Thread by @jsuedekum

In case you missed it: also the French gilet jaunes movement is all about regional labor market divides and the increasing concentration of the modern service economy in big cities

This interview puts it in rather drastic words, but it is to the point /1

spiked-online.com/2019/01/11/the…

A quick comparison with Germany: The LEVEL of the divide in smaller in Germany than in France, the UK, the US and most other countries.

Our economy doesn't only happen in Munich, Berlin and Hamburg, but it is more decentralized. /2

We have small, remote cities which host "hidden champions", i.e. highly productive manufacturing firms which are world market leader for one particular product

Examples are Schwäbiche Alb, Ostwestfalen, Emsland... Other countries don't have this. It's a German particularity /3

Why does Germany have those "hidden champions" but not other countries?

One reason is history: without German division, economic activity today would be much more concentrated; Berlin would be Europe's largest city.

But firms had to escape Berlin and are now elsewhere /4

There're other reasons (GER's traditional manufacturing focus etc.) but that's not so important

Much more important: although the LEVEL of spatial economic concentration is still lower, those gaps are rapidly increasing over time. GER is becoming like the other countries /5

In other words, urban-rural labor market divides are rapidly growing. Modern economic activity is becoming increasingly urbanized.

Reason: Increasing returns! Best workers wanna be where the best firms are, and vice versa.

The evidence is here: voxeu.org/article/assort…

This urbanization is also linked to structural transformation:

The German "hidden champions" who keep the periphery alive are all manufacturing firms. But the modern economy is about services. And those services, although footloose, have an even greater tendency to urbanize. /7

The consequence of this big shift:

- In big cities: Skyrocketing rents, unaffordable living circumstances for middle-class families
- in the periphery: decline, emigration, brain-drain, populism

Just look at AfD vote shares or read @rodriguez_pose /8

voxeu.org/article/reveng…

Now the two "million dollar questions":

1. Is all of this inevitable?
2. And if no, what can we do to stop it?

My short answers:
1. No, it's very tough but there is hope
2. Employ the right regional policies, and do so emphatically.

Some ideas:
nzz.ch/wirtschaft/glo…

Final word: Germany is really lucky to have this decentralized economic structure, the subsidiary system of government, the crucial role of the local level. It better preserves this.

But policies and decisions at the federal level also have an important role to play. /END