Labor Scarcity, Business Location and the Creative Class
Larry Littlefield
A debate is ongoing between “creative class” proponent Richard Florida and Joel Kotkin, prophet of suburban and exurban growth. Florida, seeking to explain the revival of some older cities, asserts that educated, talented, creative young people like such places, and that if communities attract such people, business will follow. Kotkin has responded that the young follow jobs, not the other way around, although he himself had earlier asserted that the most desirable environment for business-desirable workers is exurban “nerdistans” characterized by a lack of economic diversity and, therefore, income transfers. As I think about the debate, I am trying to adjust my thinking to a major shift that may be underway in the U.S. economy.
First, the baby boomers, a much larger cohort than those who went before, flooded into the labor market. The U.S. civilian non-institutional population age 16 to 25 (October data) peaked at 37.2 million in 1980; the population age 25 to 34 peaked at 42.9 million in 1990.
During the same years, women entered the labor force in far greater numbers. In 1948, about one-third of all women age 16+ were working or looking for work. In 1999, this figure peaked at 60.1%.
Moreover, recent generations have been successively more educated. In the 1990 census, for the first time the number of people who listed themselves as having management and professional specialty occupations was less than the number of people age 25+ with college diplomas. Not coincidentally, the recession of the early 1990s was the first since the Great Depression in which college graduates felt the same kind of economic dislocations previously confined to blue-collar workers.
(The shrinking share of men in the post-draft, post-Vietnam military freed up non-college educated men for the economy. The wages of non-college-educated men have been falling since that war ended.)
Through the mid-1980s, the factors pumping up the labor force had to offset a shrinking share of older people who worked. Those older workers were less educated than those who came after them, and benefited from the most generous retirement benefits in history. The share of the population age 55 to 64 in the labor force fell from 63% in 1967 to 54% in 1984; the share age 65+ working fell from 29% in 1949 to 11% in 1986. More recently, however, as the generations of women who have been more likely to participate in the labor force have moved up to higher ages, labor force participation has been rising among older people as well.
Now, however, something may be changing. Overall labor force participation among those age 16+ peaked at 67.1% in 1996, remained at that level for three years, and then started falling after 1998, bottoming out at 66.0% in 2004. As of October 2006, it stands at 66.4%, well below peak levels.
Labor force participation often decreases in recessions, as workers become discouraged by the lack of opportunities and drop out, and increases in booms, as available jobs induce more parents, seniors and teens to jump in. But labor force participation started falling before the recent recession, and remains below peak levels even though the economy has recovered.
Many of the factors that led to a labor surplus, particularly among the young, have stalled or gone into reverse. The baby boom was followed by much smaller generations, so that the civilian non-institutional population age 16 to 24 fell by 4.8 million from 1980 to 1995, and the civilian non-institutional population age 25 to 34 fell by 5.1 million from 1990 to 1999.
Indeed, were it not for a surge of immigration in the 1990s, a crunching labor shortage would have stalled the economy even then.
In addition, all the women who are going to be in the labor force are already in, so there is no scope for growth there. In fact, the share of women age 25 to 34 (prime childbearing age) who were in the labor force peaked in 1998 at 77.1%, and has since fallen to 75.4%. According to an 11/30/06 article in the Wall Street Journal, the share of women with young children in the labor force is falling.
And now the front end of the baby boom is approaching retirement. In 2006, there are only 31.7 million workers age 55 to 64, compared with 43.1 million age 45 to 54. Move ahead 10 years, and there will be a surge in the number of workers moving into the early retirement zone. And who is likely to have the income required to retire early, (or to stay home with young children)? The well-educated and otherwise skilled.
Moreover, since the quality of education, depending on one’s ideology, is either little better today than 30 years ago or actually worse, those entering the labor force will not be more productive than those leaving.
How does this change things?
For years, businesses have been in a position to dictate to even the most highly educated and skilled workers where they would go to obtain the limited number of jobs. But now, for the first time in 40 years, it is businesses that have to think of where to locate to attract and retain qualified workers.
To be sure, a business can always attract labor anywhere by paying enough money, but that would mean either lower profits or higher prices. So the location where new labor force entrants prefer to go, and where younger cohorts want to live, has become a major key factor in businesses’ decision-making.
Even more than in booming “creative class” fields, the need to attract workers has become an issue in stagnant areas and industries. The mining industry, for example, has not had to hire in decades, and now faces the upcoming retirement of nearly its entire workforce. The same is true of industries employing skilled tool and die makers. The federal government faces a labor crisis of its own, as those hired pre-1980 retire, and are increasingly replaced at far higher cost by private contractors.
To see what the future holds for slow-growth areas, look to Boston, a wealthy but fully-developed, slow-growth region.
In October 2006 the region had 97.300 unemployed workers, but it had 104,900 fewer wage and salary jobs in September 2006 than it had in September 2000. Therefore, even if unemployment magically dropped to zero, employment would not regain peak levels.
Is this because large areas of the region have been abandoned? Hardly. As in Long Island, it is because a rising share of the region’s increasingly scarce and expensive housing is occupied by empty nesters and retirees, meaning a smaller population and a smaller labor force.
So what do new entrants to the labor force want, and where are they choosing to go? The only way to look systematically look at this was with by examining the Migration of the Young, Single and College-Educated: 1995 to 2000 Public Use Microdata file of the 2000 U.S. Census.
Separating out the particular characteristics of this group from movers in general, the Bureau found that young, single, college-educated people are more likely to move to central cities than other movers, while young, married college-educated people are more likely to move to suburbs.
The Bureau also found that the metropolitan areas attracting these young movers and shakers fall into two groups. The first, which includes Las Vegas, Atlanta, Denver and Dallas-Ft. Worth, attracts large numbers of net migrants in all age and education groups. The other group, which includes New York, Chicago, Los Angeles, Washington and (barely) Boston, has net out-migration, but still attracts the young on a net basis.
The business community in Boston has taken fright, because the lack of places to for young families to live is canceling out Boston’s traditional strength – the large numbers of bright young people who move there to attend its many universities. “Today, housing in both Boston and the Bay area is unaffordable relative to other parts of the country,” Mark Zandi, chief economist at Moody's Economy.com, told the Journal. “If the tech sector takes off, it's going to be much harder to bring in skilled labor for these positions.”
The Boston Business Journal has editorialized against suburban zoning that limits density. “To explain the fifth straight year of this exodus, look no further than the real estate section of the Sunday newspaper. As housing prices soar, working families are packing up and leaving -- taking with them essential pieces of the rich fabric that has defined the face of Boston for decades.”
But exclusionary zoning provides an important benefit for suburban communities – fewer children to educate in the schools. With an affluent population and declining enrollment, Massachusetts elementary and secondary school spending per $1000 of personal income was third lowest among U.S. states in 2004, the Census Bureau reports. Children are a local liability, due to taxes, but a regional asset, because working parents come with them.
The business community has supported Massachusetts Section 40R, which provides state education funding to suburbs that agree to accept denser development affordable to young families. However,
“40R has not won many fans in communities where anything more than five units per acre can be considered too dense. In addition, 40R requires municipalities give up local control of their project in exchange for financial rewards of between $10,000 and $600,000, depending on the number of housing units constructed per project…While towns are desperate for more cash reserves, the fact that the legislation has not been widely adopted gives an indication of just how ingrained local permitting, planning and zoning processes are across the commonwealth.”
In nearly every case local residents come out to speak against the impact of new families on school taxes. Housing for seniors is more popular – when the seniors require custodial care, the state and federal governments pick up the cost.
Other regions have take over Boston’s role as the home of a young, educated population. Right now the two most prosperous regions in the United States are Austin, Texas and Raleigh-Durham, North Carolina. Each boasts huge numbers of university students – at Duke, North Carolina and North Carolina State in Raleigh-Durham and at the massive University of Texas at Austin -- and more affordable housing than Boston. Fidelity Investments has just agreed to relocate extensive operations from Boston to Raleigh-Durham, following several other companies moving to that area. Meanwhile, Ann Arbor, Michigan, home of the massive University of Michigan and Columbus, Ohio, home of the equally massive Ohio State University, are faring much better than other Midwestern Metros. The former just attracted the second “Gogleplex” planned by Google. Apparently, businesses have concluded that the best way to attract college graduates is to locate in the places where lots of them graduate.
None of these places, unlike those identified by the U.S. Census Bureau, have the kind of urban amenities touted by Florida, but in Austin and Raleigh-Durham the ever optimistic real estate industry is bent on creating them, inventing walkable “downtowns” with high density living in places that never had them, to keep the kids in town and bring the empty nesters back. Meanwhile, good news for Boston: as it’s real estate market has tanked, its economy (aside from construction and retail sales) has started to pick up.
It appears that such an agglomeration is hard to screw up, because otherwise New York City would have done so. It may also be hard to create.
Larry Littlefield is a city planner, regional economist and real estate analyst who occasionally posts on public policy topics at Room Eight. He is 45 years old and lives in Brooklyn, NY.