Does the Location of Ideas Matter for employment and earnings in the Internet Age?

1. Does the Location of Ideas Matter for employment and earnings in the Internet Age? • Richard B. Freeman • Cleveland Federal Reserve Conference, November 16, 2006

2. The two problems of US job market US Inequality At 3rd world levels Divergence Productivity Real wages

3. This talk • The Critical Importance of Ideas/Space in Global Economy – how to maintain US comparative advantage • How University/RD Makes Economic Space …but does it translate to jobs • Policies • Knowledge Needed to Assess Policies: Tests/Experiments

4. 1) Issue: How to keep good jobs/production in US when India and China are “human resource leapfrogging” The problem: Cannot compete with populous on #s of Sci-Eng Cannot compete on low wages Cannot compete on control of modern technology multinationals spread technology widely Once we thought this was not a problem: the “North-South” Model – our wages exceed theirs bcs we have monopoly of TC: edge in TC/Diffusion Human resource leapfrogging – increased educational attainment and access to most modern technologies  South can compete in high tech

5. Spreading of technology affects lead country in diverse ways • Spreading harmful if lose “retainable” industries or competitor catches up in productivity in industries with close cost competitiveness. (Gomory-Baumol) • Industries with RD/high prod growth are natural temporary monopolies: (Samuelson, JEP) • Offshoring made possible by digitalization of work  pressures for factor price equalization Loss is the gain from comparative advantage or trade – “not so big so don’t worry”

6. 2) The University/RD/Innovation Solution Investment in knowledge creation  good high wage employment Leads firms to innovate in same area Indirect spillover effects on service sector Leads firms to produce in same area The key to this scenario is that RD/University produces ideas that “stick” 1) Tacit knowledge innovation 2) People remain in area 3) Production that “sticks” with “good jobs” 4) Demand for local services with “good jobs”

7. An Incorrect Analysis Spend on University/R and D  go to input output table and find the “extra jobs” created and attribute them to University If counterfactual is another form of spending, probably do better to spend on high employment/output product AAU had an input-output type analysis on their web site that showed more low wage retail sector employment … but … if do this for low wage sectors, get more better to give money to workers --EITC

8. Taxpayer question: If they do good things, does it help keep good jobs? If we spend the money, does this lead to successful science? If we do the research, does this lead to innovation? If we do innovation, does this lead to mfg production? If we have research/innovative center, does this lead to more service sector jobs? If the only payoff comes through consumption side via better lower-priced products, then let Harry fund the research Policy implication: Do no basic research and be smart parasite – Bob Gregory recommendation to Australia

9. US Great Success in Basic RD

10. Foreign-born Share of S&E Employment in Australia and US US Australia 1990 2000 1991 2001 Bachelors 11% 17% 33% 38% Masters 19% 29% 30% 41% All PhD 24% 38% 43% 61% PhDs < 45 27% 52% 45% 64% Post-Doc 51% 60% Source: US all but post-docs from Census of Population; Post-Docs from NSF. Note: FB % Post-Doc in 1987 was 45%. Definition based on occupation Australia: unweighted samples from Censuses 1991 and 2001. Masters include only postgraduate certificates and diplomas. PhD includes Masters, PhD and post-doc. S&E definition based on education.

11. Argument Case for: Agglomeration/Clusters/Economies of scale of location/first mover advantage Case Against: “immiserizing RD” Modularity/fragmentation of production RD new products production overseas; offshoring Creates technology of factor price equalization

12. The case of Bio tech: Zucker-Darby star scientist work But few jobs Will this be the same for nano-technology? If so, it is the indirect service sector support jobs that matter

13. 3) What can we do to make ideas/production stickier? Prevent ideas from going out/tech transfer military technology Put up trade barriers so have to produce in US Reduce international student flows Restrict multinationals vs giving them RD tax breaks

14. What can we do to make ideas/production stickier? Dole/Bayh bill – encourage universities to innovate Stronger patent protection for ‘basic science findings” More science-engineering for MBA types Technology extension centers??

15. Alternatives: Increase RD, SE workforceso that existing stickiness counts more US policy Initiative: The American Competitiveness Initiative commits $5.9 billion in 2007, $136 billion over 10 years, to R&D, education, and tax breaks to encourage entrepreneurship and innovation Doubling the Federal commitment to the most critical basic research programs in the physical sciences over the next 10 years; Attracting and retaining the best and brightest by supporting comprehensive immigration reform; Suggested by NAS-NRC Report Action B-2: Provide new research grants of $500,000 each annually, payable over 5 years, to 200 of the nation’s most outstanding early-career researchers Action B-6: Institute a Presidential Innovation Award that would identify and recognize persons who develop unique scientific and engineering innovations in the national interest at the time they occur.

16. Exploit US role as “Hub”  positive feedback loops? US Advantages Domestic Links: graduate education and research; University and business; International links: trained researchers overseas  help us build on foreign-created knowledge: When they collab with us, who commercializes first?

17. Needed research on stickiness • Ideal would be random RD/University spending • Best we might do on RD • NSF funds that go to areas – EPSCOR • Competition for RD centers – regression discontinuity design – recent NIH • Other sources of information on stickiness • Competition for new investments – Greenstone • Australian – Federation fellowships; • Endeavor Scholarships

18. Australian Policies Designed to Tap Global Knowledge: Endeavor Scholarships 3 categories: • Research (1,400 scholarships) to attract high achieving scholars from selected countries to undertake research in Australia and for Australians to do the same abroad; to strengthen bilateral ties between Australia and the participating countries, showcase Australia’s education sector around the world, and build international linkages and networks; Study (6,400) - to attract top international graduate and postgraduate students to areas of research strength in Australian universities, and to support Australia's research effort. • Professional (2000) – to enable high achieving professionals to develop skills and knowledge by deepening professional engagements between Australia and participating countries; to strengthen mutual understanding, linkages, and networks between the people of Australia and participating countries. Federation Fellowships 25 “stars” given $250k salaries to come back/stay; 125 awards as of ‘05.

19. Issues Raised Fund outgoing or incoming brains? Encourage short term mobility or long term mobility? Develop more collaborations? Importance of overseas visits for research/innovation Are there substitutes for face-face communication? Rely on universities/firms or seek new institutions – national lab style RD per Sematech Focus RD on areas with greatest chance of improving employment/good jobs?