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The Winners and Losers of Economic Clustering

Creative jobs and industries help advance city economies—but they also bring with them serious economic divides.

Yulia Mayorova / Shutterstock.com

By now, we know that the clustering of companies and talent in urban areas drives innovation and economic growth. But it also generates distinct winners and losers both across and within cities and metros.

This is the upshot of my new study with my Martin Prosperity Institute (MPI) colleagues Roger Martin, Melissa Pogue, and Charlotta Mellander, which was published as part of a special journal issue in honor of the 25th anniversary of Michael Porter’s landmark book, The Competitive Advantage of Nations. Porter is known for his research on the role of clusters of firms in economic development. Our study brings together Porter’s seminal work on industrial clusters with my research on the clustering of talent and occupations. While Porter’s work distinguishes between more locally-oriented and traded industries that export goods and services outside of their immediate geographic areas, my work distinguishes between creative, knowledge-based occupations in science, technology, design, and entertainment and routine occupations in manufacturing and services.

The chart below shows how we marry these two approaches, combining them to generate four distinct occupational-industrial categories: creative occupations in traded industries (which we call creative-in-traded), creative occupations in local industries (creative-in-local), routine occupations in traded industries (routine-in-traded), and routine occupations in local industries (routine-in-local). Our analysis examines the role of these four types of industries in innovation, economic growth, and inequality across some 260 metro areas that account for more than three-quarters of the U.S. population.

Mapping occupation and industry

To start, our study finds a clear connection between traded industries and creative occupations. According to our analysis, 46 percent of workers in traded industries are in creative jobs, compared to 35 percent in local industries. This is not surprising, since traded industries compete on innovation and creativity.

The next two maps and table show the spiky geography of these competitive creative-in-traded jobs across U.S. metros.

The first map, above, shows the geography of creative-in-traded employment. This category is highly uneven across the country, although it does concentrate on the East and West Coasts. As the table below shows, the leading center for creative-in-traded employment is San Jose, where creative-in-traded jobs make up a third of employment, followed by nearby San Francisco. Next comes Boston, followed by Raleigh in the North Carolina Research Triangle, Seattle, Washington, D.C., and Austin, where creative-in-traded jobs make up roughly a fifth of employment.

Top Ten Metros Share of Creative-in-Traded
San Jose-Sunnyvale-Santa Clara, CA 33.0%
San Francisco-Oakland-Hayward, CA 23.1%
Boston-Cambridge-Newton, MA-NH 21.3%
Raleigh, NC 21.3%
Seattle-Tacoma-Bellevue, WA 21.0%
Washington-Arlington-Alexandria, DC-VA-MD-WV 20.7%
Austin-Round Rock, TX 19.8%
Denver-Aurora-Lakewood, CO 19.0%
Minneapolis-Saint Paul-Bloomington, MN-WI 18.8%
Hartford-West Hartford-East Hartford, CT 18.5%
Bottom Ten Metros Share of Creative-in-Traded
Riverside-San Bernardino-Ontario, CA 8.3%
Las Vegas-Henderson-Paradise, NV 9.0%
Memphis, TN-MS-AR 10.3%
Jacksonville, FL 11.0%
Oklahoma City, OK 11.2%
Virginia Beach-Norfolk-Newport News, VA-NC 11.4%
Louisville/Jefferson County, KY-IN 11.4%
New Orleans-Metairie, LA 11.7%
Miami-Fort Lauderdale-West Palm Beach, FL 11.8%
Buffalo-Cheektowaga-Niagara Falls, NY 12.0%

The map below shows the average wages of creative-in-traded workers across all metros. Again we see a clear bi-coastal pattern with the highest wages concentrated along the West Coast (the Bay Area, greater L.A., and Seattle) and the Boston-New York-Washington Corridor on the East Coast, as well as leading knowledge and tech hubs in other parts of the country. In both cases, the geography of creative-in-traded employment is extremely spiky.

Creative-in-traded employment is a key driver of both innovation and economic growth, according to our analysis. It is positively associated with higher levels of innovation (with a correlation of .61), higher levels of economic output per capita (.53), and higher wages (.6). (As usual, we note that correlation does not equal causation, but simply points to associations between variables). That said, creative occupations are more closely associated with innovation and economic growth (with correlations of .52 to economic output, .52 to patents, and .66 to wages) than traded industries (with correlations of .38 to economic output, .35 to patents, and .25 to wages). Furthermore, creative-in-local jobs are modestly associated with wages (.34) and economic output (.17), but not with innovation. On the other hand, both routine-in-traded and routine-in-local jobs are negatively correlated to wages and innovation, while only routine-in-local jobs are negatively associated with economic output per capita.

Who comes out on top

Our study also sheds additional light on the winners and losers of this increasingly spiky, knowledge-intensive, trade-based economy. As the chart below shows, creative-in-traded industries have far and away the highest wages out of the four categories, despite employing the smallest share of workers. Their average salary ($79,000) is 31 percent more than the wages of creative-in-local workers, 117 percent more than those of routine-in-traded workers, and 182 percent more than those of routine-in-local workers. On the other side of the spectrum, workers in routine-in-local industries—which make up the largest category and represent 45 percent of all workers—have the lowest wages.

These trends are even more pronounced when we track them over time. As the chart below shows, the share of creative-in-traded workers increased from 13.3 to 13.9 percent between 2000 and 2012, while the share of routine-in-local workers increased from 43.5 to 44.8 percent. Furthermore, the wages of creative-in-traded workers increased from 74.0 to 78.5 percent above the national average wage, while the wages of routine-in-local workers fell from 31.7 to 36.8 percent below the national average. The wage gap between creative and routine workers—and between creative and routine metros—has increased considerably over time.

Troublingly, our research finds a rather close connection between creative-in-traded employment and inequality. The share of creative-in-traded jobs is positively associated with income inequality (.31). In other words, the higher the share of creative-in-traded employment in a metro, the more unequal it is. The share of routine-in-traded jobs (largely in manufacturing), for instance, is negatively associated with inequality (-.20).

This divide is magnified by housing costs, which are higher in more knowledge-based metros. To get at this, we ran correlations between the share of creative-in-traded workers and both overall wages and those left over after paying for housing for each group. All four categories of workers have higher wages in more creative-in-traded metros. But, when we take housing costs into account, we find distinct winners and losers in these more advanced, knowledge-based metros.

On the one hand, the two groups of creative workers end up being better off after paying for housing, with positive correlations for both creative-in-traded (.33) and creative-in-local (.36) workers. For both categories, their wages rise enough on average to more than cover the increased costs of housing in these more expensive metros. On the other hand, the two groups of routine workers do not see an improvement. Our analysis found a statistically insignificant correlation for routine workers in traded clusters, and routine workers in local industries are significantly worse off (with a negative correlation of -.43).

Raising the bottom

The consequences of these findings are stark. Higher wages in metros with larger creative-in-traded employment create greater incentives for more skilled and advantaged workers to migrate to these metros. As housing costs rise, routine workers—especially those in routine-in-local jobs—are shunted off to less expensive metros which, by definition, have smaller concentrations of higher-paying creative-in-traded jobs. This creates a vicious cycle in which the advantaged become more advantaged over time, while the disadvantaged sink further into poverty.

This spiky and unequal nature of the new economy provides a substantial challenge to local and national policymakers. While government can do its part by improving education and undertaking efforts to better prepare more workers for creative jobs, there are simply not enough creative jobs to go around. Today, roughly half of the U.S. workforce is in low-wage routine jobs, effectively ensuring the continued stagnation of American middle-class wages. While the proportion of creative jobs is increasing slightly, the process is painfully slow: 1.4 percent per year over the past half-century, on average. At that rate, it will take another 25 years to achieve the same amount of creative jobs as routine ones.

The only way out of this dilemma is to transform routine jobs into creative jobs. As we outline in our report, the burden of change lies with business and industry, which has much to gain in terms of productivity, quality, and customer service by increasing the creative content of what is currently routine work. Moving forward, the competitiveness of cities will turn on their ability to employ more workers in creative and traded industries, and to transform their economies and workforces from routine to creative work.

Top image: Yulia Mayorova / Shutterstock.com

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