Cities and Regions - Flashpoints for Real Income and Welfare Inequality

• Applicant: Professor Dr. Michael Pflüger
• Subject Area: Economic Policy, Applied Economics
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 543113096

Economic growth and urbanization fire each other up. This beneficial relationship for average real incomes and welfare hides massive distributive conflicts, however. This research project addresses current tensions: cities and regions have become flashpoints for real income and welfare inequality along two dimensions: first, real income and welfare differentials between high-skilled, high-income earners and low-skilled, low-income citizens; second, real income and welfare gaps between city incumbents and city outsiders, which are barred from moving into attractive cities because of high rents and manifold regulations. The core goal of the project is to provide substantive contributions to our understanding of the role of the development of cities and regions for real incomes, welfare, and distribution, and for spatial sorting processes. The German city system is the project focus. A recent innovative urban systems growth-model provides a political-economy foundation for the mentioned tension between city-insiders and –outsiders and it also comes with many further merits (Duranton und Puga 2023), it therefore is the ideal starting point for the research project. However, the model and the model-based empirical analysis lack key ingredients that are needed for a more comprehensive distribution analysis. So far there is only one type of labor, hence differentials between high-skilled and low-skilled workers and associated sorting processes cannot be addressed. The model also abstracts from idiosyncratic location preferences and from the heterogeneity of urban costs across cities of different size. Policy analysis remains short of these aspects. The aim of the project is to close these research gaps. This main goal can be divided into three subgoals and associated project steps: Theory. The urban systems growth-model is to be generalized to feature high- and low-skilled workers, idiosyncratic location preferences, and heterogeneous urban costs. To address sorting and policies, a stylized small-scale-model is to be developed. The key components of this model should ultimately also be worked into the urban systems growth model. Empirics. As yet, nothing systematic is known about the heterogeneity of urban costs (land-, house-, rent prices, transport, congestion) in German cities of different size. This gap is to be addressed. The results of this analysis are ultimately to be integrated in the urban systems growth-model. Policy analyses. First, the small-scale-model is to be used to address the effects and interactions of various (regional) economic policies. Second, the urban systems growth-model, after being calibrated, shall serve as a basis for quantitative counterfactual policy analyses. Since the project is highly relevant not only to the scientific community, but also to politics and society, the results are to be published not only in first-rate international journals, but also in outlets for the general public and in policy forums.

• DFG Programme: Research Grants
• International Connection: Japan
• Cooperation Partner: Professor Takatoshi Tabuchi, Ph.D.