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Bright Lights, Midsize City

Economic Trends


What towns are best for business?

Are cities obsolete? According to economic theory, cities will grow as long as the economic benefits from "agglomeration"--access to goods, services, workers, knowledge, and markets--exceed such negatives as higher taxes and living costs, pollution, congestion, crime, and limited space to expand.

Some experts argue that advances in information technology, by making it possible for people to live and work in less populated areas, have changed this trade-off in ways that hurt cities. Others, such as Harvard University economist Edward Glaeser, note that recent trends belie this thesis. The share of the U.S. population living in metro areas with more than 1 million people, for example, rose from 41% in 1970, to 48.1% in 1990.

One thing that advances in information technology do appear to be changing, however, says economist Toni Horst of Regional Financial Associates of West Chester, Pa., is the size of cities that offer the most growth potential to businesses. On the one hand, she notes, innovations in communications technology have allowed many companies in large cities to relocate back-office operations to low-cost semirural sites. On the other, the need for specialized expertise in an increasingly global and information-based economy has increased the appeal of urban locations.

With all their problems, observes Horst, cities still seem best able to provide business with access to skilled workers, specialized high-value services, and the kind of innovation and learning growth that is facilitated by close contact between diverse individuals. The big question is, what size cities are best able to achieve such aims?

To find out, Horst useD econometric techniques to estimate how sizes of metro areaS affected business productivity in two periods: the 1980s and the 1990s (through 1995). In the 1980s, she found that the greatest benefits accrued to businesses located in cities with over 1.5 million workers. But in the 1990s, larger cities were at the bottom of the heap. That is, other things being equal, they provided the smallest net output gain to businesses moving from rural areas to metro areas.

By far the biggest productivity gains, Horst reports, were racked up by metro areas with employment of 750,000 to 1.5 million (chart). Last year, there were 25 such cities in the U.S., including hot spots like Denver; Milwaukee; Portland, Ore.; San Jose, Calif.; and Seattle. Two measures of the appeal of metro areas in this range are that they boast the highest number of patents per 1,000 households, and the fastest growth in professional-service employment.

None of this implies that really big cities will stop growing, only that most are likely to grow more slowly in the years ahead than smaller urban areas. Meanwhile, notes Horst, several cities such as Fort Worth, Salt Lake City, and Charlotte (N.C.), are poised to grow into the size range offering the largest productivity gains to business.BY GENE KORETZReturn to top

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Only at first glance, a study finds

It's an old story, and a troubling one. Companies with highly paid chief executive officers lay off thousands of workers, reap nice gains in their stock prices, and reward their CEOs with big pay increases the following year. But it just doesn't hold up to analysis, reports Kevin F. Hallock of the University of Illinois at Urbana-Champaign.

In a study in the current issue of the American Economic Review, Hallock analyzed the compensation of some 550 of America's highest paid CEOs from 1989 to 1995. As many critics have noted, he did find that those in companies announcing layoffs in one year enjoyed far higher pay increases in the following year than their peers in other companies. But it turned out that this apparent connection was mainly due to their companies' size.

Larger companies, the analysis showed, not only paid their CEOs the most, but also tended to give them the largest pay hikes in percentage terms. And the largest companies also were the most likely to announce layoffs.

In fact, once he adjusted the data to reflect the effect of a company's size on the probability of layoffs, Hallock found that the apparent gain a CEO might reap from a layoff program fell sharply. And once he factored other variables into the pay equation, including a CEO's age and tenure, he found no relationship at all between layoffs and subsequent pay hikes. Indeed, layoff announcements tended on average to slightly depress a company's stock price.

In a nutshell, says Hallock, "the idea that CEOs have gained financially from layoff decisions just isn't supported by the evidence."BY GENE KORETZReturn to top

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