Split Decision: Econ professor Fred Smith Says Amazon Followed Skilled Workforce To New York City and Northern Virginia

Today, Amazon.com announced that the internet retailer's long search for a second headquarters, or HQ2, had come to an end. In a surprise, Amazon decided to build two headquarters in Long Island City in Queens New York City and the other in the Crystal City area of Arlington, Virginia, outside of Washington, D.C. The announcement ended a year-long bidding process as hundreds of cities competed for the tens of thousands of jobs and expected $5 billion investment Amazon is expected to bring.

We talked to Economics professor and urban econ expert Fred Smith who has followed the HQ2 process closely.

Are you surprised that Amazon decided to split HQ2 among two cities?
I'm a bit surprised, but it's a smart move for Amazon. They are establishing a presence in the political and economic capitals of the United States. It's hard to argue with those choices.

Was the original scope of a single second headquarters simply out of reach for any single city?
No, I don't think so. I think it came down to Amazon wanting a presence in New York and Washington. Atlanta (to name one finalist) could certainly have handled the impact that Amazon's HQ2 would have had on the city. There would have been challenges if HQ2 had been placed in a single city, but a metropolitan area like Atlanta would have been able to overcome those challenges.

Why NYC and DC? Both are already expensive, crowded cities. Amazon could certainly have done this in cheaper, more flexible locales, right?
NYC and Northern Virginia (Washington, DC) are certainly high cost-of-living choices, and Amazon could have established HQ2 in a city with a lower cost of living. However, cost of living doesn't seem to have been a major concern for Amazon and I would argue that it shouldn't have been. It is important to remember that Amazon will be looking to attract a highly skilled workforce. These jobs will pay well, and the workers who will fill these positions are likely to be attracted to the world-class amenities that these cities offer.

Moreover, urban economists would tell you that the "crowded" nature of these cities is likely to be a good thing for Amazon. These labor markets will be full of high-quality job candidates for Amazon, and Amazon should have a relatively easy time finding workers who are excellent fits for their job openings.

As for the "cost" to Amazon of building in these two locations, it remains to be seen what the "true cost" will be. We don't yet know what kind of incentives Amazon has been offered. They may eventually enjoy tax breaks, subsidies for infrastructure construction, or other "perks" that will make it cheaper to build and operate in these two locations than it might otherwise appear.

Why do you think AMZ passed on Raleigh, the only finalist city in the Carolinas?
Having three fantastic research universities in close proximity to each other was surely very appealing, but I'm not sure that Raleigh was ever in the running. Shortly after the list of 20 finalists was announced, speculation centered on a handful of finalists that were viewed as being the most likely locations for HQ2. Atlanta, the Washington metropolitan area, and the New York metropolitan area were viewed as especially strong contenders. You heard very little buzz about some of the smaller cities on the list—Pittsburgh, Columbus, Indianapolis, Nashville, and Raleigh. These are great cities, but it is hard to argue that they have the world-class amenities Washington and New York have.

What do the other 237 cities do now?
Although many cities kept their HQ2 bids under wraps, enough information has been released from cities like Newark that cities will use the bids as signaling opportunities. Basically, the work that went into the bids won't go unused; other companies will be looking for new homes and friendly markets. The bids show very clearly just how far some cities are willing to go to attract business.

We all know that HQ2 is expected to bring jobs and investments to the winning city. What unexpected effects might HQ2 have on its new home?
I'm very interested to see how the new headquarters will impact the higher-ed institutions nearby. Amazon will instantly redefine the job market in its new home and it will be looking for people with specific technology-related skills that math and computer science departments produce. So, the big institutions near HQ2 will have an extraordinary opportunity to work with Amazon to meet the company's needs and that may lead to new funding and partnership opportunities.

The length of Amazon's search opened the door to some relatively contrarian looks at the "Amazon effect," as people pointed to skyrocketing rent and traffic congestion in Seattle as the flip side of Amazon's growth. How should the winning cities handle the stresses AMZ will bring?
First, I think any city would choose high rents and traffic brought on by growth instead of stagnation. Those are indeed problems but they are the kind of problems any city wants to face.

That said, these investments have the power to transform a city. Can the new headquarters serve as an integrator, promoting new opportunity for demographic overlap? By building in an area with high accessibility and diverse populations, like Queens and to a lesser extent, Northern Virginia, Amazon is positioning itself well to become a part of the fabric of both communities.  

Jay Pfeifer
japfeifer@davidson.edu
704-894-2920