Productivity is transmitted through friends
Urban aggregators are one of the favourite topics of the substack Economicsverse for a reason
Productivity arises from the improvements that a single company decides to adopt. However, most of the benefits of technological progress are captured by companies and consumers who are about the initial company. This is even more true for drastic improvements, for example, the commercialization of personal computers has benefited Bill Gates and Steve Jobs relatively infinitesimally, while instead companies that started using PCs in their production process and consumers who could afford one or more computers for home, took most of the benefits.
Today we focus on the local transmission of benefits, from company to company, and how this is influenced by the territorial distribution of industries.
In the book "The New Geography of Jobs", Enrico Moretti analyzes the distribution of work and economic opportunities, focusing on the role of human capital and learning effects that occur in growing regions. The crucial point of the book is that the presence of highly skilled workers and the spread of knowledge can generate a positive effect on local economic growth. When workers are in the same place, they find themselves discussing the work they do, and from there they can give each other new ideas, and productive improvements have a faster transmission given the large number of opportunities to exchange ideas. This process is self-sustaining, as faster progress in transmission causes greater progress which in turn causes greater transmission of this process. When a place reaches a certain point of critical mass it becomes the place "where you have to go if you want to become someone". This happens because workers go where many companies can hire them and pay them properly, and companies settle in places where they can find many ambitious workers to select from. The attraction in cities is unstoppable, but of this attraction, we can not only understand the determinants but also see the productive causes of this phenomenon.
The concentration of skilled workers in certain areas creates a virtuous circle of economic growth, as the presence of people with high skills and knowledge attracts further investment and opportunities. Moretti can observe this local effect in various contributions by comparing workers with similar characteristics, skills, and scores on aptitude tests and seeing how transfer to large cities creates an improvement in work outcomes per se. The average salary of large cities, not fully justified by the higher cost of living, shows how there is a value in itself that comes from being in cities. The economy is sending a signal to the nation's workers, saying that their productive value is greater in cities. The goal then becomes to understand why this greater value that workers acquire only by moving to a city.
In his 2004 paper, Moretti observes how the transmission of productivity reacts when companies increase the percentage of their graduates. In this paper, the extent of human capital transfers is estimated by estimating the production functions of firms starting from a dataset that matches firms to workers. The productivity of companies in cities that see a strong increase in the percentage of university graduates increases more than that of similar companies in cities that have a modest increase in the percentage of university graduates. However, these productivity gains are offset by rising labor costs. If this is not positive for companies, it certainly is for workers, who, as already observed in the first episode, manage to absorb most if not all of the increase in productivity they bring. Using three different measures of economic distance (input-output flows, technological specialization, and patent citations), it is observed that within a city, capital transfers between economically close sectors are greater than those between economically distant sectors.
Not only does transmission occur between two workers, but the simple dynamism of workers leads companies to absorb many skills from previous companies where the worker was employed.
The combination of all these factors, low search cost for companies and workers, high contact between workers and between companies to exchange ideas, and flexibility of contracts that allow quick exchange of workers between companies, leads innovation clusters to be the productive power we observe today.
In addition, Moretti discusses human capital externalities, i.e. the effects that a person's education and skills can have on the local economy. His research shows that for every manufacturing job lost, 1.6 jobs are also lost in other sectors of affected communities. This also applies positively, i.e. every worker who brings added value to an economy also increases demand for other goods and services, which will therefore be largely absorbed by the working environment in which he or she is located. For an almost "gravitational" reason, consumption tends to take place near one's position, both for states and individuals and often for the same reasons, namely transport and information costs.
Moretti observes that worker mobility in American states is relatively low, especially for less skilled workers. He proposes a relocation voucher policy, but this would worsen a series of problems that cities now have, such as housing scarcity. It would be much more useful instead of subsidizing city demand to improve the quality of city supply by spending money on transport and security and increasing the possibility of building suitably sized buildings to accommodate all interested workers. A worker brings with him added value that improves the conditions of all other inhabitants of the city and also increases the attractiveness of the city for companies looking for similar characteristics.