The New Geography of Jobs

by James A. Bacon

The New Geography of Jobs” is arguably the most important book about urban economics published in 2012. Author Enrico Moretti, an Italian-born economics professor at Berkeley, analyzes the great divergence occurring between metropolitan regions in the United States. While much of his narrative about the “innovation” sector as the key driver in regional growth will be familiar to readers of Richard Florida, Moretti provides a valuable counter-balance to Florida’s theories about the creative class.

Just as Florida ascribes remarkable wealth-creating properties to the “creative class,” Moretti puts the innovation sector — referring primarily to high-tech industry clusters — at the center of his analysis. While Florida suggests that members of the creative class gravitate to metropolitan areas that offer a particular set of attitudes (openness, tolerance) and amenities (urban cafe lifestyle, street arts scene), Moretti argues that the economic logic of labor markets are the driving factor.

To Moretti, metropolitan regions are labor pools. The labor that really matters in a knowledge economy is college-educated labor. And what matters even more than generic college-educated labor is labor with technology-related competencies in demand by the corporations that create innovative products and services. “In the world of innovation,” Moretti writes, “productivity and creativity can outweigh labor and real estate costs.”

Thus, a region like San Francisco/San Jose can have outrageous costs of living and doing business yet tech businesses migrate there because that’s where the talent is. And talent moves there because that’s where the jobs are. By doing a better job of matching employers with workers, the productivity-enhancing advantages of “thick” labor markets like Silicon Valley’s more than compensate for the region’s higher costs.

There are two other critical benefits to industry clustering, Moretti writes. Innovation clusters attract investment capital, which funds and nurtures  business start-ups. And clusters have what he calls almost “magical” spillover effects. “New ideas are rarely born in a vacuum. Research shows that social interactions among creative workers tend to generate learning opportunities that enhance innovation and productivity. This flow and diffusion of knowledge represents a crucial third advantage for workers and firms that locate within an innovation cluster.”

Thus, regions with strong knowledge clusters tend to grow, attracting both corporations and employees. Regions with weak knowledge clusters tend to remain weak. A third class of cities, which are caught in between, have uncertain futures.

The great public policy question for wanna-be growth centers is how to jump-start an innovation cluster. Broadly speaking, regions have followed two types of approaches. One is a demand-side approach, attracting employers with the hope that workers will follow. The other is the supply-side approach, improving a city’s amenities to lure talented workers in the hope that corporations will come. Following (and often misinterpreting) the theories of Richard Florida, many regions have invested public resources in a futile effort to make themselves “cool” and attract the creative class.

Moretti demolishes that reasoning: “It is certainly true that cities that have built a solid economic base in the innovation sector are often lively, interesting, and culturally open-minded. However, it is important to distinguish cause from effect. The history of successful innovation clusters suggests that in many cases, cities became attractive because they succeeded in building a solid economic base, not vice versa.”

Seattle, for instance, was a dump before Microsoft landed there and created a thick labor market for Amazon.com and a swarm of technology start-ups. Now the region is the epitome of cool. Conversely, Berlin may be the coolest city in Europe from the perspective of artistic creativity, Moretti argues. But technologically, it ranks low on the innovation index, and its income is lower than many other German cities.

What, then, can regions do? Building world-class universities is no panacea. For every Stanford/Silicon Valley, there’s a Johns Hopkins/Baltimore. How about a “big push” industrial policy — targeting a growth industry with public investment? Such approaches might be successful, he contends, but they are very expensive and very risky. Governments chase fads; they are not good at picking winners and losers. How about investing in schools and universities to create home-grown human capital? Great idea, except in the absence of local innovation clusters, the talent will move away. Regions subsidize the development of someone else’s workforce.

At times, Moretti sounds as if the rise of innovation clusters is a matter of serendipity, beyond the ken of government policy wonks to manipulate. Who could have predicted the rise of Microsoft? Who could have predicted its transformative effect on Seattle? One of the few tangible policy proposals he advances is to reform immigration policy to encourage well-educated foreigners (not unlike himself) to settle in the United States. They contribute disproportionately to wealth creation. Of course, they, too, tend to migrate to the nation’s main innovation centers.

Bacon’s bottom line: Other than to replicate Seattle by giving rise to a Microsoft-scale success story — in other words, by getting lucky — there is no simple answer. I distrust industrial policy of picking industries, whether conducted at the national level or the regional level. And the pseudo-Creative Class approach of investing scarce public resources in urban amenities that attract young, educated workers is equally problematic unless corporations can be recruited or businesses launched to hire them.

My inclination is to stick with the basics. Government should focus on a few things and do them well. Here in Virginia, and throughout American, that means reforming key broken institutions — K-12, higher ed, health care, transportation and land use — while keeping taxes as low as practicable and the business climate as hospitable as possible. I do think there is a role for making regions attractive to the creative class but those initiatives are best left to the civic realm. In sum, regional success is like personal success — the harder you work, the luckier you get.

26 Responses to The New Geography of Jobs

  1. I happen to know Professor Moretti. I once worked at a company that regularly hired Moretti to speak at its conferences. He is a very sharp guy.

    Claiming that Seattle was a dump before Microsoft is quite a stretch. There’s a little company named Boeing that has been an economic anchor for decades.

    In the high tech world there is a great deal of momentum involved. The problem is that momentum can be lost. Northern California has kept the momentum going. Boston has lost quite a bit of momentum but has begun to rebuild. Austin is on a roll as are Seattle and Portland. DC had a lot of momentum during the internet bubble (AOL, Digex, PSINet, Bell Atlantic, MCI, WebMethods, etc). However, the momentum was lost. One very big reason is the quality of life is badly hurt by the traffic. I know countless engineers who once lived in the DC area during the heyday of high tech who have moved away since the tech bubble burst. They now live in Austin, Seattle, etc.

    Government can absolutely make a difference. And it doesn’t have to be some high tax socialist Obama style BS either. Pick a part of a city and zone it for bars with no noise restrictions until 3 am. Rope it off from vehicular traffic every Friday and Saturday night. Let people openly carry alcoholic beverages as they walk from place to place. Round up some corporate sponsors and have a “battle of the bands”.

    Sound crazy?

    Go to Sixth Street in Austin, Tx and then tell me how crazy it is.

    In ten years Richmond could be another Austin from a high tech perspective. Of course, you’d have to actually try to make it different.

    Tidewater may have the right idea. Get the Sacramento Kings. Build some night life by the beach.

    NoVa will always be cursed by being tied to the anchor of Richmond-esque thinking. Not necessarily people from Richmond but the old style Virginia belief that political power and decision making should be centralized and government should never take any chances. If there is a technology renaissance in DC it will happen in the District or Maryland, not Virginia.

    If people with technical talent cared about high taxes they wouldn’t live cheek to jowl in San Francisco.

    • Don wrote, “If people with technical talent cared about high taxes they wouldn’t live cheek to jowl in San Francisco.”

      Would you be willing to rephrase this to something along these lines, “People with technical talent living cheek by jowl in San Francisco find that high taxes and cost of living are more than offset by increased economic opportunity.”

      That avoids the implication that people “don’t care about” taxes, yet acknowledges the reality that people are willing to accept higher taxes if they’re making — or hope to make — a lot more money.

  2. Moretti finds that innovative industries have large multiplier effects on local employment and wages. For every 1 technology, biotech, or finance job created by an innovation sector business, 5 additional (non-innovation industry) jobs will be created.

    The reason for this multiplier effect is that jobs in innovation industries create high revenues per employee, meaning that innovation workers are highly productive. Software engineers, genetics researchers, and brand managers need the services of lawyers, waiters, accountants, plumbers, hair stylists, baristas, and retail sales people.

    This is the fact that seems to completely confound Virginia’s policy makers.

  3. As Virginia’s policy makers consider the future they need to consider the cost of entitlements. High tech workers are “surplus citizens” – they pay more in taxes then they cost in government services. As government entitlement programs expand, having these people “in state” will get ever more important.

    Here’s a good book about the number of “Takers”:

    http://www.amazon.com/Nation-Takers-Americas-Entitlement-ebook/dp/B009TDSS62/ref=pd_sim_kstore_7

  4. We should see whether the creative class comes to Tysons. Fairfax County has been approving several rezoning plans that will allow the construction of urban-style density near the four rail stations. If you build it, will they come? And who is “they”? So far, the biggest thing to happen (and it is big) is the landing of Intelsat. This is big because it does not involve shuffling the deck chairs as a business already in Tysons consolidating its workers from other sites in Tysons.

    Re: taxes. They jury is still out. So far, the biggest signal on taxes is the strong opposition of Tysons residents to their inclusion in a service (tax) district that will help pay for the transportation improvements being constructed. The opposition caused the Fairfax County BoS to postpone approval of the new service district until this month. And this is from voters who tend to be more liberal than surrounding areas.

    Surplus citizens. Many people pay more in taxes than they take in services until they have kids. Fairfax County’s $13 K plus per student sucks up a lot of tax dollars. Two kids in FCPS requires real estate taxes of c. $27 K. Not many households pay this level of real estate taxes. When my son graduates from Langley HS this June, I will revert to being a “surplus citizen” for the first time since 1997, when my daughter started kindergarten. Unless these young tech workers don’t have families, they will soon move from “surplus citizens” to “takers.” Most won’t be living the urban lifestyle either. They will be living in SFH.

    • TMT:

      Happy New Year. Your logic is too localized. People don’t talk about San Francisco’s Marina District being a haven for high technology. They talk about everywhere from Sauslito to San Jose as being the high tech capital of the world. DC is a bigger challenge since it extends across two states and an independent city.

      Tyson’s is one potential node for the so-called creative class. Reston, Old Town, Chinatown, Bethesda and other locations in the DC area are also potential places for highly educated people to live and work.

      The surplus citizen question is best understood over the period when someone lives in an area. Kids definitely tilt the game. However, surplus only makes sense when all taxes are compared to all expenses. Not just local taxes to local expenses. You can run a deficit on real estate taxes but a surplus on income taxes – at the state and federal level. In the end, the rapidly expanding entitlement class in the United States is going to require a lot of surplus citizens to pay for those entitlements. Since so many people now receive entitlements I think you can safely assume the politicians granting these entitlements are going to stay in office.

      So, we’d better find some high earning citizens that not only pay for their own costs but pay for someone in the entitlement class as well.

      Finally, we get to the question of state vs federal vs local responsibility. A couple of US states appear to be headed for insolvency. The federal government can’t really allow that. So, we’re going to see another massive transfer payment – from the solvent states to the insolvent states. Somebody will realize that having astronomical taxes in some insolvent or semi-solvent states will simply run off too many surplus citizens. What then? The feds will have to equalize the tax burden. They’ll have to take money from the solvent states and transfer it to the insolvent and semi-solvent states. At that point it won’t really matter where you live.

      • And a Happy New Year to you also.

        Given the financial arrangement between Fairfax County and the Commonwealth, I think analyzing the issues locally makes the only sense. For fiscal 2011, Fairfax County residents paid 23.4% of the Individual Income Tax and received 9.23% of the SOQ-based aid to K-12 education. So running a surplus on state (or federal) income tax makes no sense unless you are a liberal who likes income redistribution. The rest of the state does better when Fairfax County does well because of the above-described relationship. But residents of Fairfax County need to look only at their income and local taxes when they look at issues. And I don’t really care about other communities in the area. I don’t live there; pay taxes there; or consume services there. It is simply immaterial to me that Bethesda, the District or even Alexandria have booming businesses or failing ones. Those jurisdictions don’t affect my life to any significant extent.

        I agree completely on the problem of non- or low-producers. For society to function well, each person needs to generate enough income to sustain their existence. Ditto for government services, although that can be measured over their entire lifespan. We, obviously, have some people in society who cannot do this – the very young, the very old and the severely disabled. But if we add to this class, such as by importing poverty through unregulated immigration; have excess government employees; or excessive compensation for government employees (California, anyone), we create a big drag on society and the economy.

        • I see your point but only to a certain extent. All of Alexandria, Arlington and Fairfax ought to be incorporated as a city with its own city charter. And no, I don’t give a rat’s ass whether the people in the City of Fairfax like it or not. Some things are more important than some warped sense of history. Arlington is 26 sq mi and has a population density of 8,300+ per sq mi. Only in Virginia could that be considered a county. Meanwhile, the “city” of Alexandria is 15.5 sq mi with a population density of about 9,300 per sq mi. Why is one a city and the other a county?

          NoVa City would be big enough to make some intelligent trade-offs. Approximately 1.5M people in a city of about 450 sq miles. It could immediately start separating itself culturally from DC – a la Minneapolis / St Paul or San Francisco / Oakland.

          Best of all, the 20% of Virginians who would live in NoVa City would start to gain some autonomy from the political “elite” in Richmond.

  5. Since we got rid of Gerry Connolly from Fairfax County government, we’ve had a vast improvement in the quality of local government. Sharon Bulova is a sensible person who cares more about the residents of Fairfax County than her political career. Ditto for the rest of the BoS, irrespective of party. The existing BoS has generally held the line on both spending and taxes. The County has become much more responsive to citizens on land use and transportation matters. Why would people want to give that up and be combined with the crazies living in Arlington, Alexandria and Falls Church?
    Sharon Bulova talks about preserving the suburban quality of neighborhoods. Barbara Favola talks about “smart growth.” Bulova talks about finding ways to balance revenues and expenditures and making sure we don’t fund transportation projects that fail to show measurable improvement in traffic flow. Favola couldn’t explain why rural Virginians don’t want to pay higher gas taxes to help NoVA’s traffic. Bulova pushed $403 million from taxpayers to the Tysons landowners. Favola talks about how higher taxes and more government spending improves the quality of life.

    No, I’ll stick with the status quo. It’s a heckuva lot better than being joined to crazies. If I wanted to live in Maryland or the District, I’d have moved there. Smaller is better, as elected officials are more responsive. Indeed, if were possible to break off McLean or McLean and Great Falls, I’d vote for that.

    • The status quo won’t work much longer. Fairfax is a county in name only. Our BoS needs more autonomy from Richmond. The easiest path to that autonomy is a city charter. Now, whether that requires Arlington and Alexandria in the mix – I don’t know. But Fairfax alone defeats any “smaller is better” theory. It’s already 1.1M people. Bulova is wrong with her “suburban lifestyle” theory. Your plan to hold things constant won’t work either. Fairfax is betwixt and between. Too small to be a real city, too big to be a comfortable suburb. We need to either de-populate back to about 500,000 or move up over 2M. Creeping along and hoping for the best is Richmond-logic. I won’t call it wrong or wrong headed, I’ll just say it’s not how I’d prefer to roll.

      Splitting off Great Falls and McLean is, once again, too small an idea. The future of NoVa will depend on building good jobs in NoVa. And, that’s a regional problem, not a town sized problem.

      • Fairfax County will not become a city because, while cities have more power than counties, cities are also responsible for operating maintaining most streets. With the sole exception of John Cook, all of the supervisors strongly oppose taking over the roads. It’s a deal killer. So, in the absence of a major change in the makeup of the BoS, Fairfax County will not become a city.

        Similarly, the existing BoS will not approve the added density it would take to bring Fairfax County to 2 million people. The County is committed to bring its open space holdings to 10% of the territory and in keeping density to designated areas. Tysons proved the Supervisors will not adopt plans that are strongly opposed by the citizens. There was an all-out push to extend the density beyond 1/4 mile from the rail stations. It was rejected handily. Growing to 2 million would require the Supervisors to impose growth plans over strong opposition of the community. Further, the county is simply too expensive for many people to live within its boundaries. Fairfax County will grow, but only slowly. Urban growth in select areas will occur and infill will continue.

      • McLean-Great Falls. If either or both became cities, they would need to take over their roads, but would also have control over land use decisions. McLean would limit growth and protect against the spillover of Tysons. Great Falls would prohibit growth and protect its semi-rural character. These decisions would likely please the citizenry of both communities. But neither will become cities.

  6. One of the few things that the people of Va can do with regard to initiating referenda is with respect to consolidation, recursion, etc and if I understand the code correctly, only 10% of voters are required to get it on the ballot.

    http://vacode.org/15.2-3503/

  7. DJ is clearly an odd duck sometimes. He talks about “takers” but he also sounds like a tax & spender. He’d tax folks for transportation project and METRO though if given the choice, he’d tax ROVA to pay for it.

    Clearly in urbanized areas, amenities like subways, light rail, smart growth are financed from higher taxes.

    the underlying theme seems to be that there are infrastructure needs that cannot be satisfied with the existing tax revenues.

    no?

    • I was hoping that you might have made a New Year’s resolution to try to be logical. I want a city charter for NoVa City so we can raise our own taxes and spend them however we like. Meanwhile, RoVa should do the same – for everything: transportation, education, law enforcement, etc.

      If people find themselves living in an area where the economy is broken and government services are weak – they should either get used to it or move.

      Kind of like many of our ancestors moved across the Atlantic in rickety wooden ships to escape the hopelessness of Europe.

      • Raising taxes to spend the way we want. There are two likely areas for more spending – schools and transportation. The Supervisors already think the Schools are not run as efficiently as they need to be. The existing BoS is not going to raise taxes substantially for schools.

        Transportation. The BoS is, as I’m sure you are aware, exploring how it might raise revenues to fund additional transportation projects. The staff did a study, and took it public in a series of meetings. I attended one and participated. I expect this process to continue. There are, however, a few flies in the ointment. One is what projects do the Supervisors want to fund? Input from the citizenry opposed giving money on the premise of trusting the Supervisors. This can be overcome, but, at the same time, the release of any project list will ignite debate. There needs to be consensus on the projects.

        An even bigger fly is the political need to recover some of the costs from the beneficiaries. There will be a need to form tax districts or impose service districts. Commercial landowners may be cautious in approving tax districts. Keep in mind the Tysons landowners could not agree on a tax district for roads and bus transit. That leaves service districts, which, by law, probably requires the inclusion of residential properties. Again, note the strong opposition of Tysons residents to be included in the service district and pay higher taxes to fund, in their case, 11% of the transportation improvements to built in their community.

        The election of Gerry Connolly to Congress and the decisions made on Tysons have radically changed Fairfax County. A significant shift in power to the residents has occurred.

  8. …”so we can raise our own taxes”…. re: “logical”

    that’s a pretty vague statement.

    there are 33 cities and towns in Va that “raise their own taxes” but they still have to pay sales and income taxes to the State.

    And I’d point out that many of those cities and towns are smaller than your proposed “Fairfax City”.

    I’d also point out that you already have a Fairfax City and that the law allows it to expand it’s boundaries and/or to combine Fairfax City with Fairfax County to become a larger city – like Suffolk did.

    See.. when you say “logical”, I’m trying to understand exactly what you are advocating and whether or not it would be like other city charters in Va or whether you want something totally different and revolutionary – and politically impossible.

    I also wonder if you chose one of the reasonable options already allowed by law – if the good people of Fairfax County would agree to city status which almost surely would result in higher taxes and more densification.

    So how about it. How about laying out the specifics of what you are advocating so I _can_ look at it “logically”.

    Happy New Year!

  9. “High tech workers are “surplus citizens” – they pay more in taxes then they cost in government services.”

    This is exactly as crazy as the idea that we need to protect our small farms because they pay more in taxes than they get in services.

    Look at the other end of the spectrum, the end with various kinds of entitlements. (Whether the income spectrum or the real estate spectrum). There is simply no way to extract enough to pay for the sevices required.

    When we llok at the other end of the spectrum and claim that they pay more in taxes than they get in services, it is because we have not counted accurately all the services. We have and pay for homeless shelters so that we do not have to climb over mountains of homeless people huddled at the metro stop. The homeless shelter is a service to those that pay for it every bit as much as it is to those who have to use it.

  10. re: who decides the “type” of governance for their locality.

    my understanding is that citizens can initiate referenda independent of local elected to force this issue to a vote by citizens.

    It can happen. Last year a guy in Culpeper City got so frustrated with the back and forth between Culpeper City and Culpeper County over water/sewer and other issues that he threatened a campaign to bring to a vote – consolidation and in turn one governing body – accounting to everyone and the county and city mended their differences almost overnight because they did fear that a referendum might not go the way they wanted it to.

    The question is – is there any real widespread sentiment along those lines for people who live in Fairfax County to become a city – other than DJ that is?

    what clear advantages and benefits would county citizens see in such a move?

  11. Larry,
    Cities have some additional powers, including the ability to levy a meals tax without a voter referendum. I think there are also some additional fees that could be levied more easily by a city. Fairfax County officials looked at becoming a city in order to gain control over local streets. The staff studied the matter at some length, and the supervisors reviewed the information, with the BoS deciding it did not want to maintain the streets, largely because it believed residents would demand better service than VDOT provides. As far as I know, there is nothing else behind the issue. Land use authority is the same.

    I believe the BoS understands that, if it wants major improvements in transportation, it needs to raise and keep the money locally. But, as I stated earlier in this post, there are many issues associated with raising and keeping money locally. It’s just not a Til Hazel world in Fairfax County any more.

  12. cities have a lot more flexibility in maintaining and improving roads including cutting into sub-projects and phasing.

    but your statement: ” demand better than VDOT”?

    what does that mean?

    re: “raising and keeping money locally” property, sales, real estate are all local prerogatives .. and I think relatively left up to voters and elected.

  13. Larry,

    People in Fairfax County pay high real estate taxes and expect high-quality services in return. While I think VDOT has been providing better services over the last several years, it’s not high-quality, especially on the maintenance (plowing, grass cutting, fixing potholes). If Fairfax County were to operate the secondary roads, I don’t think people would accept the same level of service. They would be all over the supervisors. The staff did a study that assumed the County would receive the same money VDOT spends in Fairfax County. The staff concluded it would take somewhere between $60-90 million more to meet residents’ expectations. I’d put my nickel on a somewhat lower number, but it would be more money. The supervisors would rather spend local dollars on expanding transportation, rather than for maintenance.

    The entire process has been changed by the supervisors’ decision to require the landowners in Tysons to pay 59.5% of the costs for road and bus transit improvements. They received considerable comments from the public insisting similar policies apply countywide. That complicates matters. It’s much more complicated than a Dillon Rule problem. Developers in Fairfax County were used to getting sweetheart deals.

    • geeze TMT – they’ll want better… would they expect to have to pay more or would they think there is another magic vault – this time in Fairfax instead of Richmond?

      ;-)

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