Enrico Moretti joins us to talk about America’s most dynamic labor markets, the “brain hubs” and their impact in the U.S economy and society.
Enrico Moretti is the Michael Peevey and Donald Vial Professor of Economics at the University of California, Berkeley. He serves as the Editor in Chief of the Journal of Economic Perspectives and is a Visiting Scholar at the Federal Reserve Bank of San Francisco. He is also Research Associate at the National Bureau of Economic Research (Cambridge), Research Fellow at the Centre for Economic Policy Research (London) and the Institute for the Study of Labor (Bonn).
- Enrico MorettiProfessor of Economics at the University of California, Berkeley
Welcome to the Policy of McCombs podcast, a data driven conversation on the economic
issues up today in this series. We invite guests into our studio to provide a highlight
of their work presented during a visit to the University of Texas at Austin Policy.
Emma Combs is produced by the Center for Enterprise and Policy Analytics at the McCombs School of Business.
I am your co-host, Carlos Carvalho, with my colleague Mario Villarreal.
Our guest today is Enrico Moretti. Enrico is the Michael B.V. and Donna Viol professor of economics at
the University of California, Berkeley. Enrico has a vast publication list in the fields of labor and urban economics.
And he joins us today to talk about his book, The New Geography of Jobs. Enrico, welcome to Policy McCombs.
Thank you for having me. So let me start with two great quotes from the book. First, I
can remember at the beginning you say that what divide America today is not just socioeconomic
status, but also geography. And the second one, which is the very end when you say that one of the most intriguing
paradoxes of the global economy is becoming increasingly local.
So I think those two quotes are a good start for free to run us through the argument of the new geography
of jobs. Sure. We tend to think of the American labor market
as one unified labor market. But in reality, there are 300
labor markets in the U.S., one for each metropolitan area in the country.
And the wages, the incomes, the standard of living that a worker
can receive in each of these markets is different, is quite different
and it’s increasingly different. So the main argument of the book is that
the American communities are growing apart in terms of their economic success, in particular,
when you’re looking at wages and and economic factors
and that these factors ultimately also have an effect, a deep effect on other parts
of those communities that are not just purely economics, but they extend to
crime, to politics, to health, to to even family formation.
We live in a country that is incredibly in increasingly different and different increasingly
depend on geography. And the difference when you when you called the Great Divergence, it
applies not only to high skill labor, but to everybody to live in those communities. So I remember
one of the. Tell us a little bit about this, the story of Bill Gates. And I think that that there’s an anecdote about Albuquerque
and Seattle there that I think, you know, shows a divergence. Yeah, I think that’s a very compelling
story, because I think it highlights how communities can grow apart. It’s
a story about two two places, Seattle and Albuquerque, Seattle. We tend to think of Seattle
as this remarkable local economy. Today, it’s one of the most successful
cities in the U.S. in terms of innovation sector salaries, job growth.
It’s a place that has been on fire for the past 20 years in terms of
the labor market. But Seattle wasn’t really like that
in the late 70s. It was a. It was struggling
Seattle in the late seventies, didn’t have much. I took it
out at old industrial structure, mostly logging and some some
some truck manufacturing. The only advanced manufacturing they had was boring,
but Boeing was really struggling back then. It was shedding jobs by the thousands and the city
was really hurting. You could see it in its board in the local
economy, but also in the school in crime, in all the local amenities
that were really suffering. And then something happened. And by the
way, at the same time, you know, we you could also see it in
its cultural institutions, in its hospitals, and its pretty much any aspects of public
life was struggling. But then something happened. It was
January of 1979 that changed the trajectory of the city forever.
And then what happened was, as more startup decided to relocate from
Albuquerque, New Mexico, to to Seattle, that’s
more startup nobody noticed at the time. They were only eleven jobs. And that’s more
startup. Was was Microsoft. Microsoft not started
in Seattle all the time. Albuquerque was a more of a tech destination
than than Seattle. The main reason why Bill Gates and Ann
Allen at Pudi, the startup scene in Albuquerque, was that that’s where the clients were. That’s where software
users were. They wanted to move back to their family. They grew up in Seattle.
That was not like an economic choice. That was something that had to do with where they grew up. And
they wanted to move back close to their parents and are a place where they grew up.
But that’s individual choice. Eventually changed the trajectory of the city
of Seattle and the city of Albuquerque permanently. If, in fact, if you look at the data,
you can clearly see that, you know, Albuquerque and Seattle are trending
along similar path in the years before 1979. But after
Microsoft moved there, you start seeing Seattle
taking off at an increasingly fast rate, attracting more
and more college graduates, more and more workers with master’s degrees, more and more startups
and investment in tech. As as Microsoft grows to the 80s and the 90s,
it becomes the center of a cluster that expands well behind
Microsoft. It now employs androids of thousands, if not millions
of generate meters of good jobs in the area, which is ultimately why
why Seattle is booming. At the same time, you look at Albuquerque as being not doing
as well. Wages have been stagnating and it hasn’t been attractive to
high skilled labor to the same extent. So does the scoop to finish this one. And I think you should
say that the amount of light and high school laboring Albuquerque is about the same now than it was in 1980.
In the same when I mentioned here is the work in 2012. Right. But a low skilled worker
will be making $4000 more in Seattle in 1980. And now it makes $14000
more than Albuquerque Incident 2012, which is which is a dramatic difference. Right. So
that impact to the cluster. It goes beyond the high skilled labor impacts, the low skilled labor workers
in those localities as well. One important fact that it’s often lost, especially people
who are critical of this type of growth, is that the growth of the innovation
sector. Increases the demand for
a lot of other jobs that are not in the innovation sector. And I think Seattle really
exemplifies it as the number of engineers, computer
scientist, mathematician and software developers grew in Microsoft
and in the in the Seattle area. The demand for local services also
increased because these people needed local services. Anything from
going to a restaurant building. How is childcare? Doctors. Lawyers? Real
estate? Entertainment and retail.
All these jobs are local services. And they they employ a vast
and diverse group of people that are not in tech. They’re not in innovation
and actually the majority of the workforce. That’s true in every city in the U.S.
And while we see story is that cities that are booming in terms of innovation
sector jobs are also increasing the demand for service
jobs. So for people who have just regular jobs in a store and restaurant in a
driving a taxi, or they’re architects, doctors and lawyers, and they
they you know, there’s a powerful multiplier effect here. And for each tech
job, there are many jobs created in the local service sector. By my estimate, five
additional jobs are created in the local service sector outside Witek for each
additional job. And I think it’s what it means is that the growth of the tech sector really
is not generate benefits for not just for a group of people, but on a broad base.
This is a good opportunity for to pivot to a general
aspect of the book that I think is fantastic. And there is a constant concern
in general in society, economists, policymakers, politicians, the society at large
about creating good jobs. And it’s a constant conversation.
Now, your book alludes alludes to that. So what are the main lessons
that you can draw from your work about how. Do we create good jobs
in a society you talk about the need of supporting a viable ecosystem for companies? ECD,
you just described the trickle down multiplier effect. And I would add something
because after all, we’re a policy center, policy oriented center. What is a role for public policy there?
It’s a great question. It’s probably a big one of the main questions for our times.
In a society where some cities are attracting
a lot of high paying jobs and creating all this additional job creation
outside tech while other cities are struggling. You know, I think about the Rust
Belt. Think about places like Flint or Detroit. They clearly don’t have that
type of job creation. The question about what to
do to help the cities that are struggling to generate
good jobs. It’s crucial. I
think that the when you look at the history of high tech clusters
in the U.S., whether Silicon Valley. You know, the big of all or like smaller clusters that you see throughout
the nation, there is not many examples. In
fact, there is no example of clusters that were created by a deliberate policy on the part
of a local government or a mayor or a state. Gardner said. Well, in a great day or the next
Silicon Valley, the typical story that you see is very similar
to the Seattle story, where a local company start growing
in a sector and and then you start attracting other companies that are similar. And around that
company, you see you fall into like an ecosystem gets formed that then makes that
place even more attractive and attracts even more companies, more workers of that type.
The EDI Millgate case, I think is exemplifies how many of the clusters
in the U.S. form. And that’s a big that that makes
it very challenging for the Flynt’s for the Detroit, because it’s really hard to identify who
is the next Bill Gates. It’s really hard to identify who should we attract.
I think one thing that local and state government can do that has been
estimated to have a very good return for the local economy is to invest in the education
of their residents at all levels, whether it’s lower level of education or higher
education, like state universities, like where we’re sitting right now,
that investment, it’s as as a very good return, social
return. And from the point of not just for the individual who get that schooling, but also
for other members of the community who leave surrounded by highly skilled workers.
And I think that once once the community start increasing its level of education,
in particular in high school graduation and college graduation, what you see is that the
economy changes and makes it more attractive to sort of double employers were, you know, providing good jobs.
Could you elaborate on your take of using subsidies and
other type of economic incentives that local governments sometimes tried to
implement to entice companies and try to bring that process that otherwise, as you
describe it, will be more organic and spontaneous in nature? Yeah, it’s
a big issue. We’re spending part of 9 in a paper
estimate that we’re spend about 90 billion dollars annually on this type of subsidies.
So it’s a big form of welfare, if you will, if you want. It doesn’t target individual but targets
company. It’s also an incredibly bipartisan policy. People both in blue
state and red state love it. And you can see with me that their hopes are that, you know, if if the story is true that the hubs are
so economically prosperous after. So that’s what I
can see, why governors are trying. Yes. To come in and say, listen, it’s great one. Yes. And the dollar offers
ah ah, the dollar to get off her. The demand to get offer is very large.
We just saw last DRDO Amazon HQ to Saga.
Some locales were offering six billion dollars to attract Amazon’s jobs.
And Amazon is not the only one. I mean, DDD Tesla received 2 billion
from promised in Nevada to go to Reno. Fox home received 2 me 2 billion from the state
of Wisconsin to go to Wisconsin. So it’s it’s really big money.
It’s there are. I don’t think we know the answer, whether this is money that
is efficiently spent on one end. If there are these forces of agglomeration,
there’s this tendency of of success to generate more success for communities.
It’s not crazy to think that you want to subsidize the first movers that if the
seed that will then generate the cluster. On the other hand, a lot
of these subsidies are generally a zero sum game among communities in the sense that Amazon
was going to go somewhere in North America by offering subsidies, essentially what, transfering taxpayer
money to the company? The net effect on average for the for
the country is not. It is actually zero.
We studied the subsidies in a paper with Michael Greenstone, Eric Ormoc,
and we’ll look at manufacturing subsidies for manufacturing plants. We are finding that and we’re
comparing it. We’re looking at discount is when they’re bidding. It’s a bidding process
where essentially just like an auction where counties are offering an out and increasing the bids and so
on. And we were comparing what happens to the county that wins the bids to the county that made it to
the last round and barely lost it. And we were finding
that for the incumbent manufacturing plants in a county that wins, we’re
finding that winning increased productivity in that county.
So these are players that existed before the big new plan gets attracted. And we’re
measuring 2.5 to of protecting this plan. We’re finding that prohibited increases in wages tend to
increase in the county as a as an effect as a causal effect of a win in this.
That doesn’t mean that that’s money that you know, that it’s all money well spent here and there.
If you’ve got five million dollars, if you spend five billion dollars and you
get an increase in productivity, you really need to compare how much you spend with how much you put
in. So so the short answer to your question is, I think this is an area of active research.
We don’t know exactly the cost and benefits, I think in the aggregate is almost certainly not
a good idea because it’s a zero sum game for individual communities. It might be
a good idea when they’re targeting specific, specific companies.
But it’s really hard to do it inefficient way because you really need to
think you really need the local mayor and local going to be like a venture capitalist and have,
you know, really pick the right. There are winners. And that’s a hard that’s a hard thing to do. So
it’s another topic that that local governments can have a role here is that
in some ways it’s hard for us to believe that everybody can be a success story. So some some cities are just have to realize
that, you know, it’s better for our citizens to go somewhere else and go take advantage of this
cluster. There are gonna be they’re gonna be successful in becoming more successful with the size of the market matter and the force of attraction
that you describe in the book. So having people giving people the ability
to move to the communities where they can be more prosperous, they can be more productive even in low skill jobs
is something that I currently wouldn’t do that great of a job. And I know you point to things
in the book, one, you talk about the the unemployment benefits they could be targeted
to how people actually move to find a better labor market. But the other one is the fact that housing supply
is a big issue in those clusters where. So so, you know. Do you see any cities dealing with those things
in any better way than others? Or do you agree that supply is the main issue
associated with affordability? In cities across the country, I think supply is one of the key issues.
When you’re thinking about the big boom towns of the 1950s
and 1960s, places like Detroit, it was very easy for the average family to
who was not living there to pack and move and move to Detroit and get a good job and get it.
It was easy for them to find housing. But when you go about the boomtown of today,
San Francisco, Seattle, Austin or Boston,
these are much more expensive places to move. It’s not that easy for the average family to
relocate there because of the cost of housing. And so
I think that the supply of housing in particularly productive cities
that are experiencing increases in last.
You know what? It’s a good thing, which is very strong labor demand and rising
job creation does play an important role. And what it does essentially
transfer some of the benefit away from the families to the incumbent
land owners. We’re lucky enough to own land before affordable. And you point out that
this sort of driver of inequality, that those those that is our virgin. This is generated not only
comes to the labor market, but also to the housing market, right, because because there are a lot of the wealth is being created
through that. And that’s that’s that’s not a we can find that trend is easier in some ways, quote unquote,
to fight a trend for allow for more housing to be to be developing. But we fear I don’t know in America,
we’re both from from places where I think we see a lot more density in the cities that we came from. And
Americans find it a lot still. I think it’s time that cities
get used to high density in the right places. You want to build in smart ways. You don’t want to build
without any constraint. I don’t want people build on Golden Gate Park in San Francisco, nor on the hills.
I want people to build on undeveloped parking lot downtown. I want people to build.
If there is one story building next to a train station in Silicon Valley, I want to develop
it to be able to build four, five, maybe six stories. We’re not talking about building skyscrapers. We’re talking about testifying
in the right places with the right strategies, not rocket science. Planners are figuring out a long
time ago. We just need a political tie to turn.
I think the mayor is turning. Clearly, San Francisco’s changed a lot in that respect. I think the new
the new planning commission and the new mayor are more prizing
than in the past. And it’s been a long process. But
it’s. But but but there were some positive efforts in the legislator that
failed. But the spurs of something. Yes. Scott Wiener, state bill
was a very smart bill that would have a lot. Would have allowed density near transit
and would have constrained municipalities ability to.
To veto these projects. I think the building
needs to be done in a respectful way, respectful of the neighborhood.
A point I want to make is that it in an interesting way. I think building
more in the right ways has environmental benefits as well, because if you don’t
build an urban core, well, you end up you induce sprawl on the periphery. And so
building downtown or building where tragedy or building near jobs in places that
already develop in the urban core actually as additional benefit because
it reduces the pressure on on the periphery of a city for
building on the outskirts. The more units we can build in hot multi-unit buildings
downtown, the fewer single family homes are going to be built
on green land and the periphery. And I think that. The.
The movement against development that developed in the 70s in many places in the
U.S. was motivated by good reason. People wanted to preserve
open land and they did. After decades of massive suburbanization, they
wanted to preserve some of the land. And I think some of my
best places were in the Bay Area are actually came from those fights and incredibly grateful that
those fights took place. Today, though, people need to realize that you’ve done
what you want is you’re going to keep preserving green land on the periphery,
but not to do that, you need to build more in the urban core and to build
these marked ways, which means also add public transit and a local amenities.
And that’s a very progressive policy and a very environmentally friendly policy. So so the
the the other the other issue that the it’s you bring out is a very important
issue is the fact that the reason for high school labor to be paid
so much more at this point in time is not only to force hide the man of high school labor,
but the short supply of high skilled laborers who identify that as another point of of of something that we
can do about it to avoid this sort of divergence. Right. Of of high skill. Are the benefits
to high skilled labor. And you pointed it to the fact that, you know, we might not be producing enough
college graduates, for example, in good college graduates. So there is clearly a giant abortion
in demand and people wanting to go to college. But the market has not adapt to that. I think we,
you and I, both Polish professors, all of us, you’re working in university. And it’s
always that’s something that we should be thinking about. ‘CAUSE Clearly, yes, having more high school laborers produce will be a good idea.
How to do it is is very different. And I think I see universities as big negative players in
the business because we are monopolists. We don’t like to adapt and like to grow. And
I feel that that we could be doing a lot more. What are your thoughts on that? I think this is one
of the key issue for the aggregate economy with the U.S. There is
overwhelming evidence that the supply of
college grads was growing very fast in the U.S. in the 60s and the 70s,
and it slowed down in the 80s and then after the 80s. And
today is not as high as it should be. One effect is that the
premium that the monetary premium for going to college has doubled. So even in the 70s,
the 80s. Since since the late 70s. Yes. So even back then, college
grads would make more than an art school graduate. But the difference was about 40
percent today. The difference is above 80 percent. And so
if you then measure it over a lifetime of a worker, we’re talking about big money, big
money. It’s a huge difference in terms of how much you can buy and your standard of living.
And I think ultimately that’s one of the reasons why inequality nationally has grown. Is the fact
that that the gap between those who have a college degree or more and those
in high school degree or less, the gap in salaries has grown so much. And that gap has grown
so much in part because the supply of college God does not keep pace
where there’s growing demand for college grads. That comes from general changes in technology
in the workplace. Now, universities have reacted by increasing their
tuitions, just like if it’s supply, growing demand. Well, the
quality, not somewhat quantity, not so much the same quality as it used to be.
It’s still even after the tuition increases, though, it’s still a good deal
like a college graduation because it pays so much more than before. And because
it’s a benefit that keeps repeating itself every year for your life, for your career.
It actually still dominates the increase in tuition.
In fact, when you think about college. Graduation is an asset.
People have compared the return on investing in your children education with the return of investing
in the stock market. We return investing in the bond market, in real estate and so on. Well, for
the past three years, investing in college education was been the best asset you could invest in.
There was no other asset that had a higher return. Even just purely economic
benefits, let alone all the other benefits that we would think a college education generates.
Obviously better knowledge, all the intellectual benefit.
What what should be the role of universities? Well, I think that that certainly expanding
and targeting education better is crucial. I think
that a very important player in this space should be community colleges set to air colleges
that are playing this very important role of taking students who might otherwise stop the high
school and then are going to two-year colleges. And then they prepare
workers for Ford for high school. John four-four Yes, because perhaps
the purpose there is to a. Up their skills game, not necessarily
the credential game that often is attached to a college degree without necessarily
a bump in the skills. Yes, and it could be college who do that have their skill
level. Actually, they they they are good engines on mobility.
The I think a very good model. California is a very good model
where people have the best of the students. So some community college students stop
at 2 years and then go to get a job. Some the best can go can enroll into the
University of California system and I have them in my classes. And it’s hard,
hardworking, bright students and they’re actually sometimes even better than the student who started
at Berkeley. So this transfer mechanism actually provides a way out for the top part of distribution
of the community college students to move up to a four year college. And it’s it’s.
I would. From what I see, from from what I see appears to be a generally successful
idea. One more question. Yeah, a couple
I have a couple of my own. I wanted to say I want to own. I wanted to talk to to ESCA
quite addressed the last question that we have here about the trend since 2012. Of course. I mean,
Enrico, you wrote the book in 2012. What would be
some updates or new trends imagined? Imagine year your. Putting out
a new edition of the new Geographe few jobs would be one or two things that
you will be like. Oh, these would have to be there. Yeah, it’s interesting. I
read the book. I mean, I was working on the book during the Great Recession
and many of the trends that I was talking about were visible. But I would say that
they are even more visible. I mean, the difference between the
successful local economies, the San Francisco’s the Austin’s Deraa legs, the Boston
and the less successful look like Detroit. The Flint was clearly visible in 2012.
But since then has become even more pronounced. When you look at wage
income differences between these places as Karaka ever since.
In some sense, this is the way I’m thinking
about the Strand’s is not it’s not like a short-run
forces, but the more deep-seeded forces. And I think after the recession ended
it, the economic geography became even more even more polarized. Now, the thing
that happened was that. I think it was previous rebel in 2016
with an electro presidential election, and I think the geographical map of the
vote for Trump versus Clinton really tracks the
the UDD economic geography that that I’m discussing in the book.
We also see similar development in other countries. If you think about
the vote for Brexit, it really tracks the the divide in the UK.
It really tracks the divide between the more successful international,
global local economies in the UK like London and the more struggling
former manufacturing places in northern England. And then the yellow
vest producing in France also is very, very similar. It’s a divide between
between three or four global cities in France and the provinces that they’re really
struggling. So in all this, I think what what has happened is that one is the economic trends have strengthened.
The economic strength that I describe in the book is strengthened. And two, that we’ve seen in a wave of
political outcomes that I think have been dramatic instead.
Yes, I can be interpret as a reaction to the strands. So just to close it out, you’re here in Austin
and in walking here, you mentioned to me that if you look over your work over the past, let’s say 20, 30 years,
one of the biggest winners of this divergence has been Austin. Austin is
an outlier. What did you call it in 1980? What would you describe as the 1980 versus now?
Well, I would characterize Austin Local.com in the 1980s as a sleepy provincial town.
And then outsiders characterize it today as a global center of innovation, one
that attracts firms and workers from around the world
and is driven by indeed the very fortunate I describe in the book. I think that
there are other cities that have. More tech jobs
now. But in terms of changes over time proportionate to what they wear, Austin is the biggest
success stories since 1980 in the U.S. Go. Thanks for joining us. Policy McCombs.
It was a pleasure. Thank you for having me. Before we wrap up, you can get more information
in our medium page. Thanks for listening to Policy McCombs. See you next time.