The economics of skyscrapers. With all the advances in transportation, networking, and the rise of inner city costs, why do companies still find it financially beneficial to set up shop in congested areas?

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The economics of skyscrapers. With all the advances in transportation, networking, and the rise of inner city costs, why do companies still find it financially beneficial to set up shop in congested areas?

In: Economics

The main answer economists have is “agglomeration economies”. Basically, firms are more productive when they’re located close to other firms, especially those in the same industries. There are lots of theories for why this is, though they’re kind of hard to test. There’s a lot more opportunity to share ideas, employees, and even favorable regulatory environments when companies are located close together. Silicon Valley is an extreme example of this. Because the tech industry is especially fluid and based on the types of things that agglomeration economies enhance (mainly people and ideas), there’s a lot of incentive to keep everything close together, and that counterbalances the increased costs of doing so (which is also pretty small for tech – all you need is office space and some computers).

An emerging answer is that it’s all about where skilled workers *want* to live. First, some people just like living in cities. You can walk instead of drive. There are lots of restaurants, stores, and cultural attractions, etc. People like that will be more willing to work for a firm if that firm is also located in a city. Second, urban agglomeration provides employees with a kind of job insurance. If you move to the middle of nowhere to work for a firm that’s the only employer, what do you do if that firm fires you or stops operating? You have to move, and that’s expensive. If you take a job in a big city instead, you have the ability to change jobs without changing where you live.

Most urban cores with skyscrapers are centrally located and/or have transportation that funnel people toward them from all directions of the metro area, which gives companies the widest area from which to recruit. The younger workers who live downtown can easily commute by bike/transit/ride share, while the older suburban workers can commute by car or transit (like commuter rail). And because there will be highways and train lines coming from all directions, the whole metro area is accessible. A company out in a suburban area might only be able to recruit talent from a portion of the area, because of the time/effort to commute there and the difficulty of commuting via transit can prevent urban young workers from considering it.