Location, Location, Location

A review of "The New Geography of Jobs"

Enrico Moretti’s “The New Geography of Jobs”

“The New Geography of Jobs” is a 2012 book by UC Berkeley professor Enrico Moretti. The book is about the nexus between economic geography and labor economics, and treats both subjects masterfully. It tackles a seemingly simple question: does where you live impact how much you earn?

The answer is a resounding yes. The most relevant unit of analysis is the city. You can divide, broadly speaking, both cities and jobs into two groups. Jobs can either by cutting-edge, high productivity, or just regular - think a Silicon Valley computer whiz versus a lawyer, a hairdresser, or a construction worker. Cities, too, are divided: cities with these cutting-edge sectors, and those without them.

Where does the difference come from? Well, in general, wages track productivity. So cutting-edge sectors, which are the most productive, have the highest wages. But there’s an interplay between location and type of job. Because cutting-edge jobs tend to be clustered in certain cities, there’s many more high wage professional types in them. These people demand lots of things that can’t be brought from elsewhere: housing, hairdressers, restaurant meals, lawyers, doctors. Because their wages are higher, they are willing to pay more - and businesses charge them more. But because “regular” people still live there, their wages also have to rise to make up for the higher cost of living. This is why laywers, doctors, waiters, and other such workers make the most money in places like San Francisco or New York, even when they’re just as good as their counterparts in other cities. So even if you don’t personally work in an innovation job, living in the same city as the innovators raises your wages (and your cost of living) because you can charge them more for the same products.

The key concept to take into account is a cluster: a dense network of interacting companies within a narrow range of activities. The most obvious examples of clusters have to do with natural resources: oil wells, refineries, etc on top of oil reservoires; mining clusters in mining areas, agoindustrial clusters in farmland, international trade clusters in coastal cities. But most clusters aren’t like that, and instead are like Silicon Valley (technology), Hollywood (entertainment), Wall Street (finance), or the American Midwest (manufacturing).

Exactly how clusters pop up is a separate thing, but why they exist at all isn’t uncontroversial. If the economy was a featureless, homogenous void, clusters would still exist. The main way to understand why is to understand that the labor market is a lot like dating, since it mostly consists of matches between two parties. Imagine that you can choose between two dating apps: both have exactly 50% men and 50% women, with equal numbers between all sexualities, but one has ten million users in your area, and the other one has just 100. Even if your chances of matching with anyone are the same in both, the chances of a match working out are much bigger in the first app because it’s thicker. The same is true for a labor market: if you want to hire workers with just the right skills, having more workers is better. So once there’s a large number of companies in one sector in one place, it’s suboptimal to no move there. Companies want to hire the best workers, and the easiest way to find them is to be close to other companies that hire similar workers.

But where do clusters come from? A good example is US biotech. In 1973, after recombinant DNA technology was invented, a number of biotech companies sprung up across the US: Boston, Philadelphia, Los Angeles, San Diego, Palo Alto, Miami, etc. But presently, there’s only really three major clusters: the San Francisco Bay Area, Boston-Cambridge, and San Diego. The normal explanation has to do with the locations of major universities (Stanford, UC San Francisco, and UC Berkeley, MIT and Harvard, and UC San Diego respectively), but UC San Diego wasn’t that good in the 70s, and it’s still not really an explanation for why places like New Haven (Yale University), Baltimore (Johns Hopkins), or Philadelphia (University of Pennsylvania) didn’t succeed. The answer seems to be that the most important and/or successful companies, during the “random location” phase, were located in those particular cities, and then the clusters formed around their success.

Locations can be picked for any number of reasons before a cluster is formed, but afterwards the best response is to simply move to wherever the cluster is. Another such example is Microsoft: Bill Gates moved his company from Albuquerque, New Mexico back to his home town, and then a cluster sprang from his success. Therefore, in the 90s, Albuquerque native Jeff Bezos moved his company (Amazon) to Seattle as well, simply because not doing so would have been a terrible idea. Similar things happened with computers and Silicon Valley (William Shockley, inventor of the semiconductor), or entertainment and Hollywood (DW Griffith moved to L.A. to shoot “Birth of A Nation”).

So does this mean that the government can create clusters? (Aka “place based policies”). Yes and no. There are two big approaches. First, to attract the kinds of people who work for cutting-edge firms to a city in the hopes that firms follow. This idea is based on the fact that highly educated workers want to live in cities with certain amenities (a vibrant food scene, cultural events, museums, etc.), and that companies will follow them if they move. This doesn’t really make much sense on its own, and it’s also not backed by the evidence.

The second approach for building clusters is to induce companies to move their headquarters, or other “big pushes” to create new activities in an area. These seem to work somewhat, with the big caveats that incentives are frequently too large compared to the benefits to the community and that the government isn’t especially good at guessing which companies would be able to create a cluster, especially because moving an existing cluster is nearly impossible, so they have to bet on a new one.

Either way, “The New Geography of Jobs” is a very good book, and I highly recommend it, at least for a more in-depth look at the ideas stated above. It’s an easy read, and you’re not left feeling like it’s either a half-baked info dump, or an incomplete summary of cherry-picked studies.