The New Geography of Jobs by Enrico Moretti
What will the future economy look like, and what factors will dictate that future? The central question raised in Enrico Moretti’s 2013 book, The New Geography of Jobs, is the future economy. Moretti is an economist from Cal-Berkley, and he has made his living looking at non-traditional patterns of economic development to find the hidden reasons for growth and change. While this book has aged a little, the book’s premise seems to be even more critical as we emerge from the COVID-19 global pandemic.
The premise of Moretti’s book is there is a more sociological case to be made as to why regional economies thrive or suffer than one might think. The common meta-thought is that more traditional efforts at economic stimulus are why economies rise or fall. Take, for instance, tax incentives for cities. Lawmakers have long used tax incentives to lure businesses to relocate, start up, or expand, and the reasoning makes sense. If I have to pay 12% in corporate taxes to locate my business in City A or a 5% tax to locate my business in City B, I would likely locate in City B. After all, that can save $70,000 in assets for every million in revenue. In addition, it makes for great headlines. These kinds of incentives, including ideas such as capital infrastructure improvements, rent-free real estate, and salary enhancements for workers, are all part of a traditional goodie bag to lure business and seem to never fall out of favor.
But what if there was more to it than that? Moretti believes there is and his analysis of over 300 Metropolitan Areas in the United States makes the case that the economic solution is much more complicated than that. After all, if tax incentives and a friendly corporate climate are the solutions, then cities like San Francisco, Seattle, Boston, New York, and Denver should be struggling to gain footing in this tax-sheltered world. But guess what? These cities continue to lead the pack in terms of innovation, per capita earnings, and as home to a disproportionate number of Fortune 500 companies. So what gives? The cities mentioned above are the most regulated, highly taxed, and expensive to start and maintain a business.
This problem is at the core of Moretti’s ideas on the New Geography of Jobs. In his book, Moretti spends a lot of pages analyzing what he calls innovation hubs or economic clusters. He describes these hubs or clusters as places where expertise and capital meet and forge a strong partnership immune to taxation or regulation. The bottom line, if the cluster is strong enough, then it will outearn the burdens placed upon it. And outpace at such a rate that even if the corporate tax were zero, it still would not have the gravity needed to lure that company away. Moretti does point out there is one caveat when it comes to the tax solution. Tax incentives have impacted centers of raw material production. Think BMW moving to South Carolina to build an assembly plant, or Amazon is putting a distribution center in North Georgia. Tax incentives, along with a lower percentage of unionized labor and lower real estate costs, have a magnetic effect on manufacturing. However, these jobs tend to be held by workers who make a lower wage and have less education. The overall economic impact tends to lend these manufacturing plants the anchor of a less prosperous, albeit highly employed, region.
So, if the manufacturing base has shifted due to tax incentives, what are the factors that keep highly skilled and high-wage jobs in places that are expensive and hard to navigate? Moretti points to three factors that overshadow tax incentives. The first is what is called the Thick Labor Market Effect. The Thick Labor Market may be the most apparent reason for enduring economic establishment in certain cities and specific markets. San Francisco is in what we all know as Silicon Valley. It is well known for having one of the highest concentrations of tech-savvy workers globally. Home to Apple Computers, Google, and other tech giants, there is a desire by young tech stars to go there to “make it.” There is a great scene in the movie The Social Network where a young Mark Zuckerberg was advised to ditch Boston where he was living to start Facebook in California because “that is where the action is.” California had the brightest minds and a concentration that would allow Zuckerberg to get up and run faster, with more innovation than he could have achieved in Boston. And that is despite the higher expenses and labor costs.
The second factor Moretti points out is that once the Thick Labor Market establishes itself, a second phenomenon happens. Infrastructure in the form of support industries gravitates to the region. Shipping, raw materials, legal services, marketing firms, medical services, and even trendy restaurants and nightclubs pop up and take root in the area. Thick Labor Markets make for a fertile growth region that is hard to uproot and replant elsewhere. The corporate infrastructure does lure cities into investing in these enhancements. Here in Central Florida, we hear about road improvements, adding parks and recreation outside of the theme parks, and encouraging more hospitality to come here to create an environment where entrepreneurs want to set up shop and will find the region suitable for their business.
The last factor is likely the most challenging factor to duplicate in regions where it does not already exist. Moretti calls it Human Capital Spillover. Much like the Thick Labor Market, Human Capital Spillover is the inevitable collision between intelligent, innovative people, resulting in even better ideas that will make even more money. This Human Capital Spillover leads the region to be start-up friendly and incubate new ideas. Think about bars on Sixth Street in Austin, Texas, where tech professionals meet over Shiner Bocks and Shuffleboard and discuss their ideas and aspirations. These thinkers are approached by a funder or thinker who can help them make that dream a reality. It can only happen if a critical mass of these talented thinkers.
So if these three factors are more important than tax incentives, what chance does a city have to try to compete with Austin or Boston? Moretti offers some ideas. The first is what he calls the Force of Attraction. His idea is simple. Sometimes, maybe not often, people live in a place like Des Moines or Lubbock, and they love living there, but their idea is such a promising talent cannot stay away, and they are willing to move to wherever the magic is happening. Talent development is where higher education can be a great leveler. Moretti contends that as higher education diversifies and creates hubs for thinkers to gather, then the odds we will see future innovation hubs grow. Here in Central Florida, the growth of universities such as UCF, USF, and FIU, universities I represent in the Florida Consortium, are examples of that opportunity. Central and South Florida has emerged in the past 15 years past their vacation destination status to be a hub for innovation in military research, space research, computer simulation, and medical industries. Economic growth in Florida has added a viable upper class of residents. It has created an environment where Tampa Bay, Orlando, and Miami are ranked #1, #3, and #5 respectively as the best places in the U.S. to start a company.
Moretti paints that our economy is far more complex than tax incentives. While these incentives help some, they are not the solution we all think. Talent is the future of our economy. Moretti calls it the “Human Capital Century,” and we live in it.