Tag Archives: El Paso

Economic policies and institutions matter

Economists often talk about the important role institutions and policies play in generating economic growth. A new paper that examines the role of urban governance and city-level productivity provides some additional, indirect evidence that institutions and policies impact economic productivity at the local level. (The focus of the paper is how administrative fragmentation affects city-level productivity, not what I present here, but I thought the following was interesting nonetheless.)

The authors graph the correlation between city population and city productivity for five different countries. There is a positive relationship between population and productivity in all of the countries, which is consistent with other studies that find a similar relationship. This relationship is largely due to agglomeration economies and the greater degree of specialization within large cities.

One of the figures from the study—for the U.S.—is shown below. City productivity is measured on the y-axis and the natural log of city population is on the x-axis. (Technical note for those interested: city productivity is measured as the coefficient on a city dummy variable in an individual-level log hourly wage/earnings regression that also controls for gender, age, age squared, education and occupation. This strips away observable characteristics of the population that may affect city productivity.)

US city productivity

Source: Ahrend, Rudiger, et al. “What makes cities more productive? Evidence from five OECD countries on the role of urban governance.” Journal of Regional Science 2017

 

As shown in the graph there is a relatively tight, positive relationship between size and productivity. The two noticeable outlies are El Paso and McAllen, TX, both of which are on the border with Mexico.

The next figure depicts the same information but for cities in Germany.

german city size, product graph

What’s interesting about this figure is that there is a cluster of outliers in the bottom left, which weakens the overall relationship. The cities in this cluster are less productive than one would expect based on their population. These cities also have another thing in common: They are located in or near what was East Germany. The authors comment on this:

“In Germany, the most noteworthy feature is probably the strong east-west divide, with city productivity premiums in eastern German cities being, on the whole, significantly below the levels found in western German cities of comparable size. In line with this finding, the city productivity premium in Berlin lies in between the trends in eastern and western Germany.”

The data used to construct these figures are from 2007, 17 years after the unification of Germany. After WWII and until 1990, East Germany was under communist control and had a centrally planned economy, complete with price controls and production quotas, while West Germany had a democratic government and market economy.

Since 1990, both areas have operated under the same country-level rules and institutions, but as shown above the productivity difference between the two regions persisted. This is evidence that it can take a considerable amount of time for an area to overcome damaging economic policies.

Payroll Tax Increase and Iowa Jobs

Iowa Job-seekers and wage-earners will feel the sting of the longest running unemployment benefits extension in U.S. history.

Thomas L Cardella & Associates expected to create 500 jobs in Cedar Rapids, Iowa. But now 200 of those jobs will be located in El Paso, Texas. The firm changed their plans because of the effect of the increased payroll tax. The company’s payroll tax is increasing form 1.5 percent to 8 percent, or $900,000. That hike makes the firm unprofitable and Cardella doesn’t want to pass it on to the customer as the government recommends. Instead the firm will freeze wages and benefits and slash corporate salaries.

A peculiar argument currently being circulated is that the federal-state unemployment program is stimulating the economy, and unbelievably, creating jobs. Rep. Pelosi made this claim. And it has been echoed by opinion-makers.

Read Thomas Cardella’s op-ed in today’s Press-Citizen refuting it.