How the pandemic has changed our cities

The pandemic has changed cites and many people are starting to revaluate their role in our lives. Some are even starting to wonder if cities are still relevant. Over millennia, cities have survived many structural changes (both economic and social) and have always proven to be surprisingly resilient. How has the pandemic changed them and are they still useful?

Before the pandemic, the main economic reasons for cities to exist was the density of jobs and amenities. Although economists argue about whether, density of amenities or jobs was the more important benefit, the consensus was that together they were the main reasons for people and firms to be in cities. The pandemic affected jobs and amenities differently and one is now compelled to wonder how this affects cities.

Fortunately, economists understand the basic forces that encourage urbanization as they have studied agglomeration forces for a long time. To a large extent the early research in this field was led by Paul Krugman who received the Nobel Prize for his contribution to this field in 2008. Since then, the main contributions to the field focused on how cities adapt to changes which offer a very good theoretical foundation for thinking about current challenges.

There are two reasons why firms may prefer to have their employees work in the same location at the same time. Firstly, many managers believe that this supports unstructured exchanges of ideas. It is a well-established notion that unexpected conversations lead to new ideas and higher productivity. However, there is surprisingly little evidence to show that ‘watercooler talk’ encourages innovation. The pandemic ruthlessly tested the assumption that teams needed physical proximity to be productive and it turns out that, in some professions such as writing, design or many branches of IT and accounting, work from home is the best option. Indeed, the work of Nick Bloom on the impacts of working from home on workers, managers and firms shows the pros and cons of office work very clearly.

Research on transaction costs and industrial organisation shows that the second reason for firms to like coordinated office work is the fact that it makes it easier to monitor employees. We have good evidence (the work of Brown and Medoff amongst others) showing that salaried employees can be monitored more effectively if they are nearby. Indeed, labour economists have documented those salaried employees need closer supervision as their renumeration is not directly related to their effort or output.

Despite the progress in monitoring technologies and skills that the pandemic encouraged, this benefit of a city office is difficult to dismiss. Therefore, it seems that although some professions may switch to remote work, there still are clear benefits for most firms to stay in cities. This likely means that the jobs that pay the highest salaries and offer the best career progress may still be in cities (controlling for all other differences between jobs). Even if they will not require daily commuting to the office, an office in a central location will still be a great asset to most firms.

It is also worth noting that providing some goods and services only makes sense if there are enough customers within a certain distance. Restaurants and retail shops have been hit especially hard by the pandemic precisely because they rely on high density. Firms that rely on physical proximity (all non-tradable service firms ranging from finance to law), will find it hard to move to a location with lower density. They will either stay in cities or disappear.  

While residents could choose to stay in cities because of the specific jobs that require personal interactions, they could also move further away to benefit from less frequent commuting. The choice is not as simple as one might assume. While many jobs may no longer require daily office work, many highly ranked schools are still located in cities and schoolwork is unlikely to move online wholly. In addition, higher density offers an increased likelihood of living in the vicinity of like-minded people and makes connecting with them easier.  

Furthermore, some services we have learned to value as parts of our daily routines only make sense at high density. For example, survey evidence shows that many young city residents choose not to drive but instead rely on cycling, ride hailing and public transportation. Cycling over long distances is not feasible and shared transportation is very difficult to provide at lower densities. Online shopping with fast delivery or food delivery offering a large choice of diverse options is again only possible within high density environments. Therefore, it seems that there are some benefits of living in cities that cannot be transferred to low-density locations and will continue to make cities attractive places to live.  

Even if all jobs were moved online permanently, cities would still attract people. Indeed, current increases in house prices suggest that the pandemic made us realise just how valuable our amenities are when we are not at work. Although access to a garden or proximity to a park are currently more valuable than ever before, recent developments in urban economics show that city amenities such as sports facilities, childcare or healthcare are also important when making location choices.

It appears that post-pandemic cities will be driven far less by density of jobs but far more by proximity to amenities. This has profound implications not only for who will live in cities but also how they will change. Quality of life will start playing a much more important role than the ease of getting to work daily. This should translate into intensifying efforts to reduce crime, congestion and pollution but increase equality, as well as the quality of education and healthcare.