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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.

Professor Enrico Moretti

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.

The Europe Center, through its Program on Sweden, Scandinavia, and the Baltic Region, has forged partnerships with those who bring visionary solutions to the challenge of diversity and reconciliation in our increasingly globalized world.   “Harbor of Hope:  a special evening celebrating Sweden’s diverse cultures” held on May 6^th is the latest effort by the Europe Center to disseminate this new way of thinking.  The participation of Sweden’s leading documentary filmmaker Magnus Gertten, and Sweden’s cultural entrepreneur Ozan Sunar, resulted in an unprecedented pairing and an evening of motivating insight for a large public audience.  The program included the screening of Gertten’s documentary “Harbour of Hope”, a multi-media presentation by Sunar and an opportunity for the audience to engage in discussion with both of these special guests.

The evening opened with a welcome by the Europe Center’s director, Professor Amir Eshel, who highlighted the support of the Barbro Osher Pro Suecia Foundation for making possible the Europe Center’s Sweden Program and this research.  The center’s Associate Director, Dr. Roland Hsu then framed the thinking behind inviting these particular two guest speakers, Gertten and Sunar.

“This evening”, said Hsu,  “we gather for a special look at the challenge to meet and embrace difference.  In today’s globalized world, market economies, and educational opportunities, but also war and persecution send unprecedented numbers of peoples across borders, away from home cultures, and into new host neighborhoods. 

In the US and in Europe we share the concern and opportunity to learn what drives people far from home.  Tonight, we focus our gaze on the city of Malmo, a city whose neighborhoods contain extraordinary diversity.  Such diversity has a history, which we shall see on film, and it has a future, thanks in large part to the cultural programing we will learn about after the film. 

Our challenge is to learn from the experience of families, fathers, brothers, mothers, sisters, and children, displaced from the familiar, and replaced in new settings.  e will look at this challenge through the eyes of two visionary artists who have touched us with their works, and who are bridging divides across competing memories, and across growing diversity of today’s mobile and global West.” 

Hsu’s introduction of Magnus Gertten and Gertten’s documentary film “Harbour of Hope” included a line from a NY Times review of Gertten’s art which he felt echoed throughout the evening’s program:  “it seems as if the past is intruding on and sometimes overwhelming the present.”  “Harbour of Hope” includes footage from the original archival film shot on April 28, 1945, the day that 30,000 survivors of German concentration camps arrived in Malmo, Sweden to begin their lives over again.  This powerful and unforgettable film is about the life stories of 3 of the survivors seen on this footage:  Irene Krausz-Fainman, Ewa Kabacinska Jansson and Joe Rozenberg. 

Following the viewing of “Harbour of Hope”, Hsu introduced the next guest Ozan Sunar by saying “In Mr. Sunar’s cultural programming, we may see not the past overwhelming the present, but instead the present clearing the way for its future.” Sunar, with a long career in the fields of arts, media and integration politics, blazed a path for those seeking new ways to include artistic values from diverse origins into Sweden’s contemporary culture.  He is currently the founding and artistic director of the international cultural house Moriska Paviljongen in Malmo.  Sunar’s presentation and the subsequent discussion on his work uniting heretofore communities in conflict through culture were both inspiring and provocative.

Harbor of Hope:  a special evening celebrating Sweden's diverses cultures; May 6, 2013, Stanford University:

As part of its ongoing effort to better conceptualize and measure governance, the Governance Project housed at Stanford’s Center on Democracy, Development and the Rule of Law held two workshops in Beijing and Sonoma in the fall of 2012. The workshops featured Chinese and Western scholars who proposed new approaches to assess the quality of governance in China. A collection of papers capturing the various dimensions of governance presented at the workshops was released in May to contribute to the body of scholarship on this subject.

The Governance Project is led by Francis Fukuyama, the Olivier Nomellini Senior Fellow at FSI, who launched the initiative in 2012 to engage scholars in the exercise of evaluating the quality of state institutions and government effectiveness. The paper series helps to define the concept of governance more broadly and to outline parameters for its assessment. 

Authors who contributed to the series include: Bo Rothstein, the August Röhss chair in political science and head of the Quality of Government Institute at the Göteborg University in Sweden, who examines the quality of government in China through the lens of public administration; Zhao Shukai, a researcher from China’s Development Research Center and deputy secretary-general of the China Development Research Foundation, who discusses rising social tensions in rural China as evidenced by conflicts in grassroots governance; and Anthony Saich, the Director of the Ash Institute for Democratic Governance and Innovation at the Harvard Kennedy School, who surveys Chinese households to gauge levels of dissatisfaction with the government, the performance of local officials in dealing with the public and implementing policy, and with the provision of goods and services.