[Book Notes] 10 insights: The New Geography of Jobs

Technology is making many jobs obsolete. Enrico Moretti’s book The New Geography of Jobs discussed the impact of technology on jobs and on American cities. My top 10 insights from the book are as follows:


#1.

People are the most adaptable machines. Machines need to be reprogrammed. You can have people doing something entirely different next week

Labor is cheap in developing countries and, therefore, factories tend to use fewer machines than factories in developed countries countries like US. This gives those factories the additional advantage of being more flexible and more adaptable to sudden change. Therefore, US cities, which directly compete with China, are at a disadvantage. We tend to think that automation/investment in machines is the best direction for a company to take. And to some extent it is true as machines increases the productivity. However, these companies lose in terms of flexibility.


In these cities, Chinese imports lead to rising local unemployment, decreased labor-force participation, and lower local wages. Not all these costs are borne by the workers; a part of the cost is borne by other Americans in the form of government aid. In essence, while the direct effect of trade is highly localized, the ultimate costs are at least in part shouldered by taxpayers in the rest of the country through federally funded programs.

 

#2.

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

Economists discovered that the price of the goods purchased by the typical low-income consumers tended to increase much less than the price of goods consumed by the typical high-income consumer. There are two plausible explanations: (a) China and (b) Walmart.


(a) Low-income consumers tend to buy proportionally more goods that are made in China — things like toys, cheap clothes, and affordable consumer electronics. Thanks to globalization, the price of these goods has risen less than others over the past fifteen years, and in many cases, like that of consumer electronics, it has actually declined. By contrast, consumers with higher incomes tend to buy proportionally more personal services—everything from haircuts and housecleaning to restaurant meals and health services. Since personal services are less exposed to foreign competition, high-income consumers end up benefiting less from globalization.

(b) Opening of a Walmart superstore causes other local stores to lower their prices by 6-12%.

Walmart Effect

Therefore, if one of our trading partners becomes more productive, the goods we are buying from that country becomes cheaper. This makes us—the consumers—a little richer. Overall, the effect of imports from low-wage countries has been highly uneven, with less skilled workers taking most of the job losses. At the same time, these imports cost less, and that saves consumers money. 

 

#3.

Increases in productivity lower prices for consumers and raise wages, but they ultimately end up killing jobs

Since 1970, U.S. manufacturing has doubled its output, and it keeps expanding over time. However, manufacturing jobs are disappearing. The reason for this apparent contradiction is that thanks to technological improvements and investment in new and more sophisticated machinery, U.S. factories are significantly more efficient than they used to be, so fewer and fewer American workers are needed to produce the same number of goods. 

 

#4.

Each new high-tech job in a metropolitan area leads to five additional local jobs outside of high tech in the long run

The vast majority of jobs in a modern society are in local services (waiters, plumbers, hairdressers). This sector exists only to serve the needs of a region’s residents and is largely insulated from national and international competition. Economists call this the non-traded sector. Most jobs in innovative industries belong to the traded sector. These jobs, which account for about a third of all jobs, are very different, because they produce a good or service that is mostly sold outside the region and therefore needs to be competitive in the national and global marketplace. The paradox is that while the vast majority of jobs are in the non-traded sector, this sector is not the driver of our prosperity. Instead, our prosperity mainly depends on the traded sector.


One of the reasons is that the productivity growth is different in the two sectors. This productivity difference between traded and non-traded-sector jobs matters because the only way to raise workers’ standard of living is to raise their productivity. Interestingly, higher productivity of workers in the traded sector means higher salaries not just for the workers in that sector but also for workers in other sectors, especially those with similar skills. Historically, when manufacturing wages inched up, other sectors had to adjust to remain competitive.


For example, builders needed to raise the wages of carpenters, roofers, and plumbers to keep them from taking a manufacturing job, even though productivity in construction was flat. So even if the manufacturing sector accounted for a minority of the workforce, for decades it was an engine strong enough to lift the salaries of many American workers, including those who worked in services.


Therefore, the rise of innovation is so crucial. It is more than just the jobs in that sector that are at stake—it’s the entire economy. Every time a company generates jobs in the innovation sector, it also indirectly creates additional jobs in the non-traded sector in the same city. In essence, from the point of view of a city, an innovation job is more than a job. A healthy traded sector benefits the local economy directly, as it generates well-paid jobs, and indirectly, as it creates additional jobs in the non-traded sector. What is truly remarkable is that this indirect effect on the local economy is much larger than the direct effect. 

 

#5.

A high-tech job has a higher multiplier effect (i.e. creates more jobs in the city or increases wages of people in other industries more) compared to jobs in other industries.

What is so special about high tech? To begin with, high-tech workers are very well paid, with salaries and benefits typically considerably above the average. This means they consume more local services than other workers and therefore create more local jobs. The final reason for the large high-tech multiplier effect is that high-tech firms tend to be located near each other. Bringing one high-tech company to a city eventually results in having more high-tech companies locate there, as dense high-tech clusters make high-tech firms more innovative and more successful.

 

#6.

The job losses dues to the innovation sector are geographically widespread but the job gains are mostly concentrated

One of the key reasons the innovation sector—unlike manufacturing—has so many jobs is that even today it remains a remarkably labor-intensive sector. The main production input in scientific research is human capital—in other words, people and their ideas. Writing software still requires hours of typing on a keyboard. Innovation keeps churning out an ever-changing roster of jobs, and yet the net effect is positive.


An analysis of the French Internet sector found that since the advent of the Web, the Internet has created 1.2 million jobs (both for positions directly linked to the Internet, such as software engineering, and positions outside the sector, like delivery of online purchases) and destroyed 500,000, thus generating a net gain of 700,000. In other industrialized countries, the best estimates are that 2.6 jobs are typically created for every one destroyed.


However, the jobs created and lost have different geographic coverage. For e.g. in the case of travel websites and Netflix, Seattle, New York, and the San Francisco Bay Area have experienced employment gains, since this is where the websites tend to be located, while all other cities have suffered a loss of retail jobs.

 

#7.

A worker’s education has an effect not just on her own salary but also on the entire community around her

It is not just that brain hubs pay high average salaries because they have many college-educated residents and these residents earn high salaries. Brain hubs pay high average salaries to non-skilled workers too. How can this be possible?


One answer is that the cost of living in cities like San Jose, Raleigh-Durham, and Austin is higher than in Flint or Merced, and high school graduates need to be compensated to live there. This is true—higher cost of living does offset some of these differences—but it is not the whole story. It explains why there are still people in Flint and Merced and why not everyone has moved to San Jose, Raleigh-Durham, and Austin. But it does not explain why there are still employers in San Jose, Raleigh-Durham, and Austin. I found that workers who live in cities where the number of college graduates increases experience faster salary gains than workers who live in cities where the number of college graduates stagnates. Thus, the same individual can make a very different salary depending on how many skilled workers surround him.


The existence of human capital externalities is good news for less educated workers in highly educated cities, because it means that they end up earning more than they would otherwise. But it also implies that well-educated individuals are not fully compensated for the social benefits that their education generates. Essentially, education has a private benefit, in the form of higher earnings for the individual who acquires it, and an additional benefit for all other individuals who live in the same city. In fact, the full return on education for society—sometimes called social return—is larger than its private return.

 

#8.

Half of companies list a spouse’s employment as the biggest reason that employees turn down a job relocation offer.

Thick markets are particularly attractive because they make it easier to match demand to supply. However, the size of labor markets affects not just workers’ productivity but also their ability to find romantic partners. The marriage market in the United States has become increasingly segregated along educational lines, with well-educated professionals increasingly marrying other well-educated professionals. Even for married couples the need for thick cities is increasing, because large labor markets are particularly important for families in which both the husband and the wife have a professional career. 

 

#9.

The more education a person has, the more mobile he/she is. The job market for professional positions is a national one, while the job market for manual or unskilled positions tends to be more localized

Today about half of American households change addresses every five years, a number that would be unthinkable in Europe, and a significant number relocate to a different city. At the time of the Great Migration in the 1920s, when more than 2 million African Americans abandoned the South for industrial centers in other regions, less educated individuals were more likely than others to migrate in search of better lives. Today the opposite is true. College graduates have the highest mobility, workers with a community college education are less mobile, high school graduates are even less, and high school dropouts come at the bottom of the list.

Upward mobility of college graduates

Why does a lack of education lead to lower mobility? For some, it reflects a dearth of information about opportunities elsewhere, a shortage of the kinds of skills necessary to make a big life change, and especially a lack of cash. Relocating is like an investment: you spend money up front, to cover the direct costs of the move and your living expenses until a job becomes available, in exchange for a better job later. But many unemployed workers with low skills are unable to make this investment, because they have limited savings and limited access to credit.


The unemployment insurance system, which was introduced during the 1930s, is essentially the same now as it was then. Currently, an out-of-work person who qualifies for unemployment insurance receives a check from the government that covers part of his previous salary. However, this system does not provide any incentive for unemployed workers to look for jobs in places with better labor markets. If anything, it discourages mobility from high-unemployment areas to low-unemployment ones, because it does not compensate for the difference in cost of living. If you are living off an unemployment check in Flint, you do not have a lot of incentives to move to Austin to look for a new job, because your housing expenses would double but your check would still reflect the cost of living in Flint.


Unemployed people living in areas with above-average unemployment rates should receive part of their unemployment insurance check in the form of a mobility voucher that would cover some of the costs of moving to a different area. This policy would also help those who are not willing to move. Unemployed workers who stay in a local labor market with high unemployment effectively impose a cost, or negative externality, on everyone else in that market, while workers who move away generate a positive externality. By increasing the number of workers who are willing to relocate, the mobility voucher benefits both those who move, who end up with better jobs elsewhere, and those who stay, who end up with a better chance of finding a job.

 

#10.

High mobility of well-educated Americans presents a dilemma to states/cities for investment in universities and colleges.

While the high mobility of well-educated Americans tends to be good for their careers, it presents state governments with a big challenge. By funding local universities and colleges, states heavily subsidize the higher education of their residents in the hope of fostering economic growth at the local level. The overall level of human capital in an area is one of the most important drivers of local prosperity. State legislatures’ support for higher education is based on the hope that it will raise labor productivity and attract innovative businesses. However, the fact that college-educated Americans are so mobile makes the states’ efforts less effective. The pull of innovation hubs dwarfs their efforts. This is great news for the cities that attract the college graduates—these cities effectively receive free human capital paid for by someone else. But it significantly limits the ability of struggling states to build a sustainable base by investing in higher education.

 

Others:

Significant part of the wealth created by America’s dynamic innovation sector accrues not just through the labor market but through the housing market. These capital gains are an important channel through which residents of innovation hubs benefit from the strength of their local economy. For renters, however, the effect of higher earnings is tempered by the increase in their monthly housing costs. Therefore, the ultimate effect on their well-being depends on which of these two forces prevail. The larger the increase in wages and the smaller the increase in rents, the better for them. As we will soon discover, local governments have the power to manage the increases in local cost of living and can therefore determine whether homeowners or renters are the ones to gain the most from a strengthening labor market.

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Not only is college a good investment, it is one of the best investments around. Let’s say the parents of our seventeen-year-old are not fully convinced. Instead of paying $102,000 for her college education, they give her $102,000 in stocks or bonds. Would she be better off going to college or enjoying the return on her financial investment? When the researchers Michael Greenstone and Adam Looney compared a college education with other financial investments, they discovered that it is difficult to find an investment that has a higher return.

Investment in a college degree delivers an inflation-adjusted annual return of more than 15 percent, significantly larger than the historical return on stocks (7 percent) and bonds, gold, and real estate (all below 3 percent). College is where smart investors should put their money. And this is without even considering risk. As it turns out, investment in human capital not only has a higher return but also tends to be safer than other investments.

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The benefits of a college education are not limited to financial gains—they extend to health, marriage, and many other aspects of life. One obstacle is the fact that many families simply do not have and cannot borrow enough money to cover the up-front costs of an education. Typically, when someone has a good investment idea but no cash, he goes to a bank to ask for a loan. Each year millions of small businesses are born this way. But this is where investment in human capital differs from other kinds of investment. Starting a business usually involves investing in goods that can be used as collateral, such as machines or real estate. Human capital, in contrast, is completely immaterial.

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There would not be many retail jobs in a city if not for the income generated in the traded sector. Policymakers and business leaders love to praise the virtues of American small businesses, invariably pointing out that small businesses are responsible for most job creation. While this is true, the vast majority of small businesses are in retail and other non-traded services. In the end their existence is dependent on the vitality of the traded sector, where large businesses are dominant.

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The thickness of the labor market for specialized occupations is a crucial factor in determining the success of the innovation sector. For e.g. on July 1, 1997, Great Britain handed over Hong Kong to China. Concerned about living under Chinese rule, thousands of Hong Kong residents, many of them wealthy and well educated, moved to Vancouver in the years preceding the handover. While there were some inevitable cultural tensions early on and not all the Chinese remained, in the end the city gained from this inflow in terms of both human and financial capital. The immigrants brought their savings, and the local economy received hundreds of millions of dollars in new investment. Many immigrants settled in towering condos reminiscent of the high-density high-rises back home, thus dramatically accelerating the revitalization of downtown. These changes helped turn Vancouver into a culturally diverse global metropolis.


Japan has had the opposite experience. Japanese high-tech companies dominated global markets in the 1980s, but they have lost much of their edge in the past twenty years, especially in software and Internet-related businesses. There are many explanations for this stunning reversal of fortunes, but a leading factor is that Japanese firms have access to a substantially smaller pool of software engineers than American firms, largely because of a lack of immigrants. While the United States is a magnet for the most talented foreign-born software engineers, legal, cultural, and linguistic barriers limit the inflow of global human capital into Japan and have effectively cost Japan its leadership in some of the most dynamic parts of the high-tech sector.