The New Geography of Jobs by UC Berkeley professor Enrico Moretti is a great book for those interested in economics, why certain jobs are hot or not, and the reasons why some cities flourish while others languish. I picked up while browsing R.J. Julia Booksellers in Madison, Connecticut, last week and thought it deserved a recap.
The iPhone is designed in California. Its 634 components are assembled in Shenzhen, China. The Chinese put in the bulk of the labor, yet Apple receives a whopping $321 for each iPhone sold. Why?
Because, Moretti explains, the innovation sector is the new driver of productivity. Or in econ-professor-speak, he explains: “For the first time in history, the factor that is scarce is not physical capital but creativity.”
What exactly are the “innovation” or “creativity” industries? They’re advanced manufacturing (e.g. iPhone), information technology (e.g. Google), life sciences, medical devices, cleantech (e.g. solar panels), robotics, new materials, and nanotechnology. They’re also any business that “generates new ideas and new products,” such as entertainment innovators, environmental innovators, and financial innovators.
Only 10% of Americans actually work in the innovation sector. One-third work for government or ed-med; a quarter work in retail, leisure, hospitality, and restaurants; and 14% work in professional & business services (e.g. law architecture management). These are the service sector industries: predominantly local, not outsourceable, and comprising roughly two-thirds of our workforce.
In perhaps his most important point of the book (reinforced multiple times), Moretti explains: Service jobs are the effect—not the cause—of economic growth. Why? Because productivity in most service jobs hasn’t grown immensely over time. It takes the same amount of time to cut hair now as it did 10, 20, or 50 years ago. Now think of the iPhone. Not only did it not exist ten years ago, but it’s getting rapidly better and cheaper thanks to technology and productivity gains. A nation’s material standard of living can only increase with productivity growth. Today such growth is predominantly taking place in the innovation sector, and they are what fund the service sector.
Manufacturing used to be the American productivity driver. From WWII to 1975, American factory worker productivity doubled. Wages for everyone, not just factory workers, increased. Once-expensive goods because affordable mass commodities. But after 1978, the decline began. Manufacturing jobs relocated to China, India, and other places with low labor costs, which helped people in those countries raise their standards of living. Some highly productive manufacturing plants remain in the US, but they require very few actual people. (As Warren Bennis noted, “The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.”) Overall, this process of moving up the productivity ladder is good for both us and countries we’re losing jobs to—it’s the application of what economists call comparative advantage.
Yes, there are still hand-made things in America. People who Moretti calls manufacturing hipsters craft locally-made, artisinal goods. “It seems as if every 28-year-old guy in [Brooklyn] has a line of artisanal pickles.” But such small-scale manufacturing is fundamentally limited and cannot alone drive a nationwide economic renaissance, Moretti argues. These jobs are the results, not drivers, of job growth. They rely on local wealthy innovation sectors. “After all, someone in the local economy has to pay for these $40 handmade shirts and $9 artisanal chocolate boars.”
Innovation sector jobs are highly labor intensive. Take coding, for example: “Writing software still requires hours of typing on a keyboard.” Moretti cites a team of digital artists who took three months to design a small wolf for the movie Twilight: New Moon. Crafting artisanal pickles is labor intensive, too, but the difference is in scalability: millions of people can watch Twilight (I’m not sure why they’d want to) but only a few can enjoy the pickles. (Moretti is smart to point out that some day a computer will be able to generate a 3-D wolf in seconds, and those coders will be out of business—but that day is not today!)
“In the end, it does not matter whether American workers make something physical, like more efficient lithium batteries for electric cars, or something immaterial, like a better search engine. What really matters is that American works produce goods or services that are innovative and unique and not easily reproduced.”
One of the most striking results of Moretti’s research is that an innovation sector job creates five additional, local jobs, both skilled and unskilled. “For each new software designer hired at Twitter, there are five new job openings for baristas, personal trainers, doctors, and taxi drivers in the community.” This is what he calls the local multiplier effect, and it’s why cities that wants to generate jobs for less skilled workers ultimately wants to attract high-tech companies. (Traditional manufacturing jobs, according to Moretti, generate only 1.6 additional local jobs.)
Moretti then explores how cities that are innovation hubs (think: Seattle, Austin, San Francisco-Silicon Valley, Raleigh-Durham, and Boston) are diverging from cities that cling to their manufacturing heyday (think: Detroit, Cleveland, and Flint). Because of the local multiplier effect, cities without innovation hubs have significantly fewer service jobs. Innovation jobs also drive up the wages of local service jobs, even after accounting for the increased cost of living in a place like Austin or Seattle.
So why don’t cities like Cleveland and Detroit just attract more high-tech businesses? It isn’t for lack of trying. Moretti explains that powerful forces of agglomeration are at work. Established innovation hubs have a “market thickness” that benefits both employers and job-seekers: essentially, if you lose your tech job, it’s much easier to find a new one (especially that one that needs your specific skills and will therefore pay more) if you’re in the Bay Area than if you’re in Flint, Michigan. The same goes for a tech company trying to hire a new engineer: it’s much easier to recruit in an innovation hub. Venture capital firms are concentrated in a few big hubs, and they want to have reliable face-to-face access to you if they’re going to invest their millions. Local services that cater specifically to tech companies (for example, intellectual property lawyers) also cluster in these hubs. Finally, there’s “knowledge spillover” generated by informal social interactions between people in innovation fields. All these factors conspire to make it very, very difficult to birth an innovation hub from will—even if your city’s cost of living is incredibly lower than Seattle’s or Boston’s.
“Being around smart people tends to make us smarter, more creative, and ultimately more productive.”
More salient than inequality of personal incomes, Moretti argues, is becoming the inequality between cities. People living in a city like Flint will continue to stagnate while those living in the orbit of Austin or San Francisco prosper. He explores different ways that cities have tried to escape such poverty traps, painting a somewhat grim picture. He also discusses gentrification and suggest ways for cities to expand without making their central districts ridiculously overpriced.
The book concludes with a discussion of education. Innovation jobs are available almost exclusively to college degree holders (with the Gates-Zuckerberg caveat noted), and Moretti takes a somewhat standard position on increasing the number of college graduates in America and makes a generic exhortation to better our K-12 system to this end. He cites evidence that going to college actually does increase one’s productivity and salaries—i.e. it’s not just a sorting mechanism for smart/ambitious people. Most interestingly to me, he notes an increasing disparity among the wages of those with college degrees—the unemployed history majors versus the petroleum engineers, for instance—but doesn’t let this fact affect his “go to college” recommendation. It’s reasonable to exhort young people to go to college if they have a clear interest in innovation sector jobs, but what about the confused 18-year-old liberal arts major who’s just going because his parents told him to? He’s much less likely to reap the vast benefits that Moretti claims wait at the end of the college rainbow.
The New Geography of Jobs was refreshingly devoid of the partisanship, unreasonably sweeping policy recommendations, and appeals to emotion to which other books in this genre often succumb. It’s balanced, well-researched (though I haven’t investigated any counter-claims), and a pretty exciting read considering its subject. Grab a copy and enjoy.