The New Geography of Jobs

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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

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