
 This means that an area’s specialfeatures, such as its quality of life, willbe an important determinant of wherehouseholds and, ultimately, firmslocate.Comparisons of the quality of life across cities have generated afair amount of interest from workers,the media, and local policymakers.Since 1981, David Savageau hascompiled the
Places Rated Almanac
.A “places rated” index is used toproduce a ranking of cities. Theindex is based on nine categoriesof amenities: cost of living (mostlyhousing costs); the economy (e.g.,the risk of unemployment); climate;education; health care (physiciansand hospitals); transportation (e.g.,airline connections); safety; recreation;and location (e.g., scenic beauty).In constructing the index, DavidSavageau uses his own judgment inthree ways. First, he uses his ownpreferences to determine which itemsto include in each of these categories.Second, Savageau assigns points toeach of the nine categories. Finally, heapplies equal weights to the rankingsin each of the nine categories tocompute an index number reflectingthe amenities offered in each city(the places rated index). As GlennBlomquist has pointed out, “Thisequal weighting means that a one-position difference in climate is equallyimportant as a one-position differencein the crime ranking.” Obviously, therankings of cities will be quite sensitiveto weights assigned to the variouscharacteristics. For example, I mightput more weight on the cost of livingin a city and much less weight on acity’s economy. This would almostcertainly result in a different rankingof cities than one produced by equallyweighting the various categories of quality of life.Beginning in the late 1970s,economists introduced a methodologyfor determining the value of an area’sspecial characteristics by observingwhat people are willing to pay tolive there in terms of higher rentsand lower wages.
4
Individuals whochoose to live in areas with a highquality of life are willing to move tothese locations despite facing somecombination of higher housing prices(or rents) and lower wages. Thiscombination of higher housing costs
2
See my 2005
Business Review
article forfurther discussion of consumer agglomerationeconomies.
3
See my 2005
Business Review
article.
Beginning in the late 1970s, economistsintroduced a methodology for determining thevalue of an area’s special characteristics byobserving what people are willing to pay to livethere in terms of higher rents and lower wages.
4
See, for example, the articles by JenniferRoback; Glenn Blomquist, Mark Berger, and John Hoehn; Joseph Gyourko and Joseph Tracy;and David Albouy. See Glenn Blomquist’s 2007article for an accessible review of the quality-of-life literature.

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