The Geography of AffluenceFor years, we’ve heard that the rise of digital technology and the resulting increase in telecommuting was going to render distance and geography irrelevant.
It is true that there are already many examples of people working remotely, removed from a physical office by distance and even time zones, connected virtually and contributing as if they were physically “there.” So it seemed intuitively obvious that a person’s location was no longer going to matter because “there” was now everywhere.
But, it turns out that these examples are not glimpses of a “placeless” virtual future; rather, they simply represent a small niche of work that happens to lend itself to being created, sent, and “collaborated upon” in an exclusively digital context. The vast majority of jobs, it seems, still require a physical presence and a certain degree of face-to-face spontaneous interaction.
As Enrico Moretti points out in his new book, The New Geography of Jobs,1 in spite of the advent of the Internet and the connectivity of social sites such as Facebook, people still learn more from the colleague down the hall, where interactions run much deeper than they do online.
One can add that once face-to-face relationships have been established, virtual communications can profitably substitute for much of the subsequent back-and-forth. But, purely virtual contact cannot fully replace one-on-one interfacing in the vast majority of situations.
What this means is that futurists were wrong about location not mattering. Even more surprising is how much the geography of job location still matters. In fact, it has become even more important than it was before. So, more than ever, improving one’s lot in life will likely require being in the right place.
For Americans, this is not a new concept. Currently, roughly 33 percent of American citizens do not live in the state in which they were born. This is up from 20 percent in 1900. This mobility is reflected by the fact that around half of Americans move from one home to another every five years.2
§§§§§§§§§§
On the other hand, Europeans tend to stay near their families and even spend their whole lives in their hometowns. Young Italians clearly follow this pattern, with 83 percent of males younger than 33 still living at home.
Traditionally, Americans have accepted the downside of moving in order to realize the gains. We’ve grown accustomed to the social and personal costs, such as living farther from our families and being less attached to our neighborhoods and neighbors.
In return, relocating can offer better opportunities, and we don’t let the negatives stand in the way of improving our situations.
§§§§§§§§§§
What is now new in this historic model of American mobility is that the ability or inability, or desire or lack of desire, to move is having a greater and greater effect on one’s affluence. As a result, a great divide based on geography is beginning to form.
To a large degree, this divide is happening along educational lines, because it is becoming apparent that the better educated tend to be more mobile.
A study conducted by Abigail Wozniak of the University of Notre Dame found that 45 percent of college graduates will move from their state of birth by the age of 30.3 For high school graduates, this figure is 27 percent, and for high school drop-outs, it is only 17 percent.
A large factor in the differences in these numbers is the greater ability of the better educated to pursue employment opportunities that require moving. Not only do they typically have the resources to make a move, but, in many instances, their relocation costs are paid by the new employer.
A high school drop-out can be considered geographically stranded. If a low-level job is lost, even if there are more opportunities in a neighboring state or city, the cost of moving may be an insurmountable hurdle.
§§§§§§§§§§
For example, at the height of the recession in 2009, Detroit’s unemployment was 18 percent and Iowa City was experiencing only 4.5 percent unemployment. These cities were just 500 miles apart, but it took an investment to move.4
There were the direct costs of moving, plus the living expenses until a job was found or until the first pay-check was received. Low-skilled, unemployed workers in Detroit lacked the savings and access to credit to make the investment to move.
§§§§§§§§§§
Using data from the Census, Wozniak analyzed workers in their late 20s, comparing the extent of their education to the economic conditions they faced in their states when they were 18 and about to enter the labor market. She concluded that education level best explains the willingness of young workers to move to a state with better economic conditions.5
Another great assumption about the digital age that is unraveling is that when location ceased to be important, the economic differences between cities and regions would begin to fade. But because location is instead becoming more important, a “great divide” is not only growing between people, it is appearing between cities and regions. Moretti calls it the “Great Divergence.”6
Brain Hubs Create More Value and They Pay Higher Wages
This divergence is sorting U.S. metropolitan areas into three main categories:
- The brain hubs, such as Silicon Valley and Seattle, have the type of industries, base of human capital, and high wages that continually attract good employers.
- The post-industrial cities, including Detroit and Cleveland, are losing both jobs and population as salaries continue to shrink.
- So-called “cities in the middle” could move in either direction.
§§§§§§§§§§
Consider the way Menlo Park and Visalia, two California cites, diverged over the past four decades. In 1969, both cities had a similar mix of residents in terms of income levels and proportions of “professional, middle-class families,” “working-class families,” and “low-income households.”
Although Menlo Park could boast a somewhat better-educated populace with a bit higher wages, the differences were fairly small. Schools in both cities were comparable, as were crime rates.
Both cities had close proximity to attractive natural resources: Menlo Park was near the ocean, and Visalia was near the Sierra Nevada range as well as Sequoia and Kings Canyon National Parks.
Today, 43 years later, despite being only 200 miles apart, these two cities may as well be located on different planets.
The Silicon Valley region is the epitome of success. It has a global reputation as the world’s most important innovation hub. Jobs are plentiful, with the second-highest average salaries in the country.
The area has a low crime rate, excellent air quality, and school districts that rank among the best in California. Menlo Park itself consistently attracts small and large high-tech companies. And it’s often referred to as “ground-zero” for the venture capital industry.
Visalia is now about as different from Menlo Park as you can imagine. Average salaries are among the lowest in America, and the crime rate is high. Its schools rank among the worst in California, and they are unprepared to deal with the large number of non-English-speaking students.
In addition, the city has one of the worst pollution problems in the nation, especially in the summer, when it suffers the third-highest level of ozone in the nation.
The defining difference between these two communities can be traced back to the 1980s, when residents’ levels of education began to differentiate American cities. Those cities with a high level of college-educated workers attracted even more of them, while cities with less-educated residents began slipping backwards.
This phenomenon is clearly on display when comparing Menlo Park and Visalia. Silicon Valley residents are highly educated, with half having college degrees and many holding PhDs; it ranks fifth among the “best educated” urban areas in the nation.
At the other end of the spectrum, Visalia ranks second-lowest in the country in terms of its percentage of college-educated workers. Tellingly, of all the major cities in the Central Valley, it is the only city without a four-year college.
This comparison provides an extreme example of the geographic sorting of workers by education levels, which lies at the heart of the increasing importance of location.
§§§§§§§§§§
Just as certain cities became centers of manufacturing in the industrial revolution, so today, geographic areas are becoming hubs in the knowledge economy. An area that has a slight advantage can grow as success attracts good workers, who contribute to further success, which attract yet more skilled workers.
It’s a “virtuous cycle.” In the knowledge economy, skilled workers translate into the ones with brain power and creativity. Today, regions that fail to attract the innovators will continue to fall behind.
Because so many physical goods have become cheap commodities, we’ve entered a new era where human capital and innovation have become highly valued.
Therefore, innovators gain the most reward from the value of new products. The iPhone is a good example.7
The phone’s 634 components are assembled in Shenzhen, China, but the value created there is low because this step in the process can be done anywhere. It’s the original idea, the unique engineering, and its industrial design that give the phone the majority of its value, and that happened in Cupertino, California, among a group of highly educated people.
Economic research has revealed that we become more innovative and more productive when we’re around other smart people. In other words, geographic location matters, which is why certain geographic regions are increasingly becoming hotspots.
But, it’s not just the innovators who are benefiting from their success in these brain hubs. There are two other positive side effects: more jobs in all sectors and higher pay for all.
Workers in cities that lead in innovation make about two to three times more than workers in identical jobs who are in cities that are moving backwards. As this gap keeps growing, it demonstrates that even for lower-end jobs, location matters now and into the future.
Job creation is the other positive side effect. Although this is not a new phenomenon, the scale is unprecedented. Whereas a manufacturing job has traditionally created 1.6 local jobs in service industries ? barbers, waiters, doctors, lawyers ? innovation jobs each create five such jobs.8 This is called the multiplier effect.
For example, Apple has 13,000 employees, and generates nearly 70,000 additional jobs in its region.
Based on this trend, we offer the following forecasts:
First, America’s innovation brain hubs will become the new engines that drive our economy and determine our prosperity.
As some sectors and occupations disappear and others grow, the effects of geography on affluence will only strengthen. The result will be a momentous shift in the labor market, where the effects of globalization, technological progress, and immigration will not be uniform across all regions in America. Residents of some cities will benefit, while other cities will suffer. Most notably, old manufacturing capitals will disappear, a trend that is already happening. In the decades ahead, there will be an unprecedented redistribution of jobs, population, and wealth, and it will happen at an accelerated rate.
Second, smart business and civic leaders will increasingly use public-private partnerships to jumpstart innovation brain hubs, and thereby trigger the virtuous cycle of affluence.
While “seeded hubs” may never fully mirror spontaneous ones, they still have considerable potential. For instance, despite its proximity to the banking hub of Charlotte, the town of Kannapolis, North Carolina, suffered a slow decline because of the disappearance of the domestic textile industry that once dominated the region. In response, the state of North Carolina partnered with Dole foods and several other life-sciences firms to create a world-class biotech research campus on the former site of an enormous textile mill. The influx of Ph.D.-level researchers and their support teams have already triggered an economic resurgence even in the face of the Great Recession. Along with other such regions across the country, this brain hub will yield significant economic fruit in the coming decade and beyond.
Third, the so-called “Great Divergence” will continue to go far beyond simple economics, driving significant social changes as well.
The ongoing division of Americans into communities largely based on education level will greatly intensify other socioeconomic differences, including cultural identity, health, family stability, and politics. These changes can already be seen with the divergence of life expectancy, divorce rates, crime rates, and political clout of different communities beginning in the 1980s. Because these differences will only accelerate, the percentage of college-educated people in any particular city will have a profound effect on both its affluence and standards of living.
References List :
1. The New Geography of Jobs by Enrico Moretti is published by Houghton Mifflin Harcourt. ⓒ Copyright 2012 by Enrico Moretti. All rights reserved. 2. The Wall Street Journal, May 26, 2012, "What Workers Lose by Staying Put," by Enrico Moretti. ⓒ Copyright 2012 by Dow Jones & Company. All rights reserved. http://online.wsj.com 3. Journal of Economic Perspectives, Summer 2011, Vol. 25, No. 3, "Internal Migration in the United States," by Raven Molloy, Christopher L. Smith, and Abigail Wozniak. ⓒ Copyright 2011 by The American Economic Association. All rights reserved. http://www.aeaweb.org 4. The Wall Street Journal, May 26, 2012, "What Workers Lose by Staying Put," by Enrico Moretti. ⓒ Copyright 2012 by Dow Jones & Company. All rights reserved. http://online.wsj.com 5. Journal of Economic Perspectives, Summer 2011, Vol. 25, No. 3, "Internal Migration in the United States," by Raven Molloy, Christopher L. Smith, and Abigail Wozniak. ⓒ Copyright 2011 by The American Economic Association. All rights reserved. http://www.aeaweb.org 6. Salon.com, May 20, 2012, "Americas Great Divergence," by Enrico Moretti. ⓒ Copyright 2012 by Salon Media Group, Inc. All rights reserved. http://www.salon.com 7. Ibid. 8. PandoDaily, May 30, 2012, "Job Creator, Money Maker: Silicon Valley and the New Geography of Jobs," by Hamish McKenzie. ⓒ Copyright 2012 by PandoDaily. All rights reserved. http://pandodaily.com
