Are cities engines of production or consumption, and does it matter?

Although urbanization began many millennia ago, for most of human history, cities have been home to a few. At the start of the first industrial revolution in 1765, less than 10% of the population lived in urban areas, and economic growth depended heavily on the productivity of the rural labor force. Since then, urbanization has grown at a steady and innovative pace in all regions, fueled by growing demand for urban workers and technological breakthroughs such as the construction of high-rise buildings.

Today, more people live in cities than in rural areas, and economic growth is increasingly dependent on the productivity of the urban workforce. The urbanization rate is about 70 percent in developed and middle-income countries in Latin America, Europe, the Middle East and North Africa, and is growing rapidly in other developing countries. What forces shape employment in cities? Why do cities of the same size located in countries with the same income level differ in the composition of employment? What are the implications of these differences for development?

Economic theory provides some insight into the differences in the composition of employment in the urban hierarchy of the country, highlighting the importance of the agglomeration economy, which takes advantage of firms from the presence of other firms in the same area. This ensures the growth of cities that are competitive in the production of goods such as clothing, electronics and pharmaceuticals. The same forces of agglomeration that allow manufacturing cities to expand also make it difficult for new commercial activities to grow elsewhere. At the same time, adjusting to adverse shocks increases the number of consumer cities where city dwellers work in retail and other non-commercial sectors. However, it is unclear how cities same population located in countries similar income levels differ in the composition of employment.

Cities around the world: consumption, production or neutrality?

We provide answers to these questions in recent article, which documents the composition of employment in 6,865 functional urban areas using new available microdata for 74 countries from 1960 to 2015. The selected urban areas are home to 3 billion people and account for three-quarters of the world’s urban population. We classify each urban area as either manufacturing city with a disproportionate share of employment in urban trade, consumption city with a disproportionately low proportion of those employed in urban commerce, or neutral city in which the share of employment in urban goods is neither too low nor too high. The distribution of manufacturing (blue), consumer (red), and neutral (grey) cities shown in Figure 1 indicates that the structure of urban employment differs sharply in cities of the same size in countries with the same level of development. Manufacturing cities are located mainly in China, Europe, India and parts of the US, Mexico, Central America and Brazil. Apart from some major manufacturing cities in Malaysia, Vietnam and South Africa, other cities in Asia and Sub-Saharan Africa are either consumer or neutral cities.

Figure 1. World distribution of production, consumption and neutral cities, since 2000

Figure 1. World distribution of production, consumption and neutral cities, since 2000Source: Jedwab, Ianchovichina, and Haslop (2022) using IPUMS census data and the Global Human Settlements Layer database. Note. Lighter shades of each color indicate lower values ​​for the degree to which a city can be assigned to each particular type.

More ways to the city of consumption

There are more routes to the city of consumption than to the city of production. Manufacturing cities arose along with industrialization, and the “origin” of consumer cities can be traced back to (i) resource rent, (ii) agricultural export rents in countries with relatively high agricultural productivity, and (iii) “premature” deindustrialization. The latter did not lead to de-urbanization, but to the de-industrialization of cities, especially the largest ones, as shown in Fig. 2 for the case of Latin America.

Figure 2 Share of employment in tradable goods by city size and decade in Latin America

Figure 2 Share of employment in tradable goods by city size and decade in Latin AmericaSource: Jedwab, Ianchovichina, and Haslop (2022) using IPUMS census data and the Global Human Settlements Layer database. Note: MFGFIRE stands for Manufacturing, Finance, Insurance and Real Estate Services.

The “origins” of urbanization matter to major cities

Compared with cities in industrialized countries, cities of similar size in resource-rich and deindustrialized economies have lower shares of employment in manufacturing, tradable services, and the formal sector, and higher shares of employment in non-tradable goods and the informal sector. In industrialized countries, the share of employment in tradable goods is high, while the share of non-tradable goods is low in cities of any size. In both resource-rich and de-industrializing countries, the share of non-tradable goods in large cities is significantly higher than in small cities, but for all city sizes, these shares are much higher in de-industrializing countries than in resource-rich countries. Thus, the “origins” of urbanization matter for the largest cities, which are the leading places of nations and engines of growth (Fig. 3).

Figure 3. Employment share by city size and origin of urbanization, c. 2000

Figure 3. Employment share by city size and origin of urbanization, c.  2000Source: Jedwab, Ianchovichina, and Haslop (2022) using IPUMS census data and the Global Human Settlements Layer database. Note: MFG + FIRE stands for manufacturing, finance, insurance and real estate services; NTR2 includes wholesale and retail trade and other activities related to domestic trade.

Stuck in consumer cities?

The presence of predominantly consuming cities will affect the ability of developing countries to catch up with advanced economies and may even explain why some countries have fallen into the middle income trap. Savings from agglomeration may be lower in countries where the share of urban employment in non-tradable goods is disproportionately high (Venables, 2017; Burger et al., 2022). The agglomeration economy can even be “sterile“In such countries, due to congestion, which can be more detrimental to firms in non-tradable sectors, which benefit relatively less from the supply-side agglomeration economy (Burger et al., 2022). While consumer cities have not much less human capital than manufacturing cities, for a given level of human capital consumption cities have more informality and higher employment in urban non-tradables than manufacturing cities. We also find higher wages in urban tradables than nontradables, and lower returns in countries with more consumer cities. This means that human capital in consumption cities is being used in less productive sectors and less productive jobs.

History also tells us that urban employment patterns can change dramatically over time. The growth of many cities was initially fueled by agricultural rent and resource exports. The industrial revolutions turned many of these consumer cities into thriving manufacturing centers. Today, countries can take advantage of new opportunities to harness their human capital and Fourth Industrial Revolution technologies and turn their cities into thriving manufacturing centers. To succeed, they need to close technical skill gaps, increase investment in digital infrastructure, and spur innovation and reform that strengthens their private sector.