Enrico Moretti uncovered that for each additional job in manufacturing 1.6 jobs are created in local jobs ranging from barbers, waiters, to doctors and lawyers. But, for the innovation sector, the job multiplier is 5. Moretti explores the implications of those job multipliers for the prospect of cities. By doing so, he dismantles Timothy Noah's The Great Divergence: America's Growing Inequality Crisis and What We Can Do about It
Moretti observes secular changes in the American workforce. 150 years ago, 50% of the labor force was engaged in agriculture vs less than 1% today. Yet, the agriculture output is far greater now. US manufacturing is undergoing the same process. US manufacturing output is as large as China's (pg. 36) and has doubled since 1970. Yet, the US manufacturing labor force is smaller than in 1970. Just as agriculture, manufacturing has become more productive and less labor intensive.
Job growth is in good part generated by the innovation sector (Internet, software, scientific R&D, pharmaceuticals). The innovation sector employs 10% of the labor force. But, it has a huge influence on overall job growth. When an extra scientist is hired in a city, over time it creates 5 additional local jobs outside the innovation sector; 2 of them are professional (doctors, lawyers, teachers) and 3 of them are low skilled (waiters, clerks). This is because innovation sector workers are highly paid and have discretionary income to spend on local services. It is also because such workers increase the capacity of the firms they join, and the latter have a demand for local services (graphic designers, advertisers).
Globalization and technological progress are the two forces that have decimated manufacturing employment and boosted the innovation sector one. Those forces have caused the great divergence between cities. Today, you have three Americas. The thriving brain hubs with a well-educated labor force and a strong innovation sector (San Francisco, San Jose, Austin). At the other extreme you have declining cities, former manufacturing stars, with low skill residents with high unemployment rates (Detroit, Akron, Gary). The third category includes cities positioned in between the two who'se fate is uncertain.
Moretti indicates that the rewards for the leading innovators with new ideas have skyrocketed (Murray confirmed that in "Coming Apart"). This is again because of globalization and technological progress. A lucrative idea can be scaled worldwide and be worth $billions unlike in yesteryears.
Moretti's insight is that when it comes to job creation there is no contradiction between the interests of high income workers and low-income ones. Because of the mentioned job multiplier, innovation workers do create jobs for local workers at all skill levels. And, all those local jobs pay more than local ones in cities that are not innovation hubs. The average salary of high school graduates is a lot higher both in nominal term and as a % of college grads salaries within the cities with a high % of college graduates (table 1 & 2, pg. 94-95). In Ann Arbor, MI, with 46% of workers having a college degree the average salary of college graduates is $65,452. The average salary for high school graduates is pretty high too at $55,456. Meanwhile, in Bakersfield, CA, with only 14% of workers with college degree, the average salary of college graduates is about the same as in Ann Arbor. But, the respective salary of high school graduates is 37% lower at only $34,807. Thus, a low skilled high school graduate, instead of being at a competitive disadvantage, actually benefits from being around more highly skilled workers (college graduates).
Moretti concludes that one's earnings is dependent on where one lives. The earnings of a high school graduate rise by 7% as the share of college graduates in a city increases by 10% (fig. 4, pg 98). The reasons behind that are: 1) college graduate workers increase both their productivity and the ones of unskilled workers too; 2) a better-educated labor force facilitates the adoption of newer technologies; and 3) an increase in local human capital generates knowledge spillovers as people learn from each other.
Globalization affects different groups differently. More assembly jobs in China and more customer assistance jobs in India translates into more R&D jobs in the US and more jobs for the non R&D workers in the same localities due to the job multiplier. Per studies conducted by Dartmouth economist, Matthew Slaughter, for every job outsourced nearly 2 jobs are created in the US (pg. 70). And, those jobs are typically high skilled jobs (engineering, marketing, design).
When Moretti focuses on the current state of cities his work resembles Richard Florida's in Who's Your City?: How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life. While Florida disclosed tiered colored maps that all looked amazingly alike: a) US Mega-Regions, b) areas by % of college graduates, c) areas by income, d) areas by % belonging to the Creative Class, e) areas by home prices; Moretti discloses a similar set of maps: a) patents per capita, b) areas by % of college graduates, c) areas by change in % of college graduates, d) areas by male life expectancy, and e) educational level of immigrants. What is amazing is that all the tiered maps of Florida and Moretti look invariably the same. Economic and scientific activities, earnings, education, lifespan all thrive (or not) in almost exactly same regions. And, they translate into respectively higher or lower real estate prices.
When Moretti focuses on the fate of cities over time, his work resembles Charles Murray in Coming Apart: The State of White America, 1960-2010. Just like Murray, Moretti notices a widening divergence between thriving cities and desperate ones. Between 1980 and 2010, the divergence in human capital (% of college grads) has widened. Invariably, the cities with the rising human capital have experienced positive trends in social outcomes (divorce rates, voter turnouts, life expectancy). Meanwhile, the cities lacking human capital have experienced the opposite. Thus, where you live does affect both how much you earn and how long you live.
The sustainability of innovation hubs is sometimes predictable based on specific causal forces (the network effect). Those forces include: 1) thick labor markets with many jobs for specialized skilled labor; 2) the presence of specialized service providers that can support the needs of enterprises at every stage. The local access to venture capital has been the key to Silicon Valley's success; and 3) knowledge spillovers such as Microsoft and Google creating entire eco systems of successful start ups. Those three forces determine the location of innovative workers and companies and therefore shape the future of cities. Those forces explain the Great Divergence of the past thirty years. Timothy Noah ignored those in his really mediocre "The Great Divergence."
The network effect, also well analyzed by Richard Florida, contradicts Thomas Friedman's "The World is Flat" (supposedly people can innovate anywhere and just need internet access). Both, Florida and Moretti specifically mentioned Friedman's flatness as something that did not occur. Location is more important than ever due to the three forces mentioned above.
The start of innovation hubs is often due to one single individual starting or moving an anchor company in a specific location. This was the case with Silicon Valley that got started when William Shockley started Shockley Semiconductor in 1955 in Mountain View. Within just a few years it would generate off springs in the same area: Fairchild Semiconductor, National Semiconductor, and Intel. Similarly, Hollywood got started when D.W. Griffith, a dominant director, shot "The Birth of a Nation" there in 1915; this created the Hollywood movie industry. Seattle got started as an innovation hub when Bill Gates moved Microsoft from Albuquerque to Seattle in 1979.
The key to sustained success for innovation hubs is adaptation. Detroit was once an innovation hub founded on the auto industry. Rochester was another one founded on traditional photography. As the domestic auto industry was pummeled by superior foreign competitors and photography was killed by digital photography both Detroit and Rochester fell on hard times (Detroit desperately more than Rochester). This is because those innovation hubs were static. They did not adapt to the changing fate of their respective industries. By contrast, San Jose and San Francisco innovation hubs are constantly morphing to the cutting edge of technology.
Mobility is the key to leveraging human capital. Moretti indicates that the more educated one is, the more mobile one is. The unemployment rate (fig. 10, pg. 160) over the past 20 years is chronically much lower for college grads than for high school grads. And, the one for high school dropouts is a lot higher. Moretti states that the difference in mobility between education levels explain part of the difference in unemployment rates. The reduced mobility of the less educated is crippling as the fate of cities is diverging. The less educated remain stuck in towns with high unemployment while the educated readily move on to better opportunities.
Moretti's policy recommendations are all geared to increasing US human capital. They include boosting Government funding for research. Another recommendation is to boost high school graduation rates, that have remained stagnant since 1970, and high school math and science programs. This would increase college graduation rates which would increase the supply of college graduates and reduce income inequality. It would also increase the number of math and science degree holders (the foundation of innovation). Another recommendation is to adopt the immigration policies of Australia. Their human capital-based immigration policies are like hiring the best and the brightest worldwide. The US instead uses ineffective country specific quota system that does not factor human capital at all. The H-1b visa system lets in only the fraction of scientists we need. Moretti states "Our ability to absorb the world's talent is crucial advantage... but, it is constrained by an immigration policy that goes against our own economic interests."
Immigrants are why the US has a dominant position in many sciences and technology. Jerry Yang (Taiwan born) cofounder of Yahoo, and Sergey Brin (Russian-born) cofounder of Google are just a couple of examples. They both created thousands of high paying US jobs.
By comparison to Moretti's excellent recommendations, Noah's recommendations in his "Great Divergence" are painfully bad (increase government payroll, strengthen labor unions, increase protectionism).