The tale of two economies?

As technology expands its impact on economies, there is an increasing trend for growth to cluster around certain regions or cities of a country, potentially widening the productivity gap and leaving behind entire segments of society. This has created the need for potential policy-based initiatives to ensure that productivity remains viable across larger parts of the country, or risk political and social repercussions.     

A new analysis of where “innovation” jobs are being created in the United States paints a stark portrait of a divided economy, where the industries seen as key to future growth cluster in a narrowing set of places. 

Divergence in job growth, incomes and future prospects between strong-performing cities and the rest of the country is an emerging focus of political debate and economic research. It is seen as a source of social stress, particularly since President Donald Trump tapped the resentment of left-behind areas in his 2016 presidential campaign, and used it to come to power. Populism has been on the rise elsewhere in the world, including in Sri Lanka, where the productivity dividend is felt to be leaving vulnerably sectors like agriculture behind. 

Research from the Brookings Institution in the US released this week shows the problem cuts deeper than many thought. Even cities that have performed well in terms of overall employment growth, such as Dallas, are trailing in attracting workers in 13 industries with the most productive private sector jobs.

Between 2005 and 2017, industries such as chemical manufacturing, satellite telecommunications, and scientific research flocked to about 20 cities, led by well-established standouts San Francisco, Seattle, San Jose, Boston and San Diego, the study found. Combined, these mostly coastal cities captured an additional 6% of ‘innovation’ jobs - some 250,000 positions.

Companies in those industries tend to benefit from being close to each other, with the better-educated employees they target also attracted to urban amenities. The Brookings Institution study highlights fears the trend risks becoming self-reinforcing and destructive, as the workforce separates into a group of highly productive and high-earning metro areas and everywhere else. Even though expensive housing, high wages, and congestion have prompted some tech companies to open offices outside of Silicon Valley, those moves have not been at scale. Most US metro areas are either losing innovation industry jobs outright, or gaining no share.

Over this decade, a clear hierarchy of economic performance based on innovation capacity had become deeply entrenched, according to the report. Across the 13 industries they studied, workers in the upper echelon of cities were about 50% more productive than in others. 

For much of the post-World War Two period labour was more mobile, and the types of industries driving the economy did not cluster so intensely, a trend that started reversing around 1980. This intense clustering has created large swaths of communities that feel they are being left out of economic expansion, with insular policies being encouraged, triggering global trade wars. 

Given that the rate of technology adaptation is slower in developing countries, it is possible that they will have more time before this becomes an acute issue, but tailoring policies to create hubs across a country and supporting them so more people have access to highly productive work will be a significant challenge in the years to come.