The Multiplier Effect of Innovation Jobs

Because of a multiplier effect, each new high-tech job in the U.S. creates five additional jobs in the service economy, says economist Enrico Moretti.

“An unprecedented redistribution of jobs, population, and wealth is under way in America, and it’s likely to accelerate in the decades to come,” argues Enrico Moretti in his new book The New Geography of Jobs (Houghton Mifflin Harcourt, 2012).

Moretti’s research gives form to a nagging sense that Americans who live in sluggish cities already know in their gut: Technological progress doesn’t affect American cities in the same way.

Instead, what Moretti terms a “Great Divergence” is developing between cities such as Seattle, Boston and Austin, the “new innovation hubs” that are “poised to become the new engines of prosperity” — and everywhere else.

A professor of economics at the University of California, Berkeley, Moretti writes that “the difference among communities in the United States is bigger than it has been in a century.” Workers in hot cities are making two to three times what identical workers make in cities that are losing ground.

Some highlights of Moretti’s research:

Job generation happens in clusters. “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,” Moretti writes. Ecosystems form in these hot cities, complete with innovation companies, funding sources, highly educated workers and a strong service economy.

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Hot companies generate five times as many indirect jobs as direct jobs. Apple, Moretti says, employs 13,000 directly in Cupertino but has spurred 70,000 indirect jobs in the region. Two-thirds of American jobs are in the local service sector, he writes, and “the almost magical economics of job creation” are that “for each new high-tech job in a city, five additional jobs are ultimately created outside of the high-tech sector in that city, both in skilled occupations (lawyers, teachers, nurses) and in unskilled ones (waiters, hairdressers, carpenters).” What’s more, innovation “has a disproportionate effect on the economy of American communities. Most sectors have a multiplier effect, but the innovation sector has the largest multiplier of all: about three times larger than that of manufacturing.”

Even though governments wish it were otherwise, there’s no turn-key solution to building energetic job hubs. Moretti writes that the multiplier effect means that “the best way for a city or state to generate jobs for less skilled workers is to attract high-tech companies that hire highly skilled ones,” but he says in a radio interview that it’s “really hard to engineer an innovation cluster; we talk about Seattle, but if you look at a lot of the clusters, they were all born in very random, and often serendipitous, ways.”

Since it’s so difficult to bring job hubs to the unemployed, governments should bring the unemployed to job hubs — in the form of relocation assistance. In a recent Wall Street Journal essay adapted from his book, Moretti writes that “Relocating is like an investment: You spend money up front — to cover the costs of a move and of living expenses until a job becomes available — in exchange for a better job later. But because of limited savings and access to credit, many low-skilled unemployed workers are unable to make this investment.” He points to Detroit, which has experienced crushing job losses: “An unemployed worker in Detroit has limited incentives to move to, say, Chicago, a more expensive city but one where the labor market is stronger.”

Moretti’s proposal: “Unemployed individuals living in areas with above-average unemployment rates should receive part of their unemployment insurance check in the form of a relocation voucher. The voucher would cover some of the costs of moving to a different area. Instead of encouraging unemployed residents to remain in Detroit, in other words, the federal government could help them relocate to another city with financial support that covers part of their moving expenses.”

It’s a bold vision: first, to point out that having a lot of college-educated residents “changes the local economy in profound ways, affecting both the kinds of jobs available and the productivity of every worker who lives there, including the less skilled.” Second, to note that the result is higher wages for both skilled and less skilled jobs alike. And third, to then posit that if you can’t get more college-educated people into struggling cities, the best way to assist people who can’t find work is to help them move to where the action already is.