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The growth of cities is higher correlated with the growth of Public Sector

The following movie is taken from “The Economists”:

http://www.economist.com/multimedia/businesseconomics explains how cities grow, slump and recover in the last decades. When we put firms and people together we generate costs but we also generate ideas. Thus, this mix generates productivity, as long as, people have higher education, (an educated population is a key factor to explain the rise of cities). However, the point that I want to focus is: growth of cities is higher correlated with the development of the public sector. Think in a very basic definition of public sector – part of the economy concerned with providing basic government services. Now, if we think what happens when big cities of the world grow, we will conclude that, for many of these cities, this growth was supported by the State. For example, if companies want to invest in a certain city, probably the State will create benefit taxation for those companies. However, the problem is that, among the years, the State has becomed, in some cities, the principal employer of the population.

One positive aspect is that “public sector employment tends to be counter-cyclical” [1] due to the fact that the State, for instance, when it wants to increase aggregated demand using fiscal policy, an aggressive cut on people is unlikely to occur. Nevertheless, the consequence of not cutting the wages and fire people is that the State cannot solve the problem of deficit, as occur actually in many countries and the Government needs to reduce his expenditure. Howsoever, for the State to cut on his employees is necessary to reformulate the logic of operation of the cities.  Let´s see the example of UK:

 

Image

 

Source: Larkin, Kieran, 2009, “Public Sector Cities: Trouble ahead”, Centre For Cities, pg. 11

The figure presents the position of the principal cities of UK in terms of Vulnerability (cities that have a lots of public services wich represents the economy of the city) and Public expenditure. Briefly, we can see that countries in sector 2 are the ones whose expenditure needs to be  reduced quickly. However, we have cities like Oxford, Cambridge and Cardiff whose philosophy works around the education services. Thus, this means that UK needs to cut the expenditure on education? It is difficult to say yes or no, because it depends on the structure of other cities.

Concluding, developed countries have a problem with their debt and this is high correlated with the way how cities are organized. Thus, it is necessary to reformulate the public sector but having in attention the specification and sustainability of each city.

References:

[1] Gomes P (2009) Labour market flows: facts from the United Kingdom, Bank of England Working Paper No. 367

Larkin, Kieran, 2009, “Public Sector Cities: Trouble ahead”, Centre For Cities.

#87, Pedro Luís Silva

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Author: studentnovasbe

Master student in Nova Sbe

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