33 theoretically that the supply-side benefits of co-location should be small for UNT firms. Likewise, Glaeser and Resseger (2010) find for the United States that AEs are strong in cities with higher levels of skill and nonexistent in less skilled metropolitan areas. Lastly, Burger et al. (2022, Panel H of Table 2) use firm-level data for 649 metro areas to estimate AEs for 98 economies. labor on urban developing They regress log productivity log density, finding an average AE of 10%-15%. They then interact density with dummies proxying for whether the firm belongs to the tradable sector, finding AEs that are twice higher than in the non-tradable sector. Congestion forces might also be stronger for the UNT sector than for the UT sector.<sup>51</sup> Finally, as shown by the trade literature, international trade affects endogenous innovation (Melitz and Redding, 2021). As such, having higher shares of firms and workers in UT rather than UNT may also promote growth.

Just like production cities can evolve into consumption cities through deindustrialization, consumption cities could still evolve into production cities in the future. We showed that they do not necessarily lack human capital, but other constraints that we do not observe constrain urban such constraints include may productivity growth; institutions, control of corruption, and investment climate, among others. There are many examples of successful transitions. The United Arab Emirates’ largest cities – Dubai and Abu Dhabi – have uncontestably become production cities by expanding FIRE. Likewise, the growth of Malaysia’s manufacturing reshaped the economic structure of the Kuala Lumpur metro area. However, since understanding what distinguishes dynamic consumption cities, which evolve into production cities, from stagnant ones is beyond the scope of this paper, we leave this question for future research.<sup>52</sup>

# **REFERENCES**

Ades, Alberto F and Edward L Glaeser, “Trade and circuses: explaining urban giants,” _The Quarterly Journal of Economics_ , 1995, _110_ (1), 195–227.

51The UT sector (MFG & FIRE) is more formal than the UNT sector (verified using both IPUMS and I2D2 data; not shown). As such, it may have smaller congestion externalities on other sectors and the city as a whole. Akbar et al. (2018) find that the roads of Indian cities are particularly congested in the middle of the day when few workers are commuting. Indeed, the (more informal) wholesale and retail trade sector (incl. roadside vendors) often causes traffic congestion. Burger et al. (2022, Table 4) find that the AEs of UT firms are reduced to a lower degree by congestion than the AEs of UNT firms, possibly because UNT firms are more dependent on local consumer markets, while UT firms rely less on local markets and employ workers who are better able to locate close to their workplaces and/or afford faster transport services.

> 52Nonetheless, Venables (2017) shows theoretically that a city is unlikely to produce UTs if it faces high urban and hinterland demand for UNTs. That is especially the case with increasing returns in tradable production that make cities specialized in UNT globally uncompetitive for the production of UTs.