Just as megacities have characteristics that distinguish them from other urban areas, there are several distinguishing features of megacity labor markets. First, the urban scale involved means that the tradeoff between scale economies and congestion costs is different than for smaller urban areas. Agglomeration economies create opportunities for improved productivity and for less costly information dissemination per capita, but congestion costs are also likely to be greater. The latter may weaken, especially in higher-income megacities, as access to the World Wide Web and other computer sources improves, although the extent to which telecommunications can substitute for transportation is controversial (see the discussion later in this paper).
Second, the composition of economic activity in megacities is distinctive in a number of ways, permitting easier comparisons across megacities than among different locations (e.g., urban and rural areas) within countries. The most distinctive characteristic of economic activity in most megacities is a large quaternary (i.e., high-order financial and service) sector, often global in scope. In addition, the informal sector represents a large share of employment, though typically not as large a share as in smaller cities; the manufacturing sector may be more or less important than in other cities, usually depending on the type of development strategy (e.g., import substitution or export orientation) and when it was adopted; and the government sector is substantial in the majority of cases where the megacity is the national capital.
Third, megacities are more open to global influences than are many other urban areas (although some natural resource locations, such as mining towns, are even more influenced by global considerations). The increasing globalization of recent years has made the world’s megacities much more interdependent than before, and international capital mobility and the ease of information connectivity have resulted in a set of megacities competing for internationally footloose economic activities. There will be winners and losers in this competition, and labor market efficiency can help determine the outcome.
Fourth, megacities have a mix of advantages and disadvantages that affect their competitiveness and the demand for labor:
A better-educated, better-trained, and more diverse labor pool, but more expensive labor costs
More access to sources of capital, with favorable influences on the labor market, given the complementarity of factors of production
A concentration of educational and training facilities, increasing the potential for human resource investments
Much higher urban absorption costs per capita (i.e., the capital costs of accommodating people in the megacity, including housing, infrastructure, and job creation) than in other urban areas and up to six times higher than in rural