Graphics by Josh Lee
The BRB Bottomline: America’s biggest cities are becoming richer and larger. Meanwhile, their smaller counterparts struggle with low pay and dwindling populations. Why is it that small cities can’t attract high paying jobs and catch up? It is because like attracts like.
The bigger cities keep attracting more jobs and employers, perpetuating a cycle going on since the last century.
Enrico Moretti, Professor of Economics, here at UC Berkeley, starts off his book ‘The New Geography of Jobs’ contrasting California’s two cities, Menlo Park and Visalia. Back in 1969, they had comparable income levels and high-paying jobs. But since then, these cities have diverged. Visalia has one of the lowest average salaries in America, while Menlo Park, and the broader Silicon Valley, has the second-highest average salary in the US with its high paying tech employers.
Since the 1980s’, as Prof. Moretti says in his book, “A handful of cities with the ‘right’ industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages.”
INNOVATION AS THE DRIVER OF GROWTH
Being Berkeley students, we are right at the heart of tech innovation. The biggest and fastest-growing companies are just next door. And for those of you trying to work in tech, you will likely end up in Silicon Valley, Seattle, or New York. But chances are you won’t be in Winston-Salem, NC or Stonecrest, GA. It’s because these cities, judging by their current trajectory, won’t be able to catch up. “The superstar cities have pulled so far away,” says MIT economist Simon Johnson in this Reuters article. At least up until the coronavirus wreaked havoc on the job market, 40% of the jobs created since 2010 went to the top 20 metropolitan areas out of the 370 in the US.
This job growth is not random. It is tied to the ‘innovation’ sector which encompasses any job that involves creation of new ideas or products. These jobs span your usual suspects like information technology, life sciences and medical devices. It also includes any innovation in entertainment, environment, and even finance.
As per Prof. Moretti’s research, every new high paying job in the ‘innovation’ sectors has a 5x multiplier effect on job creation in ancillary sectors. That is, for one new high-tech job, there are 5 news jobs in both skilled (lawyers, teachers, nurses) and unskilled (waiters, hairdressers, drivers) workers. Thus the labor market and the amenities in the city start to further develop: school, transit, bars, yoga studios, restaurants, etc. Venture capital and private equity investment follow. This is increasingly attractive for a large tech firm looking to relocate a few thousand employees or a small startup looking for financing and a large pool of candidates to employ. Koleman Strumpf, a professor of economics at Wake Forest University, says in an NYT article why Winston-Salem failed in its Amazon HQ2 bid: “We don’t have mass transit. No Amtrak. No good airports. It’s not a walkable city. It doesn’t have great amenities.”
WHY SMALLER CITIES CAN’T CATCH UP
In the mid 20th century, smaller cities could catch up through manufacturing. As big factories were established in automobile, steel, and chemical industries, cities like Detroit, Cleveland, Akron, Gary, and Pittsburgh reaped big rewards. Prof. Moretti estimates for each new manufacturing job created, it has a 1.6 multiple effect on other local service jobs. While that isn’t as high as the 5x multiplier on the tech/innovative jobs, it is still a positive multiplier.
Post World War II, productivity gains led to the expansion of manufacturing capacity. As cities like Detroit pumped out automobiles in the 1900’s, it brought many families into the middle class and prosperity to the region. But that boom only lasted for a couple of decades. Late 1970’s onwards, manufacturing started moving to China. So did the manufacturing jobs. Since 1985, the US has lost an average of 372,000 manufacturing jobs every year. Not to confuse manufacturing with manufacturing jobs; manufacturing is actually up in the US since the 1980’s. It is manufacturing jobs that have been lost, mostly due to automation. As these cities lost thousands of manufacturing jobs, they lost jobs associated with manufacturing in the service sector. The feedback loop works in both ways. The big cities create a tech job, which then creates another 5 ancillary jobs, which then attracts another tech job, and so on. Conversely, the manufacturing cities lose a manufacturing job, its associated service jobs, and so on.
HOW DID THE BIG CITIES GET HERE
One major driver for growth is the presence of big research universities. Universities increase both the demand for and supply of college graduates. Universities can also exploit their patents for profit. Many college students might start their companies while they are still in university. For example, Google started at Stanford with guidance and funding from university professors and alumnus. Universities’ medical schools and their associated hospitals also attract and retain a lot of local talent. Berkeley and Stanford (Bay Area) and MIT and Harvard (Cambridge-Boston) have contributed a lot to their local economies.
But simply being close to a big university is not enough. Otherwise, Phoenix with Arizona State, Gainesville with the University of Florida, or New Haven with Yale would have larger labor markets. Instead, universities help maintain and grow a cluster.
Take Seattle for example. There was already a cluster present. There was thick labor demand with companies like Microsoft and Boeing and supply with University of Washington. Amazon was attracted there in part by these benefits; the other being states’ lack of a sales tax.
Tax is another big attraction. Amazon’s HQ2 search was dominated by the search of the biggest tax incentives cities could offer it. Back in 2011, San Francisco, to lure companies away from its neighbors to the south, offered a 1.5% payroll tax break to companies that moved to its mid-market neighborhood. As noted in this CNBC article, Twitter, Uber, Pinterest, Dropbox, Airbnb, Yelp, Square, and Slack took advantage of the city’s offer and moved. Salesforce, Google, and Cisco also expanded their presence there.
Some cities just get lucky. They host a small company that becomes big and starts a cluster there. One example is Microsoft in Seattle. Early on, Bill Gates moved Microsoft from Albuquerque to Seattle, his hometown. An even better example is Portland with Nike. Phil Knight co-founded Nike in Portland in 1964. As it grew, more footwear competitors were drawn. Adidas moved its North American headquarters from New Jersey in 1993. Columbia Sportswear and Mizuno and Keen also moved. As recently as 2015, Under Armour made Portland its hub of operations. Portland has emerged as a strategic center for the brand, specifically in footwear and innovation,” said Diane Pelkey, an Under Armour spokeswoman, in a statement. The presence of one big company gives competitors a talent pool to hire and poach from.
These formulas for growth are not necessarily replicable. It’s difficult to find another Nike or Microsoft. You can’t develop a new Stanford in the middle of nowhere. Even harder to replicate is the Nashville model. The country music hotspot is 11th on the list of metropolitan areas with the largest job growth. With near-zero interest rates following the 2008 financial crisis, Nashville city officials built a $600 million convention center. Other factors contributing, as noted by Reuters, were ‘the state’s lack of an income tax’, ‘the city’s celebrated country music roots’ and ‘seven-night-a-week year-round party scene’ that drew major conferences and trade shows.
This entire model of a big city attracting more high remuneration jobs is predicated on the assumption that an employee needs to be in the city. But that falls apart if employees can work from home as we are observing with the coronavirus pandemic ongoing. If a highly paid employee chooses to stay in a smaller town, the additional five local service jobs could be generated there. Facebook has said that half of its 48,000 workforce might be working remotely in the next five to ten years. Twitter, Square and Slack are also exploring this idea.
However, work from home only solves our divergence problem if the employees stay in smaller cities. If they even have to come to the office once a week, they still reside in and benefit the big city. Not all of these jobs however can be made remote. Apple is pushing to restart work in the office. Not all employees may want to work remotely. Microsoft has work-from-home optional till October. Its CEO Satya Nadella thinks that “making remote work permanent could lead to negative consequences for social interaction and mental health.”
As you can see, this pandemic has added a bit of dynamism to the otherwise continuing trend of divergence. However, we won’t be able to see the effects, if any, for a long time. The pandemic is still going on. Companies and people are still adjusting. We have no definitive idea of what the labor market will be like after this is over. I would caution against making any judgements while the situation still evolves.
WHAT HAPPENS NOW
As per the data collected by the NYT, from 1960 through 1980 less-affluent counties experienced faster economic growth relative to their richer counterparts. But since then, this process of convergence has stopped. Without major changes, these smaller cities will not be able to catch up to its ‘superstar’ counterparts. Government support at all levels along with local buy-in is important to any recovery plan. For example, the combined efforts of municipal government, state government and University of Notre Dame have led to a reversal, if not an outright revival, of South Bend, IN. But without any drastic actions, the divergence will increase, and you will probably end up working in Silicon Valley.