Economic Research Forum (ERF)

Effects of urbanisation on productivity and wages: evidence from Turkey

53
Are the substantial productivity gains associated with larger cities in developed countries similar for developing countries? This column provides evidence on urbanised economies in the non-Western world by focusing on Turkey, a country that has experienced fast urbanisation and a high rate of growth of the urban population.

In a nutshell

Since the 1950s, the urban population in Turkey has increased dramatically due to massive rural-to-urban migration and a high fertility rate.

In 2017, 75% of the Turkish population lived in cities, making it a very highly urbanised country, but there are substantial spatial inequalities between regions on almost every metric, including productivity.

Doubling the employment density in an area increases average wages by 3.8-4.2%; having access to other markets is the most important determinant of the productivity differences in Turkey.

In the past decade, empirical research on agglomeration economies has provided robust evidence on the productivity gains associated with larger cities. Yet despite extensive evidence on these gains in developed countries, little is known about the impact of urbanisation in the rest of the world.

Addressing the knowledge gap on urban economies in the developing world is important for two reasons. First, the majority of the world’s urban population lives in countries that are far poorer than the advanced countries from where the evidence mainly comes (Glaeser and Henderson, 2017). In addition to the importance of urban areas being the drivers of economic growth in those countries, they also concern the lives of millions of people who reside and work in these places.

Second, the models and stylised facts documented for developed countries may not apply entirely to developing countries, as the characteristics and roles of cities may differ (Chauvin et al, 2017). For example, the rapid urbanisation observed in developing countries in the second half of the past century may have generated different benefits and costs compared with the Western world where the urbanisation rate has been relatively stable.

In recent work (Özgüzel, 2019), I provide evidence on urbanised economies in the non-Western world by focusing on Turkey, an upper-middle-income developing country that has experienced fast urbanisation and a high rate of growth of the urban population.

Since the 1950s, the urban population in Turkey has increased dramatically due to massive rural-to-urban migration and a high fertility rate. In 2017, 75% of the Turkish population lived in cities, making it a very highly urbanised country. But there are substantial spatial inequalities between regions on almost every metric (income, production, life quality, etc.), including productivity.

Spatial differences in productivity occur due to differences in the skill composition of the workforce, local non-human endowments and interactions between workers or between firms (Combes and Gobillon, 2015). Understanding differences in productivity requires consideration of all these explanations.

Simultaneously addressing all of these factors makes it possible to assess the importance of each element in the productivity differences. Quantifying these magnitudes is especially crucial for the formulation of policy to address inequalities.

I analyse social security records, a new administrative dataset that has only recently become available to researchers and thus has never been used in research before. I address the endogeneity bias due to reverse causality by using historical instruments based on census data from the Ottoman Empire and the early years of the Turkish Republic.

I find the elasticity of wages with respect to employment density in provinces to be 0.056-0.06. This means that doubling the employment density in an area increases average wages by 3.8-4.2%. This elasticity is lower than one estimated for China and India and around those estimated for Brazil and Colombia.

I also find a positive and strong effect for domestic market potential. The estimated coefficient is around 0.091-0.1, which is double that of density, suggesting that having access to other markets is the most important determinant of the productivity differences in Turkey.

This means that if the market potential of a province doubles (for example, employment density doubles in all other provinces), wages increase by 6.5%. This number is more than triple the figure of 0.02 for France, but smaller than the range of 0.13-0.22 for China.

Finally, I find that workers do not sort across locations based on their observable skills. This result is in sharp contrast with what is usually observed for developed countries, where a large fraction of the explanatory power of city effects arises from the sorting of workers (Combes and Gobillon, 2015). It is, however, very much in line with the results for China, suggesting that urbanisation patterns may be operating differently in developing countries.

Finally, I find a weak relationship between productivity (wages) and amenities, similar to that found in research on developing countries. This pattern can be explained either by the high correlation between density and amenities, or by the fact that workers in developing countries are not rich enough to forgo part of their income to live in areas with better amenities.

My findings corroborate earlier findings for developing countries, which show that while the main mechanisms of urban economies are present in the developing world, the current models need to be extended to capture the differences between Western cities and those in the developing world.

Further reading

Chauvin, Juan Pablo, Edward Glaeser, Yueran Ma and Kristina Tobio (2017) ‘What Is Different about Urbanization in Rich and Poor Countries? Cities in Brazil, China, India and the United States’, Journal of Urban Economics 98:17-49.

Combes, Pierre-Philippe and Laurent Gobillon (2015) The Empirics of Agglomeration Economies. Vol. 5, 1st ed. Elsevier.

Glaeser, Edward, and J Vernon Henderson (2017) ‘Urban Economics for the Developing World: An Introduction’, Journal of Urban Economics 98:1-5.

Özgüzel, Cem (2019) ‘Agglomeration Effects in a Developing Economy : Evidence from Turkey’, ERF Working Papers.

Most read

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The Egyptian economy is still not creating good jobs

Growth in Egypt has recovered substantially since the downturn following the global financial crisis and the political instability following the 2011 revolution – but what has happened to jobs? This column reports the results on employment conditions from just released data in the 2018 wave of the Egypt Labor Market Panel Survey.

How Egyptian households cope with shocks: new evidence

Managing risks and reducing vulnerability to economic, social, environmental and health shocks enhances the wellbeing of households and encourages investment in human capital. This column explores the nature of shocks experienced by Egyptian households as well as the coping mechanisms that they use. It also examines the relationship between such risks and job formality and health status.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Egypt’s labour market: facts and prospects

An ERF policy conference on the Egyptian labour market in late October 2019 focused on gender and economic vulnerability. This column summarises the key takeaways from the event.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.

Arab countries are caught in an inequality trap

Conventional wisdom, based mainly on surveyed household income distribution statistics, suggests that inequality is generally low in Arab countries. At the same time, little attention has been devoted to social inequalities, whether in terms of outcomes or opportunities. This column introduces a forthcoming report, which offers a different narrative: based on the largest research project on the subject to date and covering 12 Arab countries, the authors argue that the region is caught in an inequality trap.

Supporting women’s livelihoods in Egypt: opportunities and challenges

Despite the rising educational attainment of women in Egypt, their employment has declined over time and many face multiple constraints on their engagement in the labour market. This column explores ways of increasing women’s assets and economic empowerment that may ultimately lead to Egypt being as equitable in employment attitudes and practices as it is in education.