Greater income inequality among places, not just people, reshapes the labor market in America and beyond. Driving the change: the innovation cluster.

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Dr. Moretti's book, The New Geography of Jobs, was described by Forbes magazine as “easily the most important read of 2012.”

Americans frequently debate why wages are growing for the college-educated but declining for those with less education. What is less well-known is that communities and local labor markets are also diverging economically at an accelerating rate.

A closer look at the 300-plus metropolitan areas of the United States shows that Americans with high school degrees who work in communities dominated by innovative industries actually make more, on average, than the college graduates working in communities dominated by manufacturing industries, according to research by University of California, Berkeley economist Enrico Moretti, the author of The New Geography of Jobs, a book that Forbes magazine called “easily the most important read of 2012.” In the San Jose metropolitan area, for example, a high school graduate averages $68,009, compared with the $65,411 that is average for a college graduate in Bakersfield, Calif.

Some places have always been more prosperous than others, but these differences have increased more rapidly over the last 30 years as the gross domestic product and patents for new technologies have concentrated in two to three dozen communities that Moretti identifies as “brain hubs” or “innovation clusters.”

In these clusters, highly specialized innovation workers, such as engineers and designers, generate about three times as many local jobs for service workers ― such as doctors, carpenters, and waitresses ― as do manufacturing workers, Moretti said recently when speaking at Stanford Graduate School of Business. Here are edited excerpts from Moretti’s answers to questions from the Stanford audience.

What causes clusters to emerge?

This is a very active area of research, but I think fundamentally, there are three major reasons why clustering takes place. One is the thick labor market effect. If you are in a very highly specialized position, you want to be in a labor market where there are a lot of employers looking for workers, and a lot of workers looking for employers. The match between employer and employee tends to be more productive, more creative and innovative in thicker labor markets.

It is the same thing for the vendors, the providers of intermediate services. Companies in the Silicon Valley will find very specialized IP lawyers, lab services, and shipping services that focus on that niche of the industry. And because they are so specialized, they're particularly good at what they're doing.

The third factor is what economists call human capital spillovers ― the fact that people learn from their colleagues, random encounters in a coffee shop, at a party, from their children, and so on. There's a lot of sociological evidence that this is one of the attractions of Silicon Valley. You're always near other people who are at the frontier, so you tend to exchange information. Sometimes it's information about job openings. Sometimes it’s information about what you're doing, what type of technology you're adopting, what type of research you are doing. And this, as you can imagine, is important for R&D, for innovation.

So these three forces are crucial, and that means that localities that already have a lot of innovation tend to attract even more workers and even more employers. That further strengthens their virtuous circle.

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Dr. Enrico Moretti leading a seminar organized by the Stanford Program on Regions of Innovation and Entrepreneurship (SPRIE) of the Stanford Graduate School of Business as part of its Silicon Valley Project.

Are these clusters sustainable forever?

Probably not. Previous clusters have collapsed in spectacular ways. The Silicon Valley of the 1950s was Detroit. People have researched the rise of Detroit, and it mimics very well the rise of Silicon Valley in terms of the amount of innovation, the type of engineering, the type of salaries they were paying. In the 1950s, if you were a car engineer, there wasn't any better place in the world to be, and if you were a car company, you had to be there. But then, of course, it collapsed.

In my book, I have a chapter on the difference between Detroit and Silicon Valley. This region has kept reinventing itself in ways that are remarkable. It was all orchards, and then it became all hardware, and then it became all software. And now it's becoming something else: social media and biotech and clean tech. Some types of clusters don't survive big negative shocks, and other clusters are able to leverage themselves into the next thing.

Is there a clean energy cluster that is structurally different from an internet or an IT or a biotech cluster? Or are they all intermingled?

Typically, clusters are very specialized. Silicon Valley is the exception in the sense that there are so many different technologies. More typical examples are Boise, Idaho, for radio technology or Portland, Oregon, for semiconductors. Seattle has a combination of software and now a growing body of life sciences. Boston is mostly life science. D.C. is a remarkable story. It's very diversified now in terms of private-sector innovation, but most clusters are going to be small pockets of one industry.

Does your argument hold for high-paid but non-high-tech sectors? I was thinking of New York being a financial sector or L.A. being entertainment, and Houston being oil and gas. Then you mentioned Washington, D.C. That's government.

I would argue that three you mentioned would belong to what I define as innovation sectors in the following sense: Finance in New York is not bank tellers; it’s people who invent new products, new technology, and new ways of making things. They are unique, and you can't easily reproduce the cluster somewhere else. That certainly applies to entertainment, especially the digital part of entertainment that is the fastest-growing part of entertainment jobs.

It also applies to the D.C. cluster. The growth of D.C. over the last 20 years is mostly driven by private-sector headquarters moving there, and an educated labor force. Some of the companies are military contractors. Some companies are life science. They're anchored by the National Institutes of Health being there, and other government agencies. But most of the growth actually comes from the private sector.

Now oil, Houston, I'm not sure. I don't know how strong these clustering forces are for these type of jobs. I would imagine ― and we're not talking about the guy who drills, but it's more like the guy who plans where to drill ― to the extent that there is a high component of innovation that makes something that is unique, I would say it applies.

If I'm a high-tech worker, how am I responsible for creating five other jobs? It’s hard for me to accept there are five.

The way to interpret the multiplier is to imagine dropping 1,000 innovation jobs in one city but not in another, and then going back 10 years later to measure how many additional local service jobs there are in the city that experienced that innovation-sector drop of jobs. So it's a long-run effect, but it’s not impossible for three reasons.

One is that the average high-tech worker tends to do very, very well, and people who are wealthy tend to spend a large fraction of their salary on personal and local services. They tend to go to restaurants and movies, and to use taxis and therapists and doctors on average more than people who are paid less.

The second reason is high-tech companies themselves employ a lot of local services; everything from security guards to IP lawyers, from the janitor to the very specialized consultant. High-tech companies tend to use more services than manufacturing companies.

The third reason is the clustering effect. Once you attract one of those high-tech workers, then in the medium to long run, you're going to be attracting even more of those high-tech workers and companies, which will further increase your multiplier. So it's a long-run number, measured over a 10-year period.

You pointed out that the salaries of the less-educated part of the local population are higher in those places that do have a lot of the innovation. How is that reconciled with the drastic drop over 30 years in their national average compensation?

We don't have enough brain hubs where innovation is concentrated. We have 320 metro areas in the U.S., and probably, by my definition, we have 15 to 20 brain hubs. In those places, you have brisk job creation outside the innovation sector, and you have decent wages for people outside. But we also have a big chunk of the country producing not very much, in part because manufacturing jobs have been shrinking, and innovation hasn't really taken place.

So what hope is there for these areas?

That's a million-dollar question. It's tough because, in some sense, if this clustering effect is particularly strong, it's good news for places like here, but it's terrible news for places like Flint or Detroit. A successful local labor market has a very nice equilibrium, where you have a lot of skilled workers who want to go there and a lot of innovative employers who want to go there. It's really hard to re-create somewhere else.

And it's not like we're not trying. We're spending $15 to $18 billion annually in what economists call place-based policies, which are essentially subsidies to try to attract employers to these areas. The idea being: “They're not coming, so if we just break this vicious circle, if we just bring some, then the clustering effect starts taking off. We can effectively create innovation hubs where they don't exist.”

I haven't found one example of an innovation hub in the U.S. that has been created by deliberate policy that says, "We're going to create an innovation hub here." Taiwan might be a good success story. It’s hard to get data, but Taiwan was an agricultural economy in the 1960s that had very little innovation. Then in the 1970s, it created enormous government subsidies for semiconductors and a lot of other technologies. All the others didn't pan out, but semiconductors worked. Taiwan is still putting money in, so it's not exactly clear whether it's a perfect example. Picking the next big thing is very hard for the venture capitalist. It's virtually impossible for the government worker.

What's the situation in other regions around the world ?

Obviously, India and China are major success stories, but that doesn't mean that this clustering effect is not at play within those countries. A different example is Italy, where I am from. Italy has been the Detroit in this story. It had a very strong pharmaceutical sector in the 1980s, and a smaller computer cluster. Once the pharmaceutical industry started becoming global, you saw mergers and a concentration of the industry’s R&D in a few places. I know because my dad was employed there, and his lab was first moved to Sweden and then to New Jersey.

I think the same is happening throughout many countries in continental Europe, and even in places like China and India, which have success stories but enormous regional differences. The innovative part of the Chinese economy is concentrated in a handful of megalopolises.

This is an interesting paradox of the current economy. Probably the best news of the last 20 years globally is the vast increase in the standard of living in places like China and India and Brazil, so there's certainly been a convergence in the standard of living when you compare nations. But when you look within those developing nations, you see the same great divergence that you see here.

Enrico Moretti is professor of economics at the University of California, Berkeley, where he holds the Michael Peevey and Donald Vial Career Development Chair in Labor Economics. He is also director of the Infrastructure and Urbanization Program at the International Growth Centre at the London School of Economics and Oxford University. His talk at Stanford was hosted by the Stanford Program on Regions of Innovation and Entrepreneurship, located in the Graduate School of Business.

 

Kathleen O'Toole is a journalist who frequently writes about social science. She is currently assistant editorial director of marketing and communications at the Stanford Graduate School of Business.

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REAP Co-Director Scott Rozelle recently spoke at a Lung Yingtai Cultural Foundation (龍應台文化基金會) event about China and the middle income trap. Using the contrasting experiences of South Korea and Mexico as a guide, Rozelle provided a glimpse into the economic ramifications of allowing the gap between rural and urban education in China to grow wider. Read the CommonWealth Magazine article in Chinese here.

Although the Japan Studies Program (JSP) was formally established in 2011, the Walter H. Shorenstein Asia-Pacific Research Center’s (Shorenstein APARC) newest addition has a rich history that equals or even exceeds that of the Center itself. The archives—through dozens of occasional and working papers, studies, photographs of landmark events, and books—reveal three vibrant decades of research on Japanese economics, industry, government, and international relations.

Japan studies took root when the Center was founded in 1983 and has evolved with the political, economic, and social changes in Japan, and with developments in U.S.-Japan relations. Under the leadership of co-founding Center director Daniel I. Okimoto, one of the earliest projects explored U.S.-Japan competition and collaboration in high-tech industries during the 1980s and 1990s. Other initiatives led to a definitive three volume comparative study of Japan’s political economy, and an exploration of the United States’ evolving ties with its Northeast Asia allies, including Japan.

Early Center activities brought together distinguished scholars, practitioners, and policymakers from Japan and the United States for fruitful interdisciplinary academic collaboration and meaningful policy dialogue, and laid the groundwork for many enduring relationships with Japanese universities, ministries, and other organizations. One of the first of such activities was the U.S.-Japan Congressional Seminar series, through which members of the U.S. Senate and the Japanese Diet met for candid, in-depth discussion on issues of mutual significance related to trade, international economic policy, industrial policy, and security.

After Japan’s economic bubble burst in the early 1990s, the country underwent a range of political, economic, and social transformations. Even amidst challenges, Japan has adapted, as its firms continue to be globally competitive in many areas, and it persists as an Asian economic powerhouse; on the security front, Japan remains one of the closest allies of the United States. Emerging out of these transformations is a new Japan that offers quite a different picture from the old rapid-growth era.

The newly instituted Japan Studies Program aims to make Stanford a U.S. leader in the field of contemporary Japan studies. As an integral component of the Center, JSP facilitates multidisciplinary, social science–oriented research on contemporary Japan, emphasizing both academic scholarship and policy-relevant research. The program aims to become a central platform for Stanford students and the broader community for understanding and engaging with Japan.

JSP actively collaborates with other organizations on campus, such as the Center for East Asian Studies (CEAS), the US-Asia Technology Management Center, and the Stanford Graduate School of Business. During the one-year anniversary of the March 11 Great Tohoku Disaster, JSP co-sponsored a lecture series with CEAS examining Japan’s growth and recovery, and it held a major conference focused on restructuring Japan’s energy industry. Since 2011, its popular lunchtime seminar series has brought numerous high-caliber guest speakers to Stanford for insightful talks on subjects ranging from cloud computing in Japan and the United States to the comeback of Japan’s conservative party and the new era of “Abenomics.”

JSP experts actively contribute to Shorenstein APARC’s publishing program of timely, policy-oriented edited volumes and working papers, and regularly contribute op-eds and journal articles to numerous leading newspapers and scholarly journals, including the Journal of East Asian Studies, Socio-Economic Review, and Energy Policy.

Looking ahead, Takeo Hoshi, who joined the Center as JSP’s director in December 2012, says, “I want to make Shorenstein APARC the first place that researchers, policymakers, business practitioners, and students visit to understand more about the Japanese economy and politics—I look forward to working with everyone at Shorenstein APARC (and beyond) to achieve this goal.” With a strong, growing core of affiliated faculty, researchers, and staff, the future for Japan studies at Stanford looks bright.

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In 2007, Daniel Okimoto, Shorenstein APARC director emeritus, received Japan’s Order of the Rising Sun, Gold Rays with Neck Ribbon, in recognition of decades of work. (Credit: courtesy Daniel Okimoto)

(l-r) Kenji Kushida, Masahiko Aoki, Kiyoshi Kurokawa, and Takeo Hoshi ( JSP director). Kurokawa, chair of the Fukushima Nuclear Accident Independent Investigation Commission, spoke at JSP on how the scientific community can help policymakers respond to change in a globalized world. (Credit: Wena Rosario)

For almost two decades, the Walter H. Shorenstein Asia-Pacific Research Center (Shorenstein APARC) produced outstanding work in Korean affairs but lacked a separate program for Korean studies; by the turn of the millennium, however, it was clear that more attention and resources needed to be devoted to Korea. Between 1960 and 1990, capitalist South Korea had risen from the devastation of the Korean War to produce an economic “miracle on the Han River,” followed soon by full democratization. In the process, it became a global model of development. Meanwhile, North Korea was pursuing nuclear weapons and long-range missiles while maintaining one of the world’s last Stalinist systems, even outlasting the Soviet Union itself despite a devastating famine in the mid-1990s, and the regime’s threats presented a major concern to policymakers. Together, the two Korean states with radically different systems, competing for hegemony on the divided Korean Peninsula, constituted an unparalleled “natural experiment” for social scientists.

Since 2001 when Gi-Wook Shin was invited to found a program within Shorenstein APARC, the Stanford Korean Studies Program (KSP) has developed into a world-renowned center offering impactful programs addressing current, policy-relevant issues and events. KSP sponsors conferences and workshops that bring together leading Korea scholars and policymakers for meaningful dialogue. Special events afford the general public the opportunity to engage with distinguished practitioners as well as emerging scholars. KSP also supports fellowships, collaborates with a broad range of visiting scholars, publishes award-winning books and reports, and offers commentary to leading media.

Amassing talent to create a premier program

From its one-person beginning a decade ago, KSP now has faculty members in sociology, history, and literature, with two more appointments pending. In addition, KSP has two full-time staff members and a research assistant. A Korean language lecturer and a Korean Studies librarian support program activities. KSP taps into the rich array of Stanford-based faculty and senior fellows who conduct policy-related research on Korea within FSI-affiliated centers and programs, and at the neighboring Hoover Institution.

KSP has sponsored collaborative research projects on a range of Korea-related subjects. The South Korean National Assembly Project considered the generational change under way in South Korea’s government and its political and ideological implications, specifically how such changes affect Assembly votes—and Korean policy—on major issues. Other projects focus on mass media and U.S.-Korea relations, including the ROK-U.S. West Coast Strategic Forum, the Korean experience of historical injustice and reconciliation, and a book series on Korean democratization sponsored by the Academy of Korean Studies. Findings from such groundbreaking projects are regularly presented at KSP seminars and conferences, and published as books and journal articles.

A next generation of scholars

KSP is devoted to training the next generation of Korea scholars by offering courses on Korea through various academic departments, working closely with the Center for East Asian Studies, which offers an MA in East Asian studies with a specialty in Korea. A writing prize in Korean studies was created in 2012, and KSP co-sponsors a Korea internship program and convenes popular overseas seminars in Seoul, enabling Stanford undergraduates to experience Korean politics, history, and culture firsthand. In collaboration with the Stanford Program on International and Cross-Cultural Education, Stanford KSP is expanding opportunities for high school students to take online courses on Korea and for U.S. secondary school teachers to bring Korean studies into their curricula.

Each year, KSP offers outstanding opportunities for fellowships and visiting scholars from Korea and elsewhere. With generous fellowship support from the Pantech Group and the Koret Foundation, KSP has hosted over 100 alumni, including two former South Korean foreign ministers, former senior officials from the United States, South Korea, and China, and leading Korea scholars and experts. These visiting scholars participate intensively in KSP research, educational, and outreach programs, and continue their association with the program after leaving Stanford through an active alumni association.

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John Everard, former British ambassador to Pyongyang and a Pantech Fellow, speaks on North Korea at the annual Koret Conference, part of the 2011 celebration of Stanford KSP’s tenth anniversary. (Credit: Rod Searcey)

Students from Seoul’s Hana Academy perform traditional Korean music for participants of the Hana-Stanford Conference on Korea. (Credit: Rod Searcey)

In 2007, in recognition of the importance of developing a program devoted to the study of contemporary China, the Stanford China Program (SCP) was established within the Walter H. Shorenstein Asia-Pacific Research Center (Shorenstein APARC), which for decades had already been the home for extensive research on China at Stanford University; within a few short years, SCP has become an integral part of the Center, establishing a reputation as one of the top research programs in the country focusing on contemporary China, especially political economy.

Conducting cutting-edge research and training the next generation of scholars

SCP faculty are doing cutting-edge research on a wide range of challenges facing China: fiscal shortfalls and local governance, property rights reform and corporate restructuring, social inequality and mobility, food security, markets, education and poverty alleviation, environmental pollution and public health, and political participation and popular protests. SCP research is a vital part of Shorenstein APARC’s publishing program, and has resulted in several acclaimed edited volumes. The program has also played an integral role in bringing top visiting scholars from China and the United States to Stanford for a valuable cross-pollination of research and knowledge on China.

While primarily a research entity, SCP recognizes the critical importance of training new generations of Stanford students for broader and deeper interactions with China. Bringing together both research and teaching, the SCP-pioneered China Social Science Workshop has become an in-house forum for faculty and their doctoral students, as well as invited outside scholars, to present work in progress. It has fostered critical analysis and feedback essential to turn research into high-quality publications.

Other ongoing SCP academic workshops and conferences promote intellectual exchange with leading scholars within the United States and from China; the program also provides opportunities to educate broader audiences through public lectures on timely topics, such as the recent “China Under New Management” series in the wake of China’s once-in-a-decade leadership change following the 18th Party Congress.

Apart from its regular quarterly seminar series, SCP has also played a vital role in the Oksenberg Lecture, held annually to honor the legacy of Professor Michel Oksenberg. A senior fellow at Shorenstein APARC and the Freeman Spogli Institute for International Studies (FSI), and a key member of the National Security Council when the United States normalized relations with China, Oksenberg consistently urged that the United States engage with Asia in a more considered manner. In tribute, the Oksenberg Lecture recognizes distinguished individuals who have helped to advance understanding between the United States and the nations of the Asia-Pacific. Recent Oksenberg Lectures have illuminated key issues, such as the modernization of China’s military, constraints on China’s foreign policy, and areas of friction in U.S.-China relations.

Establishing the Stanford Center at Peking University

Aside from making great strides in building China studies at Stanford, SCP has played a special role in the university’s globalization efforts. Shortly after SCP was founded, director Jean Oi, with the help of Andrew Walder and strong support from FSI director Chip Blacker and dean of research Ann Arvin, started to work on creating Stanford’s first university-wide center abroad—in Beijing.

In March 2012 the Stanford Center at Peking University (SCPKU) officially opened, housed in a historic courtyard compound in the middle of Peking University, on the former site of an imperial palace. Oi concurrently serves as the Lee Shau Kee Director of SCPKU. Stanford is the only university to have a standalone center in a top Chinese university, with SCPKU serving as a unique platform for all of its seven schools, one that enables all Stanford faculty—not just those affiliated with SCP—to do cutting-edge research on a wide range of topics. Shorenstein APARC is a core program at SCPKU, with a dedicated office, and with SCP has already held a number of conferences and meetings at SCPKU since its opening. Ever cognizant of its academic mission, SCP is proud to have played a role in creating a home away from home for Stanford students to have a hands-on understanding of what China is—the kind of training you cannot get from reading a book.