Where are the 'job creators'? A Labor Day conversation
UC Berkeley NewsCenter, August 30, 2012
By Kathleen Maclay
BERKELEY — In recognition of Labor Day, and recent polls showing jobs as Americans' top concern, UC Berkeley economist Enrico Moretti, author of The New Geography of Jobs, shares his thoughts on employment, salaries, tax cuts and what he calls a "new geography of inequality."
Q: In your book, you examine long-range employment trends in the U.S. What lies ahead?
A: If you look at the economic map of America today, you see three increasingly different countries. On one hand, there are cities like Seattle, San Francisco, Boston, Raleigh-Durham or Austin, with a strong innovation-based economy and workers who are among the best educated, most creative and best paid on the planet. At the other extreme are former manufacturing centers like Detroit, Flint or Cleveland, where jobs and salaries are plummeting. In the middle, there is the rest of America, apparently undecided on which direction to take.
The difference between the three Americas was small in the 1980s, but It is likely to keep growing and possibly accelerate in coming years, as more and more good jobs are concentrated in cities with large numbers of highly educated workers and innovative employers. I call this the "Great Divergence."
Q: You also say salary depends more on where you live than what you do. Can you explain?
A: In 1980, a worker with a high school education in a city like Austin, Texas, was making slightly less than a worker with a high school education in a city like Flint, Michigan. Today, the former makes 60 percent more. The difference for workers with a college education in the two cities is even larger — and keeps growing with every year. It is not that workers in Austin are smarter or work longer. The entire productive ecosystem is different.
What happened to Austin and Flint is not an accident, but it is representative of a long-run trend that makes the city where you live more and more important. Forty years ago, America's rich areas were manufacturing centers with an abundance of physical capital. Workers were well-paid because they had access to the best machines and physical infrastructure. Today, human capital is the best predictor of a city's success. A large number of highly-educated workers in a city is associated with more creativity and a better ability to invent new ways of working.
Research shows that cities with many college-educated workers tend to develop an innovation-based economy, which attracts even more well-educated workers, further reinforcing their edge. By contrast, cities with few well-educated workers miss out on the growth of high tech, further reducing their appeal. These self-reinforcing dynamics magnify the differences between winners and losers.
Q: Why do lower-educated workers fare better in cities with more skilled workers?
A: My research shows that lower-skilled workers tend to be more productive and earn higher wages in cities with a large fraction of college graduates than in cities with a small fraction of college graduates. In particular, the earnings of a worker with a high school education rise by about 7 percent as the share of college graduates in his city increases by 10 percent.
For example, a worker with a high school education who moves from a city like Miami, Santa Barbara or Salt Lake City, where 30 percent of the population are college graduates, to a city like Denver or Lincoln, Nebraska, where 40 percent of residents are college graduates, can expect a raise of $8,250 — just for moving. This relationship is even stronger for high school dropouts.
This is remarkable and helps explain the vast differences in the economic success of various cities. Essentially, education has a private benefit, in the form of higher earnings for the individual who acquires it, and an additional benefit for others who live in the same city. Since college graduates are not compensated for the benefit that they bestow on everyone around them, there are fewer college graduates than we as a society would ideally like. To put it differently, if the salary of college graduates reflected its full social value, more people would go to college.
Q: You foresee a "new geography of inequality." What do you mean?
A: Our "Great Divergence" is caused by economic forces, but it is having profound effects outside the economics. The labor market differences between the three Americas impact life expectancy, divorce rates, political participation, crime rates and even charitable contributions. The average man in Fairfax, Virginia, lives 15 years longer than the average man in Baltimore, Maryland, 60 miles away. This difference is staggering, and it is much larger than the difference between the United States as a whole and in some poor countries. The difference has been growing for three decades – driven by increasing differences in education and income levels.
Or consider divorce, for which bad economic conditions are a known trigger. The American city with the highest incidence is Flint, Michigan, where 27 percent of all adults report divorcing at least once. With a local economy ravaged by the closure of auto manufacturing plants, declining wages and a disappearing middle class, Flint has long been in a state of economic decline. Toledo, Ohio, another former manufacturing center, is not too far down in the divorce rankings. At the other end of the spectrum are cities like Provo, Utah, in the heart of Mormon country, where the divorce rate is low for religious reasons; State College, Pennsylvania, a university town; and Stamford, Connecticut, the best-educated and most prosperous metropolitan area in the country. San Jose is also near the bottom. The difference in divorce rates between communities is pronounced, and this gap is widening.
America's increased socioeconomic segregation also affects the political process in complex and far-reaching ways. Geographical segregation increases the number of people who live surrounded by others like them, and this is likely to reinforce extreme political attitudes. The difference among communities is not just who people vote for, but also how much people vote and, therefore, how politically influential they are. In the 2008 presidential election, the 10 counties with the highest voter turnout cast four times as many votes per capita as the 10 counties with the lowest voter turnout. It is as if each resident in the top group were given four ballots, while each resident in the bottom group were given only one.
Q: How can regions that fare poorly in terms of jobs perform better?
A: Struggling communities all across America are trying to reinvent themselves and attract good jobs. Ever since Harvard business professor Michael Porter popularized the catchy concept of cluster building in the early 1990s, cities and states have been trying to engineer industrial clusters through a variety of public policy measures.
One fundamental challenge is that, for these policies to be successful, local policymakers must to be able to pick promising companies to invest in. They need to be a little like venture capitalists. Should a county spend all its money attracting a new nanotech lab, or should it go for Amazon's latest computer farm? A solar-panel R&D facility or a biotech lab? Even professional venture capitalists have a hard time predicting which industries and companies will succeed. For mayors of struggling municipalities, this challenge can prove insurmountable.
Indeed, looking at the map of America's major industrial clusters, it is hard to find an example of one that was spawned by a deliberate government policy. No local politician set out to create Silicon Valley. The success of innovation clusters in Seattle, Boston, San Diego and Raleigh had more to do with the success of an original anchor company than with economic policy. The same is true for smaller, more specialized clusters, arguably a more realistic goal for struggling communities. Consider Portland, Oregon; Boise, Idaho; and Kansas City, Kansas, three small high-tech hubs anchored by semiconductors, general high tech, and animal health and nutrition science, respectively. Although small, these are dynamic centers: Portland and Boise produce almost as many patents per capita as Boston. None of these hubs was planned. Little of the high-tech presence in these cities resulted from aggressive recruitment of companies by local governments.
Local governments can do less to revitalize struggling communities than most voters realize and mayors would like to admit. A rare example of a successful revitalization program is the Empowerment Zone, created in 1993 to provide employment tax subsidies and redevelopment funds to distressed urban areas. The program zeroed in on impoverished neighborhoods in Atlanta, Baltimore, Chicago, Detroit, New York City, Philadelphia, Los Angeles and Cleveland. The subsidies financed jobs, training programs, business assistance, infrastructure investment and neighborhood development. Research shows that the program worked because it stimulated large amounts of private investment.
Q: You write a lot about the importance of high tech and innovation for American jobs. What about the many people who can't work at Google or Apple?
A: The average American will never work for Google or Apple. But the rise of the high-tech sector matters to all of us. One reason is that attracting an Internet company or a biotech company to a city results in significant job gains for workers in the local service sector – in occupations like waiters, carpenters, doctors and teachers. This multiplier effect is surprisingly large. For each new high-tech job in a city, five more jobs are created there. Apple employs 13,000 workers in Cupertino, California, but generates almost 70,000 more service jobs in the region. So Apple's main effect is outside high tech. A high-tech job is so much more than a single job.
Most sectors of our economy have a multiplier effect, but the innovation sector has three times that of traditional manufacturing. Policymakers need to know that that the best way for a city to generate jobs for less-skilled workers is to attract innovative companies that hire highly-skilled workers.
Q: Both presidential candidates pledge to restore the U.S. manufacturing industry. Some economists say that's essential; others say it's impossible. What's your take?
A: The last two years have been good years for manufacturing employment, but they are the exception. The previous two years were terrible. For the past three decades – not just during recessions – we have been losing an average of 370,000 blue-collar jobs per year. This trend reflects the globalization of the goods-producing sector and adoption of new technologies that increasingly automate production of physical goods. For example, for each car produced, General Motors today needs 70 percent fewer workers than in 1950. American manufacturing companies today produce more goods than in 1980, but they only need a fraction of the workers.
Even when some manufacturing survives, it is very different from the traditional blue-collar positions for workers with limited schooling that politicians like to talk about. For example, while production jobs have plummeted, the number of engineers with advanced degrees in manufacturing companies has doubled.
These trends are unlikely to change significantly. The jobs of the future are unlikely to come from the traditional manufacturing sector. By contrast, the innovation sector is growing in terms of jobs and salaries. Jobs in the Internet sector have been growing 200 times faster than the rest of the labor market. For all the talk about outsourcing, software is also growing. And it is not just high tech: scientific research and development, pharmaceuticals, digital entertainment, parts of marketing and even finance are creating jobs.
Q: Would ending the Bush-era tax cuts and/or implementing higher taxes on the super wealthy negatively affect "job creators"?
A: Probably yes. Economists disagree on the exact magnitude of the effect of taxes on economic activity and job creation. It is a difficult question to answer with existing data. But in general, higher taxes do translate into lower economic growth and lower job creation in the long run. Liberals prefer to downplay this fact, but it is a mistake. Taxes do matter at the federal level, and probably even more at the state level. California, for example, has high taxes on income compared to other states, which does not help attract and retain entrepreneurs and other job creators relative to other states, like Washington or Texas.