Read the article by McKinsey “Urban America: US Cities in the Global Economy”
Focus on the discussion in section 1 (pages 9 to 16) on the contribution of large vs.
“middleweight” cities in the US vs. Europe, Latin America, and China. The discussion makes
two points. First, large cities account for a larger share of the population in the US vs. the other
regions.
1) Summarize the logic of the paper why the nature of cities in the US explains why the US is
wealthier than the other countries. What is the importance of the relative number of middleweight and large cities in the US, and the importance of higher GDP per capita of these cities.
Explain the intuition behind this logic.
2) Let’s add some structure to this discussion. Suppose in each country/region, there are two
cities, and the productivity of each city is given by AL and AM (“L” for large and “M” for
middleweight). And the output of each city is given by 1 Y AL and 0.2 . Using the
equation that the marginal product of labor in each city is equal to the wage in the city, and the
fact that the wage in large cities is 35% higher than in middleweight cities, calculate what must
be the gap between AL and AM such that large cities account for 80 percent of total employment
in the US.
3) The article claims that US GDP/capita is high because large cities account for a larger share
of employment in the US and that GDP/capita is higher in large cities in the US. Assume that
GDP/capita in a city is simply the wage in the city (this can be easily shown). Using the
numbers you derived in part (2), calculate what the employment share in the two groups of cities
in the US would be if wages in large cities were exactly the same as wages in middleweight
cities.
4) Suppose that the wage premium in large US cities were even higher than what we observe.
Specifically, suppose that the wage premium in large US cities is the same as that observed in
large Chinese cities. That is, suppose that wages in large US cities were 383% larger than in
other US cities. What would be the share of population in large US cities under this scenario?
5) Based on your answers to (3) and (4), can you explain why the share of the population in
large cities in Europe/Latin America/China is lower than in the US? Why might it be the case
that wages in large Chinese cities is almost four times higher than in the rest of country, and in
the US the wage premium in large cities is only 35 percent.
6) Now read the second part of the article (“There is no single path to rapid growth among US
large cities”, pg. 17-19). Exhibit 9 lists the top 35 cities in the US, and the change in the GDP
rank of these cities. Group these cities into cities where the rank is roughly unchanged, cities
where rank increased, and cities where rank decreased. Now look at Exhibit 8 and summarize
how the growth performances of these cities differed in terms of growth in employment vs.
growth in GDP per capita. The McKinsey article seems to suggest that cities can grow in either
manner. Explain this logic. When do cities grow by increasing population, and when do they do
grow by increasing GDP per capita?