The New Geography of Jobs

Enrico Moretti, a labour economist at Berkeley, examines why American cities have diverged so sharply in wages, employment and opportunity, and what determines which cities gain.

His central empirical finding concerns the local multiplier. Using data on employment across metropolitan areas, he estimates that each new job in the traded innovation sector generates roughly five additional jobs in local services in the same city, and that this multiplier is far larger than for traditional manufacturing, where he estimates about 1.6. The mechanism is that innovation workers earn high wages and spend them locally on services that cannot be traded, which raises wages for the people supplying those services, including workers without college education.

He then explains why innovation activity clusters. Three forces produce agglomeration: thick labour markets that let specialised workers and firms find each other, supplier ecosystems, and knowledge spillovers between people working on related problems. These forces are self-reinforcing, which produces divergence rather than convergence between cities. Moretti argues that the resulting geographic inequality is now the dominant form of American inequality, that mobility has fallen partly because housing costs in successful cities are prohibitive, and that place-based subsidies to attract firms generally fail. His policy conclusions favour housing supply, education and mobility support. The multiplier estimate has been contested on identification grounds, and the housing constraint argument has become the more widely accepted part.