The Economic Productivity of Urban Areas: Disentangling General Scale Effects from Local Exceptionality

The factors that explain differences in the economic productivity of urban areas have remained difficult to measure and identify unambiguously. Here we show that a synthesis of the classical representation of economic activity in a city in terms of a production function, together with a scaling perspective that accounts for the systematic effects of population size, leads to a new expression for the Total Factor Productivity (TFP) of urban areas. We empirically demonstrate that there is a systematic dependence of urban productivity on population size, resulting from the mismatch between the size dependence of wages and labor, so productivity increases by about 11% with each doubling in population. Moreover, deviations from the scale dependence, capturing the effect of local factors (including history and other contingencies) also manifest surprising regularities. Although productivity is maximized by the combination of high wages and low labor input requirement, high TFP cities show invariably high wages and high levels of employment relative to their size expectation. Conversely, low TFP cities show both low wages and employment. Finally we show that how educational attainment relates to these patterns and derive how it can naturally parameterize the TFP. We believe that these results shed new light on the important problem of establishing the determinants of urban productivity and inform the development of economic theory related to growth.