Land Markets and Human Capital: Determinants of Land Use and Economic Development - Prof. , Study notes of Environmental Science

Download Land Markets and Human Capital: Determinants of Land Use and Economic Development - Prof. and more Study notes Environmental Science in PDF only on Docsity! Note Set 5, page 1 Course: Rural Economic Development and Growth (AAE 4710/6710) Instructor: Dr. Kriesel Semester: Spring, 2011 TOPIC: Land Markets Reading: Shaffer, et al., Ch. 5, An important aspect of economic development concerns the land that people use for housing, commercial and government purposes. There are combined aspects of: productive use, speculative development value and amenity value that determine an area’s land use. If the land use is concentrated or high-value, then the area will experience economic development. A great example is the NE Georgia mountains. Until 20 years ago the area was remote, resource-poor and losing residents. Today the area is growing and rich. Land that sold for $500/acre 20 years ago now costs $20,000/acre. The area is still remote and resource-poor, but its amenities like mountain views and recreation have attracted vacationers and new residents. So, what determines the value and use of land? The simplest model says that a buyer will pay no more than the present value of the stream of earnings from the land, or ∑ ∞ = + = 1 )1( Pr t t t r p ice where: pt = annual land earning in year t r = interest rate So, the relevant question is: what determines land earnings? 1. David Ricardo (c.1800) He focused on soil fertility as the basis of land value. Figure 5.3 (Shaffer p.85, or classnotes) shows 3 types of land growing the same crop sold at the same price. Each farmer will maximize profits and produce at the point where MR=MC. However, the most fertile land requires much less production cost, so the farmer earns a big profit known as Ricardian land rent. The second farmer earns less rent, and the third farmer just breaks even, so there is no rent. Land that is lower quality than this will not be farmed. According to the price formula, the highest fertility land with the highest rent will be priced the highest. The land with the lowest fertility will be priced at zero. Note Set 5, page 2 2. Johann von Thünen (c. 1805) Rather than soil fertility, he focussed on locational attibutes to explain land prices. He noticed that villages in the 19th century European landscape had a very predictable land use pattern. A town center was where markets operated, and the housing was spread out from there. Perishable ag products were grown close to town, while nonperishable crops, animals and forests were grown far from town. Figure 5.5 (p.87) shows how land earnings are determined. Suppose that all producers of commodity Y have the same technology and costs. Then the only way they differ is how far they have to transport their product to the town’s market. The graph shows that producers located beyond the zero-rent margin will not produce the good. Producers close to the market earn the highest rents. Figure 5.6 (p.88) tranposes the first graph to show how rents increase with better access to the town’s market. The formal term for this curve is the bid-rent function. In terms of the PV equation, this says that land prices go down with increased distance from the town. Now consider the possibility of more than one commodity, each with different transportation costs. Figure 5.7 (p.88) shows that a commodity that is non-perishable and cheap to transport will be economically located fare from the town center. Thus, there is a predictable pattern of land uses that is dictated by transportation costs. Today’s world is more complicated than just growing ag commodities. We also have to consider: worker’s commuting costs agglomeration amenities However, the outcome is the same. Each urban area has a bid-rent function that determines land prices, and therefore land use types. 3. Economic Basis of Urban Sprawl von Thunen’s model can easily be expanded to give insight into urban sprawl. Suppose that the bid-rent function for agricultural and forestry is flat. Land use will change from rural to urban where the ag land rent intersects the bid-rent function for uran uses. This is shown below. Now suppose that there is economic growth in the urban area. This will bring higher income, more workers, and more service-type businesses. All of this increases the Note Set 5, page 5 productivity studies then there could be better policies on appropriate public investments. He maintained that human capital investments have much higher rates of return than alternative investments. E. Schultz's idea is now fifty years old and research interest in it has subsided. However, it still has a powerful influence, as seen in World Bank lending policies that continue to help "the-poorest-of-the-poor", through clean drinking water projects, sanitation and public education in less developed countries. The latest emphasis in reducing abject poverty overseas is on literacy programs for women. II. LABOR MARKETS IN REGIONAL DEVELOPMENT (no assigned reading) A. Changes in rural industrial structure 1. Employment in agriculture and natural resources, as a share of total rural employment, has declined steadily throughout the 20th century. By 2000, only 4 percent of total Georgia employment was in primary industries (agriculture, mining, forestry, and fisheries). It has stayed at that level ever since. 2. Rural manufacturing jobs are often relatively low skill and low wage. This can be explained, at least in part by the "product cycle." Product cycle theory breaks the "life" of a product into three phases: a. Early phase b. Growth phase c. Mature phase Much of the growth in rural employment, particularly in the South, has been in the production of products in the "mature phase." 3. In 1960, the service sector (broadly defined) accounted for 50 percent of employment in nonmetro areas. By 2000, 70 percent of nonmetro employment was in the service sector. 4. Services can be broken down into three categories: a. Household-oriented services (health care, education, retail trade, personal services, entertainment and recreation) In 2000, household-oriented services accounted for 36 percent of total employment in both nonmetro and metro areas in the U.S. Note Set 5, page 6 b. Business-oriented services (repair services, finance, insurance, real estate, wholesale trade, and professional services) In 2000, business-oriented services accounted for 13 percent of nonmetro employment and 21 percent of metro employment c. Other services (communications and utilities, transportation, and public administration) In 2000, other services accounted for 11 percent of nonmetro employment and 13 percent of metro employment. 5. Metro versus nonmetro earnings Median nonmetro family income has declined relative to median metro family income over last decade. In 1980, the median nonmetro family income was 79 percent of median metro family income ($16,592 compared to $21,128). In 2000, this figure dropped to 72 percent.) 6. Poverty a. In 1973, 14 percent of all nonmetro residents had income below the official poverty level. In 1990, this percentage had risen to 18 percent, but fell to 16% by 2000. b. A higher percent of the poor in nonmetro areas are "working poor" than in metro areas. I.e., the labor market participation rate of the poor is higher in nonmetro areas than metro areas. Over 2/3 of nonmetro poor families have at least one member in the labor market. 7. Unemployment Unemployment rates in Georgia have been higher for rural counties: 1990 2000 Unemployment rates in rural counties 6.48 6.01 Unemployment rates in metro counties 5.5 3.77 Note Set 5, page 7 IV. Definition of Labor Market A labor market is the mechanism by which labor services are bought and sold and thus allocated to various occupations, industries, and geographic areas. V. Labor Demand A. The firm's demand for labor is given by its VMPL curve. This is because the profit-maximizing firm will employ labor up to the point VMPL = Wage. The curve is defined as PMPVMP LL ×= where VMPL = marginal revenue product of labor MPL = marginal physical product of labor P = the price of the output Cartoon: The Firm's Labor Demand Curve $ wage Labor quantity D=MRP B. Factors that shift the labor demand curve 1. Demand for the product produced by labor. An increase in demand for the product will raise its price (P) and thus increase the demand for labor. 2. Productivity of labor. This is determined by the amount of capital per unit of labor (i.e., the K/L ratio) and by the level of technology. An increase in the K/L ratio or more advanced technology will increase the marginal productivity, and hence, the demand for labor. 3. The price of other resources (especially capital and energy). An increase in the price of a substitute resource will increase the demand for labor. An increase the price of a complimentary resource will decrease the demand for labor. Note Set 5, page 10 3. Environmental, social, and cultural amenities. The psychic income from amenities affect the potential migrants perception of the gains from migration. 4. Phase of the national business cycle. People may be less inclined to migrate during times of a national recession when jobs may be hard to find everywhere. IX. Unemployment The official, government definition of labor force: employed workers + unemployed workers. Officially, unemployed workers are persons age 16 and over who have actively sought work during the previous week but didn't find it. This official definition ( called U-3) of unemployment only partly covers labor market distress. The Bureau of Labor Statistics provides other measures that are more narrowly (U-1 and U-2) or broadly (U-4 through U-6) defined measures. The six state measures are based on the same definitions as those published for the U.S.: U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force; U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force; U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate); U-4, total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers; U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers; and U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers. Typically, the U-6 measure is 2 times the rate of U-3. More information is at: http://www.bls.gov/lau/stalt.htm XI. Community Actions to Improve Labor Market Performance (reading: Shaffer, p. 119) 1. Job Creation: programs like small business development, industrial retention or plain old smokestack chasing will increase the local demand for jobs 2. Employment Counseling: the community can have a job coordinator who matches unemployed clients with vacancies at local companies. Note Set 5, page 11 3. Job Training Strategies: The community can work with the local college/trade school to train workers needed by local companies. A formal on-the-job training program can be useful, especially if worker’s wages can be subsidized during th training period. Job training can also involve resume preparation and interviewing skills. 4. Remedial Education: these are local school programs to assist school dropouts. Assistance can be given in GED preparation or in basic reading/math scores. 5. Subsidized Public Employment: Although usually too expensive for a community, some states have programs to employ targeted groups like teenage mothers. In Wisconsin, recipients work in exchange for welfare benefits. The idea is that this first exposure to the workplace will make a “real” job easier to get.