The Impact of Innovation Jobs and High Tech Industries on the American Economy

The impact of innovation jobs and high tech industries on the american economy presented in enrico morettis the new geography of jobs

Just fifty years ago, manufacturing was the driving force behind the American economy. The automobile industry was thriving, and so were cities like Detroit that relied heavily on the automobile industry.

Today though, Detroit is a crumbled empire whose economy is in ruin. As the way people think has evolved, so has the economy and its primary sectors. The real money is not in manufacturing; it is the idea that rakes in revenue. Innovation jobs in the traded-sector are revolutionizing the way the economy works and determining how well a city’s economy fares. High-tech industries are creating jobs across the country, leading economists to predict increased prosperity.

In The New Geography of Jobs, Enrico Moretti argues that innovation is reshaping the economy, and the traded sector will continue to grow and increase prosperity in America. In the 1980’s and 90’s, the world issued 400,000 patents annually. In 2010, 800,000 patents were issued worldwide, a testament to how much the sector had grown (Moretti, 47). Manufacturing jobs have fallen from prominence in the 21st century, and now engineers, designers, and marketers are transforming the job sector.

For example, the computer industry has seen a 634% increase in jobs in the last ten years. Similar sectors such as R&D, life sciences, and pharmaceuticals have also experienced enormous job growth. Moretti claims that these new jobs in the traded-sector result in more jobs for doctors, lawyers, waiters, and other local professions. Thus, the ripple effect caused by the increase of innovation jobs raises output and employment in other sectors.

However, innovation and its impact occur unevenly across cities. Some metropolitan cities are hot-spots that host hundreds of start-ups in the innovation sector. Take Silicon Valley for example. This area in California is inhabited by a plethora of high-tech companies that employ workers who specialize in creativity. Silicon Valley and Seattle are among the areas that develop clusters of innovation jobs. These cities are hubs for promising employees with a skillset that can be best fit to a particular firm’s needs.

Because firms and workers locate in one concentrated area, labor markets are thick. In these markets, employers can easily find capable workers in their field and the workers can find a suitable employer who values their unique skillset. The high concentration of innovative thinkers in such close proximity leads to knowledge spillovers. Unplanned interactions with smart, creative people aid the spillover of knowledge (141).

New ideas create new start-ups, and new start-ups create more jobs for the entire community. Based on his analysis of eleven million American workers, Moretti concludes that every new job in the high-tech sector indirectly creates five new local jobs in the non-traded sector over the long run (60). To harness this growth, cities must adapt to the ever-changing economy. Innovation jobs are the sparkplug that now drives our economy forward, and according to Moretti, it will be the cause for America’s prosperity in the future.

Moretti contends that the number of jobs in the traded-sector will continue to rise. Recent data from the U.S. Bureau of Labor Statistics claims that over 306,000 engineers were employed in 2012. That number has continued to grow; employers in America searching for engineers planned to hire 9.6% more college graduates with engineering degrees in 2015. A majority of these engineers, specifically ones hired in the high-tech sectors like San Francisco and San Jose, are trained in computer and software engineering.

In the United Kingdom, engineer employment rose by 17.7%. The sector has witnessed the sustained growth Moretti predicted, and the salaries for new employees has also risen. Computer engineers were offered starting salaries of up to $69,250 (Patel, 21). IT and software engineers have many job opportunities due to the increasing demand for their services.

Growth in R&D is an additional reflection of the shift toward high-tech industries. Pharmaceutical companies are making major shifts to invest more in their R&D departments. In 2015, Bristol-Myers cut one hundred jobs while deciding to refocus their research away from virology.

The job cuts are directly related to new changes stemming from R&D. The company is currently renovating their location in San Francisco, likely due to the competitive nature of the area. Bristol-Myers has ongoing research in fields such as immuno-oncology, heart failure, fibrosis, and other genetically defined diseases.

In this case, innovation has a negative effect on the job market. While Bristol-Myers is focusing on R&D, well-trained people are losing employment, contrary to Moretti’s predictions. These layoffs occur because innovation causes technological changes. Thus, new equipment can ultimately result in the loss of jobs, suggesting Moretti is overly optimistic regarding job growth from technological advance.

Moretti also fails to capture the nature of competitiveness in the field of innovation. The United States maintains an edge in innovation and traded jobs, but Moretti does not seem to understand how other nations are beginning to reap the rewards of innovation. In a 2010 study evaluating the forty most industrialized nations in the world, the United States ranked dead last in “rate of change in innovation capacity”.

Essentially, the study shows that America’s growth in the innovation sector is the worst among economically productive countries. Some elements that determined the rankings in the study included education and investment in development with considerations for the ability to innovate down the road (Lechleiter).

As John Lechleiter argues in his Wall Street Journal article, innovation requires a three-pronged ecosystem in order to thrive. One of the necessary elements in this ecosystem is free markets that enable inventors and innovators alike to reap rewards for their creativity. While America’s markets enable innovators and start-ups to succeed, American legislation restricts investments in innovation.

Unlike many other nations, the United States’ tax system hurts our economy and the number of jobs it produces. The government must provide the innovation sector with “nutrients” as Lechleiter says, so that the sector can grow sufficiently. The final branch of the ecosystem is the talent and creativity that spawns new ideas.

As America falls behind in education, so does the ability for its citizens to formulate original innovations. Lechleiter points out that the level of proficiency of math and science must rise among children in grade school. He also suggests that America should allow more immigration of talented scientists. Science also needs suitable funding in to improve research and develop new ideas, specifically in divisions such as pharmaceuticals. Once the United States embraces the ecosystem required to increase innovation growth, the economy will see serious improvements.

Another fallacy in Moretti’s main argument regards innovation jobs and their status as catalysts for the economy. According to Moretti, each new job in the traded-sector results in five new local jobs in the long term. Evidence from the International Monetary Fund suggest otherwise. IMF statistics show that unemployment in the United States has been slightly rising in the past year. From May to June 2016, unemployment rose from 4.7 percent to 5.1.

The statistics compiled show unemployment increases by sector, so it is possible that innovation jobs are rising. Nevertheless, Moretti claims that more high-tech jobs produce more jobs for the entire economy. The numbers in Patel’s article are evidence that high-tech jobs are on the rise, so where are all of the new jobs that Moretti claimed would come with them?

In light of the doubts that innovation produces job growth, economists have created theoretical models to determine whether or not predictions like Moretti’s are accurate. David Ricardo shows innovation can result in decreased labor while increasing revenue. In his model, Ricardo visualizes how changing capital buys new technology and slices the demand curve for labor in half. Still, the innovation expands the price frontier, resulting in higher profits.

One hundred years later, Knut Wicksell reformed Ricardo’s model to reflect more modern working standards. The only significant alteration is that Wicksell made the supply curve for labor perfectly inelastic whereas Ricardo’s curve was perfectly elastic. Now, the demand for labor determines wages, not employment rate (Humphrey, 19-21). Wages may end up decreasing, but the working class is not left unemployed as they were in Ricardo’s model. Wicksell’s model also allows for revenue to increase, supporting Moretti’s claim.

So whose model is correct? Ricardo’s assumptions of a horizontal supply curve, and a minimum wage determined by the demand for labor are completely uncharacteristic of a labor market that would emerge today. His belief that innovation destroys more jobs than it creates are based on these factors that are unrealistic in modern economies. Wicksell’s model is much more accurate, and there is evidence to prove that innovation has raised both labor markets and profits in the past. As Humphrey states, innovation is beneficial for American economic growth and it will create a higher demand for labor over time.

Based on varying research, determining the accuracy Moretti’s arguments is very difficult. Throughout The New Geography of Jobs, Moretti makes compelling points that have some validity, but he does not account for all factors. For example, since the book was published, unemployment has fallen, but there have been episodes where unemployment has surged.

Moretti contends innovation will guide the economy to prosperity, but he fails to discuss the three-pronged ecosystem that is necessary for innovation to succeed on a larger scale. Moretti did correctly predict further growth in the high-tech labor market, and his theory that these jobs increase local jobs in the non-traded sector has traction based on Wicksell’s model.

Works Cited

  • Humphrey, Thomas M. “Ricardo Versus Wicksell On Job Losses And Technological Change.” Federal Reserve Bank Of Richmond Economic Quarterly 90.4 (2004): 5-24. EconLit. Web. 17 Oct. 2016.
  • Jaramillo, Cassandra. “Bristol-Myers to Close Sites, Cut 100 Jobs; Pharmaceutical Company, Adjusting its R&D Efforts, Will Discontinue Discovery-Research Efforts in Virology.” Wall Street Journal (Online), New York, N.Y., 2015.
  • Lechleiter, John C. “America’s Growing Innovation Gap.” Wall Street Journal, New York, N.Y., 2010.
  • Moretti, Enrico. The New Geography of Jobs. New York: Mariner Books, 2013. Print.
  • Patel, Prachi. “Where The Jobs Are: 2015 [Resources].” IEEE Spectrum 52.7 (2015): 21-22. Academic Search Premier. Web. 13 Oct. 2016.

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