The New Geography of Jobs

In 1979, Seattle and Albuquerque were comparable regions, in population, in reputation and industry.

That year, young Bill Gates and team moved their fledgling computer company Microsoft back home to Seattle — and that changed everything. A generation later, Albuquerque native Jeff Bezos decided to move his own early ecommerce company Amazon to Seattle because Microsoft built an ecosystem there. Today, Seattle is a top-tier innovation economy, by my news organization’s own measure, and Albuquerque isn’t even on the map.

Where once regional economies sought physical capital, they now pursue human capital, and there’s a flywheel effect for people even more than the agglomeration effects of industry. So argues the influential 2012 book The New Geography of Jobs, written by economist Enrico Moretti.

This matters because like manufacturing in the 20th century, the knowledge sector is the driver of the economy today. All those “tradable jobs” create all the non-tradable ones that follow. Put another way, if you lcoate a tech firm or manufacturing plant in a town, then a Walmart will follow — but not the other way. All those productive workers make everyone else more productive too, for three big reasons: complementarity, better technology and externalities.

Globalization was supposed to mean “the world was flat” Instead, geography matters even more. Below find my notes for future reference.

My notes:

• In 1969, Menlo Park and Visalia, California in looked somewhat similar to engineer David Breedlove, who turned down a job at Hewlett-Packard and moved to Visalia. Now wildly different places
• This Great Divergence started in 1980s about who has the right industries and who had the wrong ones
• “At the same time that American communities are desegregating racially, they are becoming more segregated in terms of schooling and earnings.”
• “More than traditional industries, the knowledge economy has an inherent tendency to geographical agglomeration. In this context, initial advantages matter, and the future depends heavily on the past. The success of a city fosters more success, as communities that can attract skilled workers and good jobs tend to attract even more. Communities that failed to attract skilled workers lose further ground.”
• Cyclical change vs secular change in an economy
• As Detroit on one hand has declined, Shenzhen has grown.”
• “Although jobs and local services constitute the vast majority of jobs, they are the effect, not the cause, of economic growth. One reason is that productivity and local services tends not to change much overtime. It takes the same amount of labor to cut your hair, wait on a table, drive a bus or teach math as it did 50 years ago.”
• His research: multiplier effect of a high tech job leads to 5 additional jobs in other parts of an economy, the largest multiplier effect — about three times more than manufacturing. (See below, I wrote about multiplier effects, and his numbers might be somewhat exaggerated but still true)

• “The best way for a city or state to generate jobs for less skilled workers as to attract high-tech companies that hire highly skilled ones.”
• Thomas Friedman’s 2005 book The World is Flat argued that geography didn’t matter anymore — but the opposite has proven true
• Detroit was the richest big U.S. city in 1950; American manufacturing employment reached in fall 1978 — 20 million Americans
• In 2012, half as many manufacturing jobs than in 1978
• Levi Strauss closed its San Francisco manufacturing plant in 2001
• Difference between the past driver of the economy (manufacturing) to now where manufacturing is boutique: it’s the result of the economy not the driver of it
• Low income Americans spend more on products built cheaply overseas where rich Americans spend more on services that take place here and so do not face global competition
• “One of the paradoxes of globalization is that the very people who have been hit the hardest in terms of jobs have gained more as consumers.”
• In 1817, David Ricardo introduced “comparative advantage”
• American manufacturing still exists but gone to big ticket items: airplanes and medical devices
• David Autor: Automation hit middle-skill routine jobs, leaving non routine jobs (customer service and labor at the lower-wage end, and innovation at high end)
• Intel CEO Andy Grove wrote in a 2010 Businessweek essay: “It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world.”
• Economist Tyler Cowen ‘s “great stagnation:” Twitter and Facebook won’t replace Ford and General Motors
• But Facebook and Amazon are platform companies where more people build companies on them (My note: more than Ford dealerships and GE suppliers?)
• Michelle Alexopolous: post WW2 technological innovations are misunderstood because of limited measures (This is a challenge to Robert Gordon’s Rise and Fall of American Growth)
• Obama’s manufacturing czar said if a town brings a manufacturing plant a Walmart follows but not in reverse — even more true for high tech. Gene Sperling’s quote from 2012 in Wall Street Journal: “If an auto plant opens up, a Wal-Mart can be expected to follow,” but that opening a Wal-Mart doesn’t bring an auto plant.
• High tech pays well and clusters more
• Tradable jobs lift everyone up (cause); non tradable jobs are the effect
• Innovation may be only 10% of jobs but manufacturing at peak was only 30%; the economic engine always creates more by local effects
• High tech jobs equals 5 follow on jobs (2 professionals like doctor and 3 blue collar like barista and carpenter ) — although see chart above to note discrepancies on these totals
• “In the same way that tractors and combines replaced farmworkers and robots replaced factory workers, powerful computers, and better software, will someday do the work of digital artists.”
• French internet sector analysis: 1.2m jobs created (software devs and ecommerce delivery), destroyed 500, netting 700k
• The estimate has been 2.6 jobs are created for every one destroyed — but they’ve concentrated in certain regions
• In the 20th century, you collect physical capital but now it human capital
• “In most innovative industries, the main production costs are the fixed costs of research and development. The variable costs of producing are typically low.”
• Matthew Slaughter in 2010: for every one American job outsourced, nearly two are created in the United States
• Balasubramanian and Sivadasan in 2011: Of data from 48k companies, patents lead to growth
• John van Reenen: salaries peak three years after product release
• Seattle and Albuquerque were roughly similar in 1979, then Microsoft moved back home — that changed everything (because Bezos who was an Albuquerque native actually came to Seattle because Microsoft built an ecosystem)
• Multiple equilibria mean 40k Microsoft jobs create many more
• Update his chart on the regions with highest and lowest share college degrees
• He notes high school degree holders in educated regions often earn more than college degree holders in less educated regions (((Even with cost of living adjustment))
• “Wage differences in the United States have as much to do with geography as they have to do with social class.”
• “The earnings of a worker with a high school education rise by about 7% as the share of college graduates in his city increases by 10%”
• “There are three reasons for the relationship between the number of skilled workers in a city in the wages of their unskilled neighbors. First skilled and unskilled workers complement each other: an increase in the former raises the productivity of the latter. In the same way that working with better machines increases a worker productivity, working with better educated colleagues increases the productivity of an unskilled worker. Second, a better-educated labor force facilitates the adoption of newer and better technologies by local employers. Third an increase in the overall level of human capital in a city generates what economist call human capital externalities” ((Three simply: complementarity, better technology and externalities)))
• “Knowledge spillovers”
• Robert Lucas argued in a 1988 paper that these spillovers could explain rich and poor country gap
• Authors 2004 paper: Increase in college grads only marginally helps other college grads, but 4 times the bump for high school grads and 5 times for high school dropouts
• Jane Jacobs called “new work” which Jeffrey Lin has studied: 5-8% of jobs are in new work at any given time
• Scott Carell US Air Force data on social multiplier effect of health and diet
• Jason Fletchers shows social impact of smoking: 10% increase in social network smoking increases by three percent likelihood of smoking
• Moving to Opportunity program 1994-1998
• Divorce has economic conditions; Flint had highest rates of divorce (28% of adults people there reported divorce)
• Bill Bishop’s 2008 book The Big Sort is an example of further divide: author notes that low turnout counties are becoming lower turnout and vice versa
• Author, David card and Kevin Hallock : corporate HQ ties to $10m in additional public contributions: for every $1,000 in market value for that company, $1 goes to nonprofits (via individual contributions and less direct corporate contributions) — and many services are being done by nonprofit
• Walmart chose Brisbane California for ecommerce division after hiring limitations in Arkansas — now in San Bruno
• It’s not just more devs or more jobs, because both can’t be true. Labor pools are actually roughly in similar balance across the country most times — but in places like San Francisco the software developer talent is “thicker” (many sellers and many buyers).
• “For example in the United States, the average wage in labor markets with over 1 million workers is a third higher than the average wage in markets of 250,000 workers or less. This remains true even after worker seniority, occupation and demographics are held constant. Remarkably this difference is now 50% larger than it was in the 1970s. Market size is particularly important for workers with highly specialized skills, such as high-tech engineers, scientists, mathematicians, designers and doctors.”
• Assortive mating
• Half of companies report spouses employment as reason for not accepting a job (with relocation)
• Costa and Kahn: power couples accelerate agglomeration effects
• VC 20 minute rule
• I/O ventures required startups to move to SF
• Adam Jaffe et al: “home bias” of knowledge diffusion in patent citations
• Excluding same company citations, a patent is twice as likely to cite a local patent than others (0-25 miles; declines 25-100 miles and practically disappears 100 miles father
• Path dependency for regions; density of regions below
• Steve Keller: Silicon Valley today may look like Detroit for 1940s/1950: must keep adapting
• Half of all Americans change address ever 5 years, far higher than Europe
• College graduates move more and have lower unemployment than different educators levels — lack of mobility is part of the reason
• Author recommends mobility vouchers as part of unemployment insurance to move from high unemployment to low (a la trade adjustment assistance)
• John f Kain: spatial mismatch (network and information gaps); followed in 1987 book Truly Disadvantaged by William Julius Wilson
• Author argues now the difference is across cities
• John Bound: states that graduate lots of college students (Michigan and Ohio) don’t keep them so they subsidize innovation cities — author argues federal government should subsidize education instead
• The economic gains of innovation sector accrue not only through labor market but also housing market — homeowners benefit by labor and housing prices rising (renters depend on whether housing or wages increase faster)
• Ed Glaser : more restrictive housing gets more expensive housing
• Nordstrom family stuck to downtown core Seattle and later leaders invested in housing more than restrictive SF and Boston (which got more expensive housing)
• San Diego’s Torrey Pines Road in La Jolla was not destined to be associated with biotech; Biogen initially left Cambridge, which was hostile to their “Frankenstein factories” for Switzerland .. universities not the whole reason
• Lynne Zucker and Michael Darby argued the reason is academic stars , those who happen to specialize in a sub field when it pops off — more important than venture capital or government funding
• In 1913, movie industry in New York, with outpost in Chicago, Philadelphia, Jacksonville, Santa Barbara and Los Angeles. By 1919, 80% of American movies were made in California. Allen Scott argues it was 1915 and the (racist) blockbuster Birth of a Nation and the star director DW Griffith
• These innovation industry locations are different than manufacturing that was tied to physical footprints and geography
• (William Shockley is that star for Silicon Valley)
• Michael Porter in 1990s popularized cluster building, these plac- based policies are a kind of welfare for cities
• How to redevelop: demand side (lure employers first), or supply side (lure the workers first)
• Richard Florida popularized the supply side, chasing the creative class with the arts
• In 2003, Michigan launched its Cool Cities campaign including Flint and Ford Founding spent $100m on arts as economic development
• Berlin’s mayor called his city “poor but sexy”
• Authors research: land grant universities boosted college graduates and higher wages in that city — even tho college grads are highly mobile in United States
• Bayh-Dole Act in 1980 created tech transfer
• Washington University in St. Louis is better than University of Washington in Seattle: universities and health centers can attract in people but are necessary not sufficient
• Poverty trap overcome with “big push”;’ targeted and sustained (ie Washington University economics department push worked by overpaying academic stars but then broke down in Great Recession) Tennessee Valley authority was a “big push”
• In 1984 New York Review of Books, Jane Jacobs criticized big push strategies including TVA
• Intel semiconductor lab in 1976 for Portland; HP printer division to Boise; Kansas City by Kauffman‘s Pharma lab
• Taiwan, Israel military and Ireland financial were big push government strategies
• Solyndra in Fremont California now the classic cautionary tale of industrial policy (Bush loan guarantee program and Obama expansion)
• Solar panels: investment subsidy of R&d may make sense due to spillover but Germany and Spain failed to incentivize production so that may not have agglomerate effects
• “A big push program the size of the Tennessee Valley Authority would be unthinkable today” but small ones are
• Authors research: BMW plant chosen between Greenville South Carolina (winner) and Omaha (loser) . New plant has knowledge spillover when other similar plants are there
• Pat Kline research: Empowerment zone program successful from Clinton: Atlanta, Baltimore , Philadelphia and Los Angeles among them: solved collective action program by not picking industry winners , and were catalyst not a giveaway
• Nick Bloom and John van Reenen: R&D lifts not just company’s stock but whole industry
• Increase R&D tax credit (pharma less important than telecom tho)
• Larry Katz and Claudia Goldin: supply of college grads outpaced demand keeping inequality in check but then 1980s demand for college degrees grew far faster than supply (macroeconomic shock)
• Gary Becker won Pulitzer Prize for his human capital book: college is an investment
• Michael Greenstone and Adam Looney: college tuition is a much better financial return and safer than most any other asset class
• Bookings: 44 hubs attracted 25% or more college-educated immigrants over high school dropouts (Philly SF, DC. Pittsburgh), and 30 are opposite (Phoenix)
• Jennifer Hunt and Majolaime Gauthier in 2010: immigrants predict regions with more patents
• Low-skilled immigrants may suppress native low skilled workers but high skilled create more value
• PISA scores lagging, but in early 1900s we made high school mandatory first and started our rise
• In 2012, he asked: will we reshape immigration or our education system? Or both, or neither?