A wail of two cities

Do the cities of Kazakhstan attract more workers than they need?


Why is the unemployment rate in Kazakhstan’s two major cities – Astana and Almaty – unusually high?

Generally, these rates – which measure the share of the labor force that is looking for work -- have exceeded the national rate since 2005, according to data from the national statistical agency. Almaty's rate was a sixth higher than the national one in 2009 and remained a tenth higher in 2010. Astana's rate is usually lower than Almaty's but was still a twentieth higher than the national rate in 2010.

Among the oblasts, the only unemployment rate that has been as consistently as high as those of the cities is that of Mangistau, in west Kazakhstan’s “oil country.” It was a fifth higher than the national rate in 2005-6 but then dropped sharply, beginning to rise again in the national slowdown of 2009. (For the figures, see the notes below.)

One might expect a low unemployment rate in cities, because they attract employers. If the firm sells in a national or global market, then it will receive the same revenues regardless of where it locates in the country. So it should put down its roots wherever it can produce most cheaply. Typically, that place is a city, for several reasons.

First, a firm can cut its costs by locating near others in its industry. This cluster of producers generates enough demand to support specialized inputs nearby. When two flour mills locate side by side, they attract a pool of flour workers. Both mills will benefit, since they no longer need to recruit workers in distant cities.

Similar reasons may help explain the growth of high-tech industries in the United States, such as Silicon Valley in California or Route 128 near Boston. For example, computer manufacturers sometimes need workers to repair instruments. It usually isn’t worth the factory’s while to simply keep repairmen on payroll for a task that may take just a few weeks each year. But if several manufacturers locate near one another, then they can support a fulltime firm devoted to instrument repair. Such factors may also help explain why, in the Eighties, over half of the steel industry concentrated in Pennsylvania, Ohio and Indiana; and nearly half of the auto industry in Michigan, concluded the American economist Gerald Carlino.


Going steady


Workers may also prefer the cities, since labor conditions may be more stable there than out in the country. The urban economist Arthur O’Sullivan explains why. When firms in the city step up hiring, the wage will begin to increase. This, in turn, will attract immigrant workers, who will vie for jobs by bidding the wage back down. Similarly, when urban hiring declines, wages will begin to fall. Many workers will respond by leaving. Since they no longer bid down the local wage, this will drop only a little. In short, the urban wage is fairly steady over time, whether firms are demanding more workers or fewer. Now consider an isolated rural area, where workers must take any jobs that they can find, almost irrespective of the wage. Changes in firms’ demand for labor can touch off sharp changes in the wage, since there is no moderating change in the number of workers.

So, workers who prefer steady wages may move to the cities. In turn, this expansion of the urban labor force may attract employers, creating jobs.

Why, then, is the unemployment rate so high in Almaty?


Do bright city lights blind?


The traditional explanation of unemployment is that high wages are attracting more job seekers than firms want to hire. In a free labor market, the jobless eventually will offer to work for less than the going wage, eliminating the unemployment. But minimum-wage laws – which ban low wages – may destroy jobs for unskilled workers whom firms would employ only for rock-bottom pay. (Whether minimum-wage laws are actually so damaging is controversial. For a crisp introduction to the debate, see the text by Ronald Ehrenberg and Robert Smith.) However, it is not apparent that wages are too high in Almaty but not in the rest of Kazakhstan. The minimum-wage law is national.

Perhaps Almaty workers are willing to put up with a little joblessness in exchange for the city’s amenities – the “bright city lights.” Unlike the steppes of Kazakhstan, Almaty offers a myriad of shops and schools. This may also help explain why the unemployment rate is higher in Almaty than in Astana, which is not yet as diverse as its sister city.

Some statistical evidence suggests that urban amenities attract consumers. In the past 20 years, cities with more restaurants and live-performance theaters have grown more quickly, in the U.S. as well as in France. The main amenity is good weather, as measured either by January temperature or by the amount of rain and snow. One statistical study finds that, among counties in the U.S., weather may explain more growth in population or in housing than does any other determinant. "No variable can explain [U.S.] state and city growth over the past 80 years as relably as temperature," concluded economist Edward Glaeser in surveying the literature.  This makes sense. You can’t find a substitute for good weather. (Astana, take note.)

To measure the value of amenities, economists look at housing rent. People are willing to pay higher rents in cities because they receive higher wages there and because they enjoy the fruits of urban living. If rents are rising more rapidly than wages, then the city’s amenities must be growing more valuable. Via this reasoning, Glaeser, Jed Kolko and Albert Saiz found that large U.S. cities with higher amenity values grew more rapidly than did other cities over the Eighties.

Or maybe Almaty workers tolerate spells of unemployment in order to have steady wages during their long periods of employment. They may dislike a pay cut more than they would like a pay raise of the same size; that is, they are “risk averse.” Whether this explains Almaty’s high rate of unemployment may depend in part on whether jobless workers here can rely more on some source of income – the family or the government – than can the unemployed in the rest of Kazakhstan. But even if this were true, one would still have to explain why workers in Almaty are more risk-averse than those in the remainder of the country.

Another possibility is that migrants to cities are too optimistic. Hearing of an economic boom in Almaty, they may happily conclude that they will surely find a job there now. But over time, potential migrants should become better informed about employment, if only by keeping in touch with friends and relatives in the cities. The rate of unemployment in the cities (relative to the national rate) should fall. In Almaty and Astana, it has actually risen for nearly a decade. The mystery continues. -- Leon Taylor, tayloralmaty@gmail.com


Notes


The following ratios are for the unemployment rate in the given region, divided by the national unemployment rate. All underlying data are from the national statistical agency.

a. Almaty: 2003, 1.01; 2004, 1.05; 2005, 1.04; 2006, 1.05; 2007, 1.08; 2008, 1.11; 2009, 1.17; 2010, 1.09.

b. Astana: 2003, .95; 2004, .99; 2005, 1.01; 2006, 1.03; 2007, 1.05; 2008, 1; 2009, 1; 2001, 1.07.

c. Mangistaya Oblast: 2003, 1.1; 2004, 1.17; 2005, 1.2; 2006, 1.19; 2007, 1.17; 2008, 1.03; 2009, 1.08; 2010, 1.1.


Good reading


Ronald G. Ehrenberg and Robert S. Smith. Modern labor economics: Theory and public policy. Ninth edition. Boston, Massachusetts: Pearson. 2006. Chapter 4 discusses minimum-wage laws.

Arthur O’Sullivan. Urban economics. Sixth edition. Boston, Massachusetts: McGraw-Hill. 2007.

Edward L. Glaeser, Jed Kolko, and Albert Saiz. Consumer city. Journal of Economic Geography 1, pages 27-50. 2001.

Edward L. Glaeser.  Reinventing Boston: 1640-2003.  National Bureau of Economic Research working paper #10166. 2003.  Online.   Published in the Journal of Economic Geography  5(2), pages 119-153.  April 2005.


References

Gerald A. Carlino. Productivity in cities: Does city size matter? Business Review, Federal Reserve Bank of Philadelphia, Nov.-Dec. 1987.

Alfred Weber. Alfred Weber’s theory of the location of industries. Translated by C.J. Friedrich. University of Chicago. 1929. Weber pointed out in 1909 that firms choose the cost-minimizing location. A related work is August Losch’s The economics of location, 1944.