Over 50% of people live on less than 3% of the world’s land. The future of our cities is dense. Most urban planners and policymakers praise dense cities as a solution to the challenges our cities face. Many cities have put in place policies that encourage density as way to address sustainability, urban sprawl, car dependency, access to services, and safety.
A recent study shows that the benefits of dense cities are neither guaranteed nor equal. Titled "The Economic Effects of Density: A Synthesis" in the Journal of Urban Economics, it's written by Gabriel Ahlfeldt and Elisabetta Pietrostefani from the London School of Economics and Political Science.
Policies that encourage density will shape our cities for decades to come. These policies, according to Ahlfeldt and Pietrostfaci, have not been well grounded in evidence.
With density comes benefits such as higher productivity, more innovation, shorter commutes, cheaper provision of public services, preservation of green spaces, and lower carbon footprints. But dense cities also have greater inequality. With an emphasis on creative, professional, digital and financial work economic productivity gets concentrated in superstar cities. Work becomes more specialized and highly skilled tech and knowledge workers benefits from higher wages, more job options, and being around other people doing similar things. Lower skilled service workers, renters, and first time buyers struggle with housing costs, making cities less affordable places for them to live.
Ahlfeldt and Pietrostfaci examine the degree to which a variable, like incomes or rents, changes in response to an increase in density. By assigning dollar values to these sensitivities to change, or elasticities, the costs and benefits of increased density come into focus. On average, a 1% increase in density results in an per capita increase of $280 ($190 after taxes) in wages and $347 in rents. Not only do rents increase faster than wages, they increase exponentially while incomes rise linearly. Premiums on space cause the rent/income gap to widen as cities become more dense.
After accounting for the costs and benefits of variety of other categories in addition to rents and incomes, an increase in density is found to have a net positive impact on people’s lives.
So what limits cities from benefit from endless density? Many economists subscribe to marginal productivity theory. At a certain point, benefits of increasing the density of a city decline due to lower productivity related to, in part, higher costs as wages rise. For Ahlfeldt and Pietrostfaci, it's the costs of density (i.e. that rents increase exponentially against linear income growth) that decrease productivity. This implies there is latent capacity in cities for people and firms to benefit from further density, if only we could figure out how to make them more affordable as this density occurs.
Dense cities facilitate higher productivity, more innovation, shorter commutes, cheaper provision of public infrastructure, preservation of green space, and a lower carbon footprint. But they also lead to higher rents, construction costs, income inequality, and concentration of pollution, and lower self-reported well being.
"Our findings also have important policy implications as they suggest that policies that encourage densification are likely efficient but not necessarily equitable."
For Ahlfeldt and Pietrostfaci, the inequality of density is found between cities in developed and less developed countries, between the US and other developed countries, and across a city’s population.
Economies of cities have diverged over time. As cities become more dense, clusters of tech and knowledge industries have better access to highly educated, skilled talent. Divisions of labour become more pronounced, jobs more specialized, and wage gaps between tech and knowledge workers and lower skilled workers widen. This skilled wage gap is found to be more pronounced in the US than any other developed country in the study.
A homeowner enjoys density benefits without the pressure of rising rents. Even if they choose to move, homeowners typically benefit from increased home prices. Again, an exponential rise in rents versus linear income growth means renters pay increasingly more to live in dense cities. Homeownerhip becomes a wedge in society, lifting those who can afford to own and crushing those who can't.
With more "eyes on the street", compact cities are supposed to increase safety. In most developed countries this is true, but in the US higher densities are associated with higher crime levels.
As cities become more dense, wages rise. In developing countries wages rise twice as fast they do in wealthy countries. Despite growth in wages, density in developing countries has a negative net effect on quality of life. The reverse is true of dense cities in developed countries.
In developed countries dense cities lead to less driving in favour of transit, cycling, and walking. This effect is less evident in developing countries. As incomes rise in dense developing countries, cars become more affordable. This could work against the density effect that favours alternate modes of transportation.
Ahlfeldt and Pietrostfaci find that the benefits of dense cities are real but not enjoyed equally. Urban planners and policy makers must understand the economic impacts of the policies they employ. For policies that encourage density, that means understanding the trade-offs between economic efficiency and inequality.
The idea that increasing density will improve affordability in cities gets repeated a lot. It’s enticing because it subscribes to the "science" of supply and demand which works nicely on paper. This research suggests that it's more messy than that. I agree with Richard Florida's recent piece calling for an "inclusive-prosperity agenda" that emphasizes "better jobs, higher wages, more transit, place-based policies to assist lagging cities, and a more robust social safety net". But in order find that winning combination, we need to have a deeper understanding of why so many of the benefits of cities are being captured by land values.