Are High-Tech Enclaves Inevitable?

The example of cities like San Jose, Seattle and Austin that attract thousands of highly skilled and highly paid workers is one that many U.S. cities have tried to emulate over the years, generally with only moderate success. Is there a better way to distribute these workers so that more of the country benefits?

A new study from the Federal Reserve Bank of Richmond investigated the allocations of occupations and cities across the United States with the goal of figuring out the best spatial allocation of those occupations and what policies would be needed to achieve that optimal allocation. Put more simply, is there some way to allocate these high-skill, high-paid workers that improves the lives of all American workers?

Probably not, according to researchers Esteban Rossi-Hansberg of Princeton and Pierre-Daniel Sartre and Felipe Schwartzman of the Federal Reserve Bank of Richmond. Trying to spread the wealth, so to speak, is likely to result only in diluting it. These are the cities with the most high-tech jobs.

The study refers to highly skilled and highly paid jobs as cognitive, non-routine (CNR) occupations and the more of them that exist in one location the more productive they are: “[S]mall industrial cities in the U.S. should attract non-CNR workers and not try to become the next San Jose. The concentration of CNR workers in a few ‘cognitive hubs’ should be encouraged, not scorned.”

On the one hand, then, perpetuating these few cognitive hubs ensures that they remain optimally productive (or “spatially efficient”). On the other hand, doing so perpetuates the wide gap between how non-CNR and CNR workers are rewarded. These are the highest paying jobs that don’t require a college degree.

In order to maintain that spatial efficiency, the researchers have a proposal: “[A] flat wage tax on all individuals to correct for the differences in the marginal utility of consumption generated by heterogeneous preferences for location.” In other words, you can live where you want and if you have a non-CNR occupation and choose to live in a small city, the government will level up your income.

The researchers calculated that transfers to non-CNR workers would amount to $18,126 (2013 dollars) and CNR workers would pay transfers of $16,856 per worker: “Ultimately, the policy amounts to a subsidy to non-CNR workers to move to smaller cities with low CNR shares, and incentives to CNR workers to form even more intensive ‘cognitive hubs’ in today’s largest cities.” The idea is perhaps better known as a universal basic income.

The Fed’s researchers conclude that intensified efforts by policymakers and city governments to attract CNR workers to medium-size and small cities “would be counterproductive.” CNR workers are more productive when surrounded by members of their tribe, so scattering them around the country “is a waste of resources” because even though there are more CNR workers than ever, they remain a scarce resource that is “too valuable” to be spread too thinly.

A better policy would be to “incentivize” non-CNR workers to move to smaller cities through the use of transfer payments: “Otherwise, cognitive hubs might use other indirect means of pushing out non-CNR workers such as, for example, housing supply constraints, zoning restrictions, or a lack of investment in transportation networks to aid commuting.”

It’s not necessary to look beyond home prices in Seattle or San Jose to find evidence of how CNR workers can displace and marginalize non-CNR workers: “Implementing the necessary transfers would not only help avoid those inefficient policies and benefit CNR workers, but it would also improve the welfare of non-CNR workers and the many small and medium sized cities where they would end up living, working, and producing.”

If the study sounds more divisive than uniting, keep in mind that its focus was on the economic effects of spatial distribution. The potential social impacts are left as an exercise for the reader.

One reader, Will Wilkinson of the Niskanen Center, told Bloomberg News that the Fed study is a “thought experiment about the optimal allocation of workers. I can’t imagine the political circumstances in which you would work this out.” That about sums up our thinking on this as well.