Uncovering the drivers behind urban economic complexity and their connection to urban economic performance

Abstract

The distribution of employment across industries determines the economic profiles of cities. But what drives the distribution of employment? We study a simple model for the probability that an individual in a city is employed in a given urban activity. The theory posits that three quantities drive this probability: the activity-specific complexity, individual-specific knowhow, and the city-specific collective knowhow. We use data on employment across industries and metropolitan statistical areas in the US, from 1990 to 2016, to show that these drivers can be measured and have measurable consequences. First, we analyze the functional form of the probability function proposed by the theory, and show its superiority when compared to competing alternatives. Second, we show that individual and collective knowhow correlate with measures of urban economic performance, suggesting the theory can provide testable implications for why some cities are more prosperous than others.