The Talent Supermarket of Cities
In 1993, James Rauch wrote a seminal paper showing that holding individual education constant, wages rise with the skills of metropolitan areas. Enrico Moretti has taken over this topic and written sophisticated papers that look both across metropolitan areas and within firms, showing that supermarket workers get more productive when better workers are in their shift.
If you read that paragraph carefully, you should note there is no mention of a density dividend. The quality of the workers in the room or neighborhood makes all the difference. Yes, proximity matters. But that is a function of distance, not density.
If you are looking for better workers, hire international migrants. Just so happens that dense cities do a great job of attracting talent from a bigger geographic cache. That's the birthplace diversity dividend. The movers are the shakers.
Such observations lend themselves to natural experiments. Take a dense city, such as Nairobi, Kenya, and find the neighborhood with the most migrants. That's the urban economic engine:
Depending on whom you're talking to, the Eastleigh market is either a tangle of back alleys where Islamist terrorists and pirates go to launder money, or it's one of the brightest spots of African capitalism, a dynamic 24-hour shopping center that's the only place for hundreds of miles where you can buy new jeans and sneakers at 2 in the morning.
Part of the reason Eastleigh attracts such investment, and such suspicion, is that Somalis make up the majority of people doing business there.
"When you come to Eastleigh, you feel that you are in Mogadishu or in other parts of Somalia, so you don't feel that you are an outsider," says Mohammed Shakul. "You feel at home." ...
... "The Kenyan government started to actively question what is the nature of this money," Kantai says. "And part of the questioning was motivated by the American counterterrorism push in East Africa."
He says what a Kenyan audit uncovered was $2 billion being quietly piped into Eastleigh through Somali channels — this in a year when Kenya's total GDP was about $40 billion.
"In this way, the Kenyan government began to understand the size of Somali capital. And one of the reactions, and this is a natural reaction from any government, was absolute panic," Kantai says. "It's like, how is it possible, that there is this kind of money, floating about, and we don't know about it?"
He says Kenya's reaction did not have to be one of fear — it did, after all, discover that its economy was 5 percent bigger than originally thought.
The Eastleigh neighborhood is more open to global capital flows. That's the "Borderless Economics" dividend. You can find many other similarly dense places in Nairobi. They aren't producing 5% of Kenyan GDP.
However, better to have Eastleigh in a big, dense global city than in one of the globalization backwaters. Somalis are more likely to run into top tier talent from other parts of the world. The quality of collision is much better. The question of density is rather beside the point.