Labor Markets and Sustainability: Short-Run Dynamics and Long-Run Equilibrium

Many of the world’s economies experienced rapid structural changes due to globalization and other forces over the past 50 years. During this period, developing countries were the recipients of massive foreign direct investment, and their industrialization was accompanied by urbanization, city gigantism, and related environmental issues, such as pollution. Over time, investments in the education of the urban poor allowed their move from the industrial sector to the service sector. This growth of the service sector came at the expense of the industrial sector, which implied structural changes in cities and massive cleaning efforts. The objective of this study is to model these transitions in a simple dynamic framework. The economic model indicates that in the short run, urban growth is negatively impacted by environmental degradation and agglomeration costs, while service sector growth is negatively impacted by environmental cleaning costs. In the long run, optimal city and service sizes are both decreasing functions of environmental degradation and agglomeration and cleaning costs. Thus, sustainability ultimately determines the optimal city size.