Economic Development and Public Finance Working Paper Series
REP 06-04, Human Capital, Quality of Life, and the Adjustment Process in American Metropolitan Areas, by John I. Carruthers and Gordon F. Mulligan, February 2007.
This paper presents a locational analysis of growth and change within the American constellation of
metropolitan areas. It begins with the premise that the development process happens in two interconnected ways: Via
demand-induced growth, which is driven by economic opportunity, and supply-induced growth, which is driven
personal preference. The nature and spatial outcome of these mechanisms are investigated by estimating a series of
three-equation regional adjustment models wherein changes in population density, employment density, and the
average annual wage are endogenously determined. The models involve all metropolitan counties in the continental
United States and cover the three five-year time periods between 1982 and 1997. Four cases are considered for each:
(1) a core model containing a single initial condition, aggregate size, plus locational controls; (2) the core model with
variables representing initial industrial composition; (3) the core model with initial industrial composition, plus four
variables representing human capital factors; and (4) the core model with initial industrial composition, plus four
variables representing quality of life factors. In order to account for spatial dependence in the development process,
each model is specified with spatial lags of its three dependent variables and is estimated using a spatial two-stage least
squares technique. The results of the analysis illustrate the evolving nature of the adjustment process and the
development patterns that it produces.
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