Beneath the Surface

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Enrico Moretti makes a good case that where a worker lives still matters, and that job opportunities are unevenly distributed across metropolitan areas of the United States. The best jobs in the innovation sector of the economy are to be found primarily in a small number of thriving metropolitan areas.

I find Moretti less convincing when he addresses more general economic questions, such as how many good jobs the new economy can create. He presents a rather rosy view of job creation that would be contested by other authors.

How much opportunity?

Moretti cites the spectacular growth rates of certain kinds of jobs, such as in software, scientific research and development, and pharmaceuticals. But even in these areas, the absolute numbers of jobs are not as impressive as the growth curves (which tend to rise steeply when they are starting from close to zero). Moretti says that the innovation sector can be the main engine of economic growth without providing a majority of the jobs, but one would still like to know how much it can grow beyond its estimated 10% of jobs today, considering that manufacturing jobs used to employ 30% of the labor force.

Moretti asserts that “2.6 jobs are typically created for every one destroyed,” but he doesn’t suggest a time frame for that process or explain why job creation has been so sluggish and unemployment so high during this particular transition.

Consistent with his rosy view of job creation, Moretti regards the concentration of good jobs in certain metropolitan areas as a temporary state of affairs:

Just like people, industries have life cycles. When they are infants, they tend to be dispersed among many small producers spread all over the map. During their formative years, when they are young and at the peak of their innovative potential, they tend to concentrate to harness the power of clusters. When they are old and their products become mature, they tend to disperse again and locate where costs are low. Thus it is not surprising that the innovation sector— the part of the economy that is now going through its formative years— is concentrated in a handful of cities.

Cities that have fallen behind can catch up by means of a “big push: a coordinated policy that breaks the impasse and simultaneously brings skilled workers, employers, and specialized business services to a new location.” Apparently this is only theory, however, since “looking at the map of America’s major innovation clusters, it is hard to find an example of one that was spawned by a big push.”

I would suggest that the jury is still out on whether the information society can create as many well-paid, full-time jobs as the manufacturing society in its heyday. The last book I reviewed, Jeremy Rifkin’s The Zero Marginal Cost Society, argues that it cannot. Rifkin believes that the information age is calling into question the whole idea of the paid job as defined by capitalism. The fact that knowledge is so easily shared may place a limitation on how much it will be bought and sold in the marketplace. When people can access the ideas of the most renowned scholars on the Internet for free, how many intellectuals will be paid to think?

I accept the assumption that as machines do more of the routine work, people will be liberated to engage in more creative activity. The question is how much of that creative activity will take the form of paid work. Maybe we will do less paid work in the aggregate, but distribute what paid work there is more evenly.

Why inequality?

Moretti’s take on inequality is consistent with his belief that the demand for qualified employees is ample, and the problem is on the supply side. In other words, the system is a meritocracy, with low pay and unemployment resulting from inferior qualifications. The way to remedy that is to invest more in education and/or admit more educated immigrants. (He notes that highly skilled immigrants can be job creators rather than job stealers because of their contribution to innovation and its economic multiplier effects.)

This meritocratic view is contested by other economists, notably Thomas Piketty in Capital in the Twenty-First Century. (See my review, especially Part 3.) In his view, the distribution of income depends not just on merit but on institutional factors, such as the organization and bargaining power of unions and the influence of executives over their own compensation. The widening pay gap between executives and other workers cannot be accounted for by a widening education gap. The distribution of income also depends on the share of national income going to owners of capital, which has been rising recently (from a range of 15-25% in rich countries in 1970 to a range of 25-30% recently). This happens when the return on capital remains high although the rate of general economic growth has slowed. Getting ahead through wage growth becomes harder compared to profiting from accumulated wealth.

Moretti makes a contribution to economic geography, but his general view of the job market never gets beyond the conventional wisdom to address the more interesting controversies.

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Enrico Moretti. 2013. The New Geography of Jobs. Boston: Houghton Mifflin.

Economist Enrico Moretti has a surprise for those who think that advanced means of communication and transportation have rendered the geographic location of work unimportant. The world is so connected, so the theory goes, that the same activity can be carried on almost anywhere. A factory can be located in Birmingham or Bangkok, and a software designer can work in a downtown office or a rural cabin. Moretti, on the other hand, contends that location matters, that the innovative work that drives today’s economy clusters in geographic centers of innovation. As a result, “Your salary depends more on where you live than on your resume.”

Moretti starts his book with the story of a young engineer who made a very consequential move in 1969. Seeking a more peaceful environment, he moved from Menlo Park in Silicon Valley to Visalia in a more agricultural area. In those days, the two places were statistically rather similar, but after forty years of change, they represent the geographic diversification Moretti is discussing. While Menlo Park exemplifies the thriving, high-tech, high-education center of innovation, “Visalia has the second lowest percentage of college-educated workers in the country, almost no residents with a postgraduate degree, and one of the lowest average salaries in America,” along with a high crime rate.

This is not an isolated phenomenon. Moretti calls it the “Great Divergence”:

A handful of cities with the “ right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages. This divide— I will call it the Great Divergence— has its origins in the 1980s, when American cities started to be increasingly defined by their residents’ levels of education.

Moretti acknowledges that some forms of convergence are occurring as well. As poorer countries develop, many of them are becoming more similar to richer countries. Traditionally poorer regions such as the American South are also converging with other regions in many respects. But within countries and regions, some cities–such as Austin, Atlanta, Dallas, Durham and Houston in the South–are emerging as the affluent and educated centers of innovation, while others are being left behind.

From production to innovation

“Over the past half century, the United States has shifted from an economy centered on producing physical goods to one centered on innovation and knowledge.” Moretti notes that even in hi-tech areas such as computers, production jobs are declining, and job opportunities are mostly in the more professional, technical and managerial areas. We haven’t stopped making things–US manufacturing output is actually increasing, and locally made goods are often very fashionable–but manufacturing can no longer provide employment for tens of millions of people.

According to a study of companies in twelve industrialized countries, some firms are much more successful than others in finding a place in the new economy. The more successful ones “buy more computers, spend more on R & D, take out more patents, and update their management policies.” They don’t just produce what any number of other companies could produce; they lead in innovation, creating the jobs in what Moretti calls the “innovation sector.” He estimates that it currently includes only 10% of the jobs, but it is increasingly the “driver of our prosperity.” That’s because it is the major source of productivity gains, and it has a powerful multiplier effect that creates other jobs, especially in both professional and nonprofessional services. He calculates that five additional local jobs are created by each new high-tech job. Not only that, but the presence of many highly educated, highly paid workers in a metropolitan area boosts the productivity and wages of other workers in that area. As a result, even workers without college degrees are better off living in an area where many residents are well educated.

Geographic concentration

Why are the innovative companies and jobs clustered in a such a small number of metropolitan areas? A striking example is Seattle, which has benefitted greatly from Microsoft’s decision to move there from Albuquerque in 1979. The presence of one big hi-tech firm attracted others, such as Amazon, and had many other unforeseen consequences. For example, former employees of Microsoft have started 4,000 new businesses, most of them in the local area. Before the move, the percentage of college-educated workers in Seattle and Albuquerque differed by only 5%; today the difference is 45%!

Traditionally, the location of cities has depended on natural advantages such as harbors or access to natural resources. Since centers of innovation depend more on human capital, their location depends more on creative interactions among human beings. Once someone starts the creative ball rolling–a major university helps–then innovative activity feeds on itself in many ways. Moretti identifies three “forces of agglomeration” that foster the growth of an innovative center:

• Thick labor markets: A labor market that already contains a lot of highly educated labor attracts more employers who need that labor, and vice versa. The more specialized the skills needed, the harder it is to find them outside of a major innovation center.
• Specialized service providers: Innovative companies need specialized services such as “advertising, legal support, technical and management consulting, shipping and repair, and engineering support.” As those develop, they help create an entire “ecosystem” supporting innovation.
• Knowledge spillovers: New ideas foster other new ideas to create a stimulating cultural environment that benefits all. In that way, education has a “social return” that benefits many others besides the holder of a degree. Moretti notes that this is a strong reason for society to share the costs of education, since it shares the benefits.

In the United States today, Silicon Valley is the #1 innovation cluster, followed by Austin, Raleigh-Durham, and Boston. The ten metropolitan areas with the largest share of college-educated workers are Stamford (CT), Washington, Boston, Madison, San Jose, Ann Arbor, Raleigh-Durham, San-Francisco-Oakland, Fort Collins-Loveland (CO), and Seattle-Everett.

One downside to living is these areas is the cost of housing, which is driven up by the competition of well-paid workers for proximity to good jobs and schools. This is another factor maintaining the geographic divergence between areas with different educational levels. Today the educated are more mobile, since they have the money, skills, and information to go where the opportunities are. Less educated workers can also benefit from the higher wages of thriving metropolitan areas, but only if they can reside there in the first place.

The divergence of places extends to many aspects of public and private life. Metropolitan areas that differ in educational and income level also differ in average life expectancy, family stability, political participation and resources for charitable giving. For example, men in some poorer metropolitan areas in the U.S. have life expectancies comparable to those of poor countries.

Continued