Sorting Models of Household Location and Urban Amenities

In earlier chapters of this volume it has been argued that highly educated workers are often regarded to be a crucial element of economic prosperity and growth in cities. In The Economy of Cities Jane Jacobs (1970) puts forward the thesis that human interaction is an important aspect of city life and crucial for our understanding of why people concentrate in expensive places with high densities. Economists such as Lucas (1988) picked up this idea, which was interpreted as human capital externalities. That is, interaction between higher-educated individuals generates benefits for society that exceed those accruing to the individuals. The high population density in cities stimulates interactions, and the external effects associated with them are an important source of agglomeration economies. Cities thus become more productive places and this process works continuously and generates growth. This process works better if higher-educated people interact. Empirical evidence confirming this hypothesis was provided by Rauch (1993).1 Later studies include Glaeser and Maré (2001), who find that workers moving to the city realize important wage gains, especially when they are young. This suggests that cities foster skills. Glaeser and Maré (2001) show that these workers do not lose these gains when they later move to rural areas, which suggests that their sojourn in a city has permanently increased their productivity.