Human Capital and Agglomeration Economies in Urban Development

Large and productive metropolitan areas play a growing role in the working of developed and emerging economies alike. This paper surveys the recent contributions of urban economics, highlighting the role of external increasing returns—called agglomeration economies in the context of a city, which are key in the development and functioning of large, prosperous cities. One critical feature of these mechanisms is their cumulative nature: once set in motion, they feed themselves. The various costs associated with city size put a brake on such mechanisms. In many countries, the unevenness of the distribution of skilled labor across cities is both the cause and the consequence of particular agglomeration economies. Human capital is beneficial to the cities, which attract skills and talents. However, cities’ spatial concentration exacerbates regional disparities at the risk of generating strong political and social tensions within nations.