Spurring rebound in chronically depressed metros

3.22.2012 | As the recession begins to loosen its grip, cities and regions across the country are beginning to assess the damage and plot a course of recovery. They might turn to an initiative by the Federal Reserve Board of Chicago for some guidance, as well as a strong base of research on metro and regional resilience.

Network member Hal Wolman recently spoke at the Federal Reserve Bank of Chicago as part of their “Industrial City Initiative.” The project is examining cities that were traditional manufacturing hubs in the 1960s and determining why prospered and others declined. Providing a broader context, Wolman pulled together the key findings from several ongoing initiatives that are examining resilience in distressed metro regions, including work by BRR.

Some metro regions fall into a malaise and never really recover. Others rebound relatively quickly. Nationwide, the share of metro areas that could be considered chronically distressed range from 9% in the West to 60% in the Northeast. A chronically distressed area is a region whose average annual growth rate in employment or gross metropolitan product (GMP) over the prior eight years is less than 50% of the national growth rate and at least 1 percentage point below it and whose growth rate continues to be less than 50% of the national rate for seven consecutive years.

By those calculations, 15% of the metro areas in the South are chronically depressed, 37% in the Midwest, 60% in the Northeast, and only 9% in the West.

Of those chronically depressed metro areas, a sizable number recovered eventually, except in the Northeast, where only 30% recovered. In the West, for example, 71% of chronically distressed metros eventually recovered. In the South, 45% recovered, and 58% recovered in the Midwest.

So what leads some areas to rebound and others to continue to struggle? As Wolman reported, what allows some metros to rebound and others to languish is difficult to pinpoint, but in general, regional performance, after controlling for a variety of factors that influence performance, is affected by:

  • The area’s human capital (the education level of labor force)
  • Wage rates at beginning of period (the higher the wages at the beginning of the shock, the worse the performance later)
  • Industrial structure at beginning of performance period, particularly the share of manufacturing.
  • Presence of major research universities
  • Agglomeration economies (as measured by metro area population size)
  • Flexibility of labor market (in Right to Work states)

City performance, after accounting for several other factors thought to influence performance, is affected by:

  • The economic performance of the larger metropolitan area in which city is located (there are few examples of strong cities in weak metro areas)
  • City performance is related to metro area growth in employment, gross product, industrial structure (negative relationship to share of manufacturing)
  • Metro area wage rates at beginning of period negatively related to city performance
  • Crime rate
  • Age structure of population (the greater the share of the population under age 17 at the start of the shift, the worse the performance in rebound)
  • Path dependence (a high correlation between performance of a city in prior period to performance in present period)

When economic problems hit, the most common response of area planners is to work to create new organizations to help spark a restructuring  of local and regional economic development. Unfortunately, traditional economic and industrial development policies have little or no impact in short-run. Recovery instead rests largely on the individual firms in the region. In fact, the most important determinant of economic resilience is the strategic decisions by major players in the region’s export sector. Rather surprisingly, amenities and downtown redevelopment may or may not matter, but interviewees in case studies mostly believed they did.

Wolman drew on a variety of larger projects in reporting these results. A Fannie Mae project, for example, examined the effect of policy, and particularly state policy, on a metro area’s performance, comparing how poor performing and well performing cities.

Likewise, a Brookings Institution project created an index of city economic conditions based on three indicators measuring growth between 1990-2000 (jobs, annual payroll, establishments). They also created a city residential condition index based on per capita and median income, poverty rate, unemployment rate, labor force participation rate.

The BRR project used six case studies to help explain why some regions were shock-resistant while others were adversely affected and which factors explained their resilience (or not).

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