This article is commentary on a paper presented at a conference organized by the Federal Reserve Bank of New York in April 2005, "Urban Dynamics in New York City." The goal of the conference was threefold: to examine the historical transformations of the engine-of-growth industries in New York and distill the main determinants of the city's historical dominance as well as the challenges to its continued success; to study the nature and evolution of immigration flows into New York; and to analyze recent trends in a range of socioeconomic outcomes, both for the general population and recent immigrants more specifically.Economic conditions - New York (N.Y.) ; Federal Reserve District, 2nd ; Urban economics

J. Vernon Henderson

English

Research Papers in Economics

FRBNY Economic Policy Review / December 2005 25
he paper by Edward L. Glaeser offers an insightful and 
entertaining overview of almost four centuries of the 
economic growth of New York City. First, I will address some 
of the themes I took away from the history sections of the 
paper. Then I will turn to the modern era and comment on a 
basic point I think the paper misses in the description of both 
the historical record and the modern era: the role of New 
York’s vibrant neighborhoods.
The author’s first theme is New York City’s four-centuries-plus 
record of sustained economic and population growth. During this 
period, New York has outperformed Boston (and Philadelphia) to 
become the nation’s leading city and metropolitan area. 
Geography has played a key role. New York has a great natural 
harbor connected to a long navigable river, the Hudson, 
something that Boston lacks. In addition, New York’s central 
location on the east coast offered advantages over Boston’s 
periphery location to the north. At the dawn of major 
industrialization, New York was the hub of what emerged as a 
hub-and-spoke transport system stretching up and down the coast 
and inland. Moreover, given New York’s initial transport cost 
advantages at the time and its slightly larger population, the city 
benefited from a noticeable “home-market effect,” as described in 
the recent economic-geography literature. For industries 
exhibiting scale economies, a larger home market becomes a 
source of local demand that helps escalate local production scale.
Glaeser describes how these advantages helped New York 
become America’s center for manufacturing in the sugar, 
garment, and publishing industries well into the twentieth 
century. Even today, New York’s presence in two of these 
industries continues, evidenced by a high concentration of 
firms engaged in the haute-couture fashion and upscale 
magazine publishing industries. For publishing, New York’s 
initial advantage was its high-volume port connections with 
England, allowing the city to receive most first copies of new 
books published there. New York publishers could then pirate 
versions of these books for sale in the city’s local market and the 
rest of the country. As for pirating, it had none of those Puritan 
scruples slowing down commerce.
The author also describes the waves of immigration from 
Europe to New York, which swelled the city’s population and 
helped meet the demand for workers in the factories and 
centers of commerce. The reason why so many immigrants 
chose to stay in New York, however, is not fully explained; 
Glaeser contends that they “did not want to spend the time and 
money to travel further.” While it is plausible to believe that an 
immigrant who had traveled for months would be tempted to 
stop where the boat dropped him off, one could argue that he 
would only stay for an extended time if New York’s advantages 
made doing so attractive. Besides a strong labor market 
demand, New York City offered immigrants ethnic 
neighborhoods. Each neighborhood had a network of contacts 
to aid in finding housing and jobs. These rich and colorful 
neighborhoods and networks are well described in historical 
accounts as well as in the literature set in New York. The 
J. Vernon Henderson
The views expressed are those of the author and do not necessarily reflect the 
position of the Federal Reserve Bank of New York or the Federal Reserve 
System.
Commentary
J. Vernon Henderson is the Eastman Professor of Political Economy
at Brown University.
<j_henderson@brown.edu>
T26 Commentary
richness of the city’s dense neighborhoods is a theme that 
continues into the modern era.
Glaeser’s discussion of the modern era focuses on New York 
City as a financial capital where face-to-face contact and 
immediacy of information are critical. The point he misses is 
that this immediacy of information and ability to make face-to-
face contact exist in other industries as well, especially those 
where the creative side is critical. The table shows some of the 
major industries in New York. For each industry, the location 
quotient is given—the ratio of New York’s (Manhattan 
County’s) share of national employment to its share of total 
national private employment. For example, for 
headquarters, the location quotient is 1.6, that is, New 
York’s 3 percent share of headquarters employment divided 
by its 1.83 percent share of all national employment.
The table reveals that with the exception of FIRE (finance, 
insurance, and real estate), New York is not really a headquarters 
capital—its share of national headquarters employment (and 
its share of headquarters establishments) is only modestly 
above its share of general employment. The literature asserting 
that the city’s economic base is driven by headquarters is 
misguided. What New York does have is finance, as emphasized by 
Glaeser, and services, such as advertising. New York is by far the 
nation’s leading advertising agency city, with an even greater 
concentration of sales than employment. New York City is also a 
center for the arts. These activities have two key features: first, they 
are New York’s leading exports; second, the creative activities such 
as advertising, theater, and fashion are located in dense 
neighborhoods, where people in these businesses interact at the 
neighborhood level. New York’s success today is based in large 
part on its dense commercial neighborhoods, where face-to-face 
meetings and the exchange of information are essential.
Consider advertising. New York has more than 1,000 
advertising agencies. These agencies are clustered throughout 
southern Manhattan, although some clusters remain on or 
near Madison Avenue. For these agencies, networking with 
others in the creative design of ad campaigns is critical. 
Networking can be formal, such as asking another agency to 
contribute work for a campaign, or informal, such as 
exchanging ideas over coffee or lunch.
The key questions are why advertisers are so concentrated in 
New York and what role New York’s neighborhoods play. We do 
not know all the answers, but several things are apparent. One 
attraction of New York is its “buzz”—a great labor market of 
young, creative, and ambitious people. For advertisers, the people 
they sell to—broadcasters—are there as well. But what New York 
also offers is an array of dense advertising agency neighborhoods 
from which to choose. Arzaghi and Henderson (2005) uncover 
two fascinating aspects of these neighborhoods. The implied 
benefits of having more neighbors nearby dissipate over space 
incredibly quickly. The authors find strong positive effects of 
having more neighbors within 500 meters, some between 500 and 
750 meters, but none beyond 750 meters. Clusters of advertising 
agencies on one side of Manhattan do not network with agencies 
on the other side. What are firms willing to pay to be at the center 
of the action of a large cluster of agencies rather than isolated on 
the fringes? In 1992, the average monthly rent for Class A office 
space in southern Manhattan was $28 per square foot. The typical 
advertising agency was willing to pay $10 more per square foot per 
month for an increase of up to 50 neighbors nearby, which is close 
to the maximum number of neighbors in any one census tract. But 
then who pays the higher rent and locates in the dense clusters, and 
who operates more in isolation?
Arzaghi and Henderson find spatial separation in the local 
market. The highest-quality firms are the ones willing to pay 
the most to be at the center of big clusters, while lower quality 
firms operate on the fringes. Agencies in New York move 
within the city, with new firms spinning off from old ones, on 
an ongoing basis. For example, a new agency can set up on the 
fringes of Manhattan, develop its talent and potential, and 
move to the center of a large cluster where it pays higher rent. 
Some employees will then spin off their own firm and move to 
another cluster, and so on.
Location Quotients of Selected Major Industries
in New York
Industry 1997 Quotient
Headquarters  1.6 
FIRE headquarters 5.5
Financial services 6.4
Securities brokers 13.4
Business services 4.1
Advertising 8.0
Arts 3.8+
Source: Aarland et al. (2005).
Notes: The location quotient is defined as New York’s (Manhattan 
County’s) share of national employment in industry x divided by its 
share of total national employment. The numerator of the arts quotient 
excludes arts employment in the twelfth and fifteenth congressional
districts. FIRE is finance, insurance, and real estate. The arts category 
includes performing arts, publishing, museums, and broadcasting.FRBNY Economic Policy Review / December 2005 27
Part of the lifeblood of New York City is its vibrant 
neighborhoods and dense centers of activity. A century or two 
ago, part of this vitality was manifested by waves of immigrants 
who clustered in the networks of their own ethnic neighbor-
hoods. Today, some of the city’s vitality is manifested by the 
different clusters of advertising agencies, fashion designers, and 
artists scattered throughout New York. As long as those 
individuals engaged in certain creative commercial activities 
require face-to-face networking, New York will offer the dense, 
vibrant neighborhoods that can help them to succeed.References
28 Commentary 
Aarland, K., J. Davis, J. V. Henderson, and Y. Ono. 2005. “Spatial 
Organization of Firms.” Federal Reserve Bank of Chicago 
Working Paper no. 2003-30. Revised May 2005.
Arzaghi, M., and J. V. Henderson. 2005. “Networking Off Madison 
Avenue.” Brown University working paper, March. Available at 
<http://www.econ.brown.edu/faculty/henderson/madison.pdf>.
The views expressed are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York 
or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or implied, as to the 
accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any information contained in 
documents produced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever.

Spatial Organization of Firms.” Federal Reserve Bank of Chicago Working Paper no. 2003-30. Revised

Commentary on "Urban colossus: why is New York America's largest city?"

http://www.newyorkfed.org/research/epr/05v11n2/0512hend.pdf

Commentary on "Urban colossus: why is New York America's largest city?"

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