The article is excerpted from Economic Focus, published by the Federal Reserve Bank of Richmond.
Throughout American history, people have moved from farms and small towns to seek their fortunes in the big city. The story of the last century has been one of increasing urbanization. As of 2018, 86% of Americans lived in cities or surrounding suburbs, and large cities accounted for a similar share of total U.S. economic output. It wouldn’t be a stretch to call cities the engines of growth in the modern era.
But despite the appeal and benefits of urbanization, cities are not without costs. They are more expensive, more crowded, more prone to crime, and more vulnerable to disease outbreaks than sparsely populated rural areas.
The past year has brought that last cost into stark relief. In the era of modern medicine, it has been easy to forget that cities have been associated with many horrible pandemics throughout history. … For most of history, city dwellers could be expected to live shorter lives than their counterparts in the country.
“There are demons that come with density, the most terrible of which is a contagious disease,” says Edward Glaeser of Harvard University. As one of the country’s foremost urban economists, Glaeser has long been a champion of cities and their many societal benefits. But in his forthcoming book with fellow Harvard economist David Cutler, Survival of the City, he devotes his attention to the challenges facing cities, with disease high among them.
Urban plagues in the industrial era eventually led to advances in medicine and sanitation technology, which enabled cities to thrive and grow rapidly. Some researchers now wonder whether the Covid-19 pandemic could put a dent in that growth. Densely populated cities like New York were early hot spots for the virus and suffered high rates of infection and death.
Many cities attempted to limit the spread of the virus by shifting work from offices to homes and limiting social gatherings. With vaccines rolling out and virus cases falling, the end of the pandemic seems to be in sight. But will city life return to the way it was before?
The Attraction of Cities
To predict cities’ future, it helps to consider why people have been attracted to cities in the past.
“There’s a long-running debate: Are people in cities because they love cities or because that is where the highest-wage jobs are?” says David Autor of the Massachusetts Institute of Technology. “I think it is more the latter.”
Decades of research by urban economists point to the productive advantages of cities throughout history. Firms in the same industry tend to cluster together in cities because they can share the same inputs into production, like capital and skilled labor. Cities also tend to be located on major transportation hubs, giving them access to bigger marketplaces. People moving to cities have more options for work and play. They interact with more people, share ideas, and spread knowledge across companies, enabling industrywide gains in productivity.
These forces have benefited different industries at different points in time. In the 19th and early 20th century, many cities grew as manufacturing hubs for a particular product, such as automobiles in Detroit. Since the late 20th century, successful cities have focused on knowledge-based industries, like finance in New York or computer technology in Silicon Valley. In recent research, Autor found that work in cities has become increasingly polarized since 1980. College-educated professionals earn a wage premium working in cities even after accounting for higher cost of living, but wages for less-educated urban service workers have flattened.
College-educated workers have also been attracted to cities in recent decades because of their amenities, such as theaters, exclusive restaurants, museums, concert venues, and professional sporting events. In a 2020 Journal of Urban Economics article, Victor Couture of the University of British Columbia and Jessie Handbury of the University of Pennsylvania found that these urban amenities were the biggest factor in explaining the influx of young college graduates to cities since 2000.
All of this evidence points to cities being attractive places for the highly educated to live, work, and play prior to 2020. But the response to Covid-19 may have changed that. Before the pandemic, most knowledge-based workers in cities still commuted to downtown offices every day. Only a small share of full-time employees worked from home.
“If you go back to the 1980s, there were no networked home computers,” says Nicholas Bloom of Stanford University. “So it was mostly low-level jobs that could be done by mail or phone that could be done from home. I think that generated the impression that people working from home were lower level and less productive. It’s only since about 2010 that we have been able to fully replicate the office at home.”
[During the pandemic, the number of working days from home increased from five percent to 50%.] But this tenfold increase didn’t affect all workers evenly. In a survey of 2,500 workers Bloom conducted last May, about a third said they could do their jobs perfectly from home, while another 30% said they couldn’t do their job from home at all.
This divide is starkest in cities. Lukas Althoff and Conor Walsh of Princeton University, Fabian Eckert of the University of California, San Diego, and Sharat Ganapati of Georgetown University explored the divide in a paper last year. They found that the high-skill, knowledge-based jobs that have benefited the most from cities in recent decades are the ones that can most easily be done remotely, while the low-wage service sector jobs that have seen their wages stagnate can only be done in person. The authors argued this has revealed a paradox about cities.
“The large cities in the U.S. are the most expensive places to live. Paradoxically, this cost is disproportionately paid by workers who could work remotely, and live anywhere,” they wrote.
The pandemic also diminished the other major attraction of living in cities: the amenities. Bars and restaurants curtailed in-person seating to comply with social distancing guidelines. Theaters and museums closed. Sporting events played out for TV audiences and empty stadiums. As the lockdowns stretched on, some began to wonder whether people who could now work from anywhere would choose to stay.
A Blip or a Sea Change?
After a year of working from home and social distancing, the data suggest that some city residents did decide to move. Bloom found evidence of a “donut effect” in real estate markets for the most densely populated U.S. metro areas. Rents in city centers declined over the course of 2020, while home prices in the surrounding suburbs rose.
“Workers aren’t completely leaving San Francisco or New York, but they are moving out from the center of cities to the suburbs,” says Bloom. “And that’s entirely rational if you think post-pandemic you will only come into the office three days a week. You are less sensitive to a long commute, and you appreciate having more space at home if you will be spending more time there.”
In numerous surveys conducted since the pandemic began, a majority of workers have expressed a desire to continue working from home, at least some of the time, even after the pandemic ends. Several companies, including Microsoft and Salesforce, have announced that their employees can continue working from home indefinitely.
The pandemic has solved what Autor calls a “coordination problem” — it led large numbers of people to make the move to videoconferencing technology all at once. Before the pandemic, in-person meetings were the norm for many organizations, despite the challenges of travel and coordinating schedules. Now, lots of people have experienced virtual meetings.
“The big revolution wasn’t that the pandemic taught me how to use Zoom,” says Autor, who has been using it to collaborate with co-authors for years. “It’s that it got everyone else to use Zoom. Before, it wasn’t acceptable for me to tell my colleagues, ‘You go to Hong Kong, and I’ll just be at home on my computer talking to you.'” …
Still, the share of work from home is likely to be less than what it was during the height of the pandemic. …
Even firms that want their teams to continue meeting in person may decide they don’t need to locate in expensive cities. With the option to collaborate with anyone virtually as needed, they could choose cheaper locations for their physical headquarters, perhaps in scenic natural settings or with school systems that workers perceive as higher performing.
“Because of this, I think cities like New York are more vulnerable than they have been in decades,” says Glaeser.
In addition to the impact of increased telework, social scarring from the pandemic could have a long-term negative effect on demand for urban amenities. After living with the virus for over a year, some city dwellers might be hesitant to return to crowded restaurants, subway cars, and stadiums. Some who formed new habits during the pandemic — exercising at home, watching movies on their televisions — might find no reason to return to old practices such as going to the gym or the movie theater.
On the other hand, the pandemic has also highlighted the inadequacy of virtual gatherings as a substitute for in-person social interaction. After the virus is controlled, there could be pent-up demand to return to life as normal. In a 2020 paper, Richard Florida of the University of Toronto, Andrés Rodríguez-Pose of the London School of Economics, and Michael Storper of the University of California, Los Angeles predicted that demand for urban amenities will remain strong after the virus-induced lockdowns are lifted.
“Nonetheless,” the authors wrote, “even if cities will not shrink or die from the Covid pandemic, they will certainly change.”
Tim Sablik is a staff writer for the Federal Reserve Bank of Richmond.