The industrial revolution created an enormous economic shift in which work became highly centralized. People moved to cities to work in factories and office buildings. The tendency for jobs to aggregate in small geographic areas was required for large-scale production of goods as well as for large-scale research efforts. The growth of the financial sector also resulted in increased centralization, with New York and London and a number of other hubs becoming global marketplaces for capital. Brookings has just come out with a new study that shows that concentration of jobs has been accelerating in the last decade, with important social and economic implications:
The relationship between place and economy is constantly evolving, and continually shaping the growth, development, and decay of our communities.Brookings Institution
Famous examples of the concentration of jobs are Silicon Valley and San Francisco for technology and New York and London for finance. In both of these fields, concentrations of skilled people and money result in hotbeds of wealth and growth. And, of course, this process is self-reinforcing.
While there are benefits to the centralization of capital and skilled workers, there are also considerable negatives. First, these locations tend to get very expensive, such that even very well-paid workers have a hard time affording decent housing and education for their kids. For those who are not employed in the dominant high-paying industries, the situation rapidly becomes untenable. Local people get priced out of the housing market and you end up with major problems with homelessness. The increase in housing price also forces workers to commute from further away. San Francisco is high on the list of places with the worst (longest) commutes. A recent survey found that 44% of people who live in the Bay Area want to leave.
The giant question, of course, is why tech and financial companies continue to concentrate to this extent. In both of these fields, there is no inherent reason why they need to be situated in very small geographic areas. Anyone with a computer and access to the internet can do the work, regardless of location. The standard economic answers are that (1) people like to live in an area where there are a large number of potential employers and (2) companies like locations where there is a ready source of local talent. At some point, though, the negatives associated with living in a very high cost of living area will surely limit the inflow of talented people.
In the not-to-distant future, we will see increasing shifts in tech and finance jobs to less-expensive and more-desirable places to live that also have healthy populations of skilled workers. While being in the central location for your industry is desirable for a number of reasons, the negatives in places like San Francisco and New York have really piled up. More companies and people are deciding to go elsewhere. We are seeing substantial growth in tech in places like Austin and Boulder.
The emergence of tech and finance ‘outposts’ will have broad impacts. Bringing high-paying jobs in these fields to smaller cities provides a non-polluting boost to the local economy. Being able to live in places other than major cities should also be attractive to those who are not dedicated urbanites. The downside to this shift is that the outpost cities can experience rapid increases in cost of living as highly-paid workers enter the local market and drive up housing prices. We have been experiencing this in Boulder for a number of years.
While jobs in a range of fields have been consolidating in a small number of urban locations, it appears that we have reached a tipping point. The major urban centers that have been the hubs for finance and technology have become so expensive and crowded that companies and people are expanding into smaller outpost cities. The larger implications of this transition are hard to predict, but the large proportion of people in the Bay Area who say they they want to leave suggests that the expansion into outpost cities is just getting underway.
Addendum, September 2019
The Atlantic just published an article on flows of people out of the three largest metro areas in the U.S.: LA, Chicago, and NYC. The data showing that people are leaving the major job clusters is consistent with my thesis here.