Cities' productivity is proportional to their size – unless they're British

Wokingham: unexpectedly productive. Image: wx8 at Wikimedia Commons.

It's always satisfying when a simple theory comes along which seems to make sense of messy and complicated things. We ran a piece last year on the theoretical physicist Geoffrey West, who seems to have hit upon a "grand, unified theory of cities". It runs as follows: if a city doubles in size, then, all else being equal, a whole range of things from crime to wages will increase by around 15 per cent. 

The explanation for this impossibly neat correlation lies in the idea that if you put lots of people, businesses and infrastructure in one place, the increase in interactions and shared ideas will drive up economic productivity, innovation, and a host of other factors. Diseases spread faster in densely populated cities; it should come as no surprise that ideas and expertise do, too. 

This month, the Organisation for Economic Co-operation and Development, which encourages trade and economic progress among its 34 member countries, unveiled its own grand unified theory of cities' productivity and size. In two tome-like reports, based on some of the most accurate city-level data ever collated, they concluded that, if you double the size of a city, you generally increase its productivity per capita by between 2 and 5 per cent.

That may not sound all that impressive – it's much less than West's version, for a start. But nonetheless, it means that a city like Paris should be anything up to 50 percent more productive than a settlement of 50,000 people. What's more, it means that simply moving to a city makes an individual more productive:

If you were to take a random person from a small city and relocate that person to a larger city without changing his or her characteristics, the person would, on average, be more productive in the larger city... This effect would occur no matter whether the randomly picked person worked in a high-skilled or low-skilled occupation.

There are several explanations for this effect. Firstly, there are more jobs in cities, so that individual is more likely to find one. Also, they are more likely to be in a more specialised and innovative firm, and more likely to be a good match for their skills. Due to higher competition in cities, meanwhile, businesses which aren't pulling their weight tend to be forced out. There's also that "network", or "agglomeration" effect we saw in action in West's research. 

The theory is borne out when you plot US cities' productivity differential (which is loosely based on wages) against their population size. There are outliers, but as you can see, the statistical relationship is relatively strong:

Source: "The Metropolitan Century" (OECD).

There's also this bar chart, which plots OECD cities in North America and Europe against size. (In Asia and Central America the rule doesn't work so well, for reasons too complex to go into here.)

So: the bigger a city gets, at least in the western world, the more productive it becomes. Great. Glad we've got that sorted.

Except, actually, we don't. Take a look at the same factors plotted using UK cities:

There are two odd effects at play here. First, cities don't increase in productivity in the way you'd expect as they increase in size. Second, as the report notes, London's productivity is "larger than would be expected given its size". 

If you've had even half an ear turned to the arguments over devolution to UK cities, you might be able to guess at a few of the theories which could explain London's productivity bottleneck. The OECD researchers themselves don't have any conclusive answers, but here are a few possibilities:

1. Skills drain. High average levels of education have a big effect on city productivity, even among lesser educated people. In the UK, graduates tend to move to London – which is why many cities are keen to gain control of their skills budget as part of their devolution deals. 

2. Geography. The UK is relatively small, which is perhaps why graduates feel able to move en masse to London, while those in the US may be less likely to move across the country to New York. 

3. Governance. US cities, and those in larger European countries, tend to have more control of their own affairs than UK cities. The OECD also found that capital cities tend to grow faster, and be more productive, than other cities, which may partially explain London's impressive productivity levels. 

There's also another possibility, which is that smaller cities are more productive than you'd expect, which flattens out the graph. This could be, again, a matter of geography. Three of the significant outliers – Bracknell, Wokingham, Milton Keynes – are London commuter towns, which the researchers believe could explain their higher productivity. 

The OECD also found that cities increase in productivity if other populous cities are "nearby"; they define nearby as "within 300km".  

And Britain simply isn't that big. That could be distorting the trend:

The black line is about 300km long.

So are small UK cities over-productive, or are big ones besides London under-productive? And is London an innocent outlier, or is it a succubus pulling skills from other cities? Answers on a postcard, please. 


 

 
 
 
 

A new wave of remote workers could bring lasting change to pricey rental markets

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus. (Valery Hache/AFP via Getty Images)

When the coronavirus spread around the world this spring, government-issued stay-at-home orders essentially forced a global social experiment on remote work.

Perhaps not surprisingly, people who are able to work from home generally like doing so. A recent survey from iOmetrics and Global Workplace Analytics on the work-from-home experience found that 68% of the 2,865 responses said they were “very successful working from home”, 76% want to continue working from home at least one day a week, and 16% don’t want to return to the office at all.

It’s not just employees who’ve gained this appreciation for remote work – several companies are acknowledging benefits from it as well. On 11 June, the workplace chat company Slack joined the growing number of companies that will allow employees to work from home even after the pandemic. “Most employees will have the option to work remotely on a permanent basis if they choose,” Slack said in a public statement, “and we will begin to increasingly hire employees who are permanently remote.”

This type of declaration has been echoing through workspaces since Twitter made its announcement on 12 May, particularly in the tech sector. Since then, companies including Coinbase, Square, Shopify, and Upwork have taken the same steps.


Remote work is much more accessible to white and higher-wage workers in tech, finance, and business services sectors, according to the Economic Policy Institute, and the concentration of these jobs in some major cities has contributed to ballooning housing costs in those markets. Much of the workforce that can work remotely is also more able to afford moving than those on lower incomes working in the hospitality or retail sectors. If they choose not to report back to HQ in San Francisco or New York City, for example, that could potentially have an effect on the white-hot rental and real estate markets in those and other cities.

Data from Zumper, an online apartment rental platform, suggests that some of the priciest rental markets in the US have already started to soften. In June, rent prices for San Francisco’s one- and two-bedroom apartments dropped more than 9% compared to one year before, according to the company’s monthly rent report. The figures were similar in nearby Silicon Valley hotspots of San Jose, Mountain View, Palo Alto.

Six of the 10 highest-rent cities in the US posted year-over-year declines, including New York City, Los Angeles, and Seattle. At the same time, rents increased in some cheaper cities that aren’t far from expensive ones: “In our top markets, while Boston and San Francisco rents were on the decline, Providence and Sacramento prices were both up around 5% last month,” Zumper reports.

In San Francisco, some property owners have begun offering a month or more of free rent to attract new tenants, KQED reports, and an April survey from the San Francisco Apartment Association showed 16% of rental housing providers had residents break a lease or unexpectedly give a 30-day notice to vacate.

It’s still too early to say how much of this movement can be attributed to remote work, layoffs or pay cuts, but some who see this time as an opportunity to move are taking it.

Jay Streets, who owns a two-unit house in San Francisco, says he recently had tenants give notice and move to Kentucky this spring.

“He worked for Google, she worked for another tech company,” Streets says. “When Covid happened, they were on vacation in Palm Springs and they didn’t come back.”

The couple kept the lease on their $4,500 two-bedroom apartment until Google announced its employees would be working from home for the rest of the year, at which point they officially moved out. “They couldn’t justify paying rent on an apartment they didn’t need,” Streets says.

When he re-listed the apartment in May for the same price, the requests poured in. “Overwhelmingly, everyone that came to look at it were all in the situation where they were now working from home,” he says. “They were all in one-bedrooms and they all wanted an extra bedroom because they were all working from home.”

In early June, Yessika Patapoff and her husband moved from San Francisco’s Lower Haight neighbourhood to Tiburon, a charming town north of the city. Patapoff is an attorney who’s been unemployed since before Covid-19 hit, and her husband is working from home. She says her husband’s employer has been flexible about working from home, but it is not currently a permanent situation. While they’re paying a similar price for housing, they now have more space, and no plans to move back.

“My husband and I were already growing tired of the city before Covid,” Patapoff says.

Similar stories emerged in the UK, where real estate markets almost completely stopped for 50 days during lockdown, causing a rush of demand when it reopened. “Enquiry activity has been extraordinary,” Damian Gray, head of Knight Frank’s Oxford office told World Property Journal. “I've never been contacted by so many people that want to live outside London."

Several estate agencies in London have reported a rush for properties since the market opened back up, particularly for more spacious properties with outdoor space. However, Mansion Global noted this is likely due to pent up demand from 50 days of almost complete real estate shutdown, so it’s hard to tell whether that trend will continue.

There’s a wide world of speculation about the long-lasting changes to real estate caused by the coronavirus, but many industry experts say there will indeed be change.

In May, The New York Times reported that three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — have hinted that many of their employees likely won’t be returning to the office at the level they were pre-Covid.

Until workers are able to safely return to offices, it’s impossible to tell exactly how much office space will stay vacant post-pandemic. On one hand, businesses could require more space to account for physical distancing; on the other hand, they could embrace remote working permanently, or find some middle ground that brings fewer people into the office on a daily basis.

“It’s tough to say anything to the office market because most people are not back working in their office yet,” says Robert Knakal, chairman of JLL Capital Markets. “There will be changes in the office market and there will likely be changes in the residential market as well in terms of how buildings are maintained, constructed, [and] designed.”

Those who do return to the office may find a reversal of recent design trends that favoured open, airy layouts with desks clustered tightly together. “The space per employee likely to go up would counterbalance the folks who are no longer coming into the office,” Knakal says.

There has been some discussion of using newly vacant office space for residential needs, and while that’s appealing to housing advocates in cities that sorely need more housing, Bill Rudin, CEO of Rudin Management Company, recently told Spectrum News that the conversion process may be too difficult to be practical.

"I don’t know the amount of buildings out there that could be adapted," he said. "It’s very complicated and expensive.

While there’s been tumult in San Francisco’s rental scene, housing developers appear to still be moving forward with their plans, says Dan Sider, director of executive programs at the SF Planning Department.

“Despite the doom and gloom that we all read about daily, our office continues to see interest from the development community – particularly larger, more established developers – in both moving ahead with existing applications and in submitting new applications for large projects,” he says.

How demand for those projects might change and what it might do to improve affordable housing is still unknown, though “demand will recover,” Sider predicts.

Johanna Flashman is a freelance writer based in Oakland, California.