Macroeconomics of Unbalanced Productivity Growth and Urban Crisis: a Simulation

Abstract

The "theory of unbalanced productivity growth and urban crisis" was developed by the economist William Baumol. It is based on a macroeconomic model of a region which is characterized by a progressive sector where technology is steadily advancing and a nonprogressive sec tor where it is not. In the progressive sector wages rise to match gains in productivity and in the nonprogressive sec tor they rise by "wage diffusion." A major component of the nonprogressive sector consists of municipal and other government services. When, under certain conditions, more and more workers enter the nonprogressive sector, municipal fiscal crises are a likely result. The macroeconomic model used in this study is a 19- equation system with eight difference equations for which analytical solutions are not available at this time. A FORTRAN computer program, however, is developed for simulations covering a 50-year period. The results of these simulations are the basis for seven propositions. The worst case (the one most conducive to urban crisis) occurs when the demand for the output of the nonprogressive sector increases at a faster rate than income (i.e., this sector is "in come elastic") and is insensitive to price increases (i. e., is "price inelastic"). In this case the nonprogressive sector absorbs a growing percentage of total employment, and the year-by-year real output of the economy decreases.