Finding the sweet spot

 

industriesdiverse

Paul Harrington, the director for the Center of Labor Markets and Policy at Drexel University, was the keynote speaker at a discussion on the state of the Hudson Valley economy last Tuesday at the SUNY New Paltz Student Union. He provided a thorough analysis of the ups and downs of the regional labor market during the recent harsh recession and slow recovery.

Citing government labor statistics, Harrington said that employment in the Hudson Valley, which stood at 870,888 for 2013, had peaked at 896,827 in 2007. In the last four years, the number has been clawing its way upward at a pace of around 5000 a year. At this rate, it won’t get back to the 2007 high-water mark for several more years.

In deference to the college setting, Harrington also provided his perspective on the effect on young people of the weak labor market during the Great Recession. Young college grads, he said, have been forced to take non-college jobs, often ill-paying and sometimes part-time. That has bumped out of their job prospects the kids without college degrees, usually the first to be laid off during a business contraction. Everyone has moved down the queue.

Advertisement

The statistics Harrington cited on the regional labor market are discouraging. Recent college grads are leaving the area or having trouble paying their student loans. The labor force remains virtually stagnant. The best that can be said is that the recovery is continuing, albeit at a snail’s pace.

The closest the Hudson Valley has to a coherent strategy for economic development comes from the New York State-created Mid-Hudson Regional Economic Development Council (MHREDC). The core of the strategy is “creating jobs in targeted industries,” a variant of business professor Michael Porter’s theory of business clusters. Porter posited in 1990 that “certain industries are related to each other, and these industries tend to locate together.” Clustering was — and is — important for locational decisions. For any region, having clusters of related industries allowed a region to focus its bets and build on its strengths.

Common sense
It’s not a word that fits trippingly on the tongue: coagglomeration. But the term, presently unheard in Hudson Valley circles, has become an important word in present-day economic discussions. So, as Shakespeare’s Hamlet put it, don’t just mouth it. Stick with it.

Economics pioneer Alfred Marshall provided the rationale for coagglomeration 124 years ago. “A district which is dependent chiefly on one industry is liable to extreme depression, in the case of a falling-off in the demand for its produce, or for a failure in the supply of the raw material which it uses,” he wrote. “This evil again is in a great measure avoided by those large towns or large industrial districts in which several distinct industries are strongly developed. If one of them fails for a time, the others are likely to support it indirectly; and they enable local shopkeepers to continue their assistance to workpeople in it.”
Fair enough: a simple, common-sense idea.

In academic research, the theoretical work on coagglomeration probably begins with J. Vernon Henderson’s 1974 discussion of the benefits and costs of firms in the same industry locating near each other (“spatial concentration”). The largest cities, he said, following Marshall, were likely to be the most economically diverse. In more localized economies, smaller cities were likely to be specialized.

The small-cities IBM of the Hudson Valley in the 1970s fit the specialized category, doesn’t it?

Granted, business clusters are an important dimension of economic thinking. Most of the people in the economic development field seem to have gotten that far. The experts in the Hudson Valley have identified several regional clusters as worthy of encouragement, including biotechnology and pharmaceuticals, the food and beverage industries, and 3-D printing and advanced manufacturing. Other clusters include information technology, agriculture and tourism.

The state economic development apparatus seems to agree. It has used the annual consolidated funding application (CFA) process as a mechanism for support of these clusters — and, to be fair, other projects as well. The $3-million state grant to make the $35-million Marist cloud computing project happen announced this Monday is a substantial state bet on mid-Hudson information technology.

Like many players elsewhere, the region’s leaders seem to have stopped reading after their discovery of clusters. They’re 25 years behind the times. From their lack of awareness of more recent thinking, some — including, I must admit, myself — have been forced to conclude, rightly or wrongly, that our leaders have little idea of the post-Porter universe. They make bets and hope for the best.

That’s an unpleasant surprise. There have been hundreds of articles and books written not refuting Porter but expanding significantly on his work. There’s more to be learned.

Similar knowledge requirements
In 1997, a paper authored by Glen Ellison and Edward Glaeser took economic theory a step forward in their “Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach.” They coined the term “coagglomeration” to refer to “the more general tendency of various industries to locate together.” They found there was great variety in the forms that cities take to locate industries together. The largest cities in particular tend not to be specialized one-industry towns, they wrote.

Many recent economists, perhaps most, have focused on the importance of entrepreneurship and other types of innovation in human capital. Richard Florida’s 2002 “The Rise of the Creative Class” was the pioneer work based on the thought that building clusters of industries was a simplistic way of furthering economic development. Rather, the mix of what he called creative people, Florida said, would in the future be the main determinant of workplace organization, economic prosperity and, as one review put it, “even which cities will thrive or wither.” Build your stock of human capital, and you will prosper.

A decade later, Enrico Moretti’s “New Geography of Jobs,” which I have discussed in a recent column, picked up, like many others had, on that theme, declaring that a region’s continued prosperity was dependent on its ability “to continue to climb the innovation ladder.” Only a few metropolitan areas would succeed in doing that, he wrote. Being in or near “a brain hub,” Moretti suggested, was really important for innovation. Success was dependent not just on the quality of a region’s workers “but on the whole ecosystem that surrounds it.”

Following that approach, economists Robert Helsley and William Strange wrote an important 2012 technical paper on the subject entitled “Coagglomeration and the Scale and Composition of Clusters.” They cited examples of inefficient coagglomeration. Since the distribution of public goods, particularly education and knowledge, caused efficiency or inefficiency, they wrote, informed decision-making was important.

Maybe the geographic concentration of jobs wasn’t quite as significant as the geographic concentration of occupations, wrote Todd Gabe and Jaison Abel, two New York Federal Reserve economists, in their paper, “Shared Knowledge and the Coagglomeration of Occupations,” published in April of last year. Shared knowledge, they conclude, is a factor most directly related to the geographical concentration of economic activity. “People are apt to locate around others involved in the same type of work activities, thinking less about whether their peers are employed by companies making similar or different types of goods and services.” Occupations with similar knowledge requirements tend to coagglomerate.

My conclusion: It’s important to go beyond building regional clusters and strengthening the regional labor force. Focus on “the whole ecosystem that surrounds it.” That vague concept is a way of thinking. It provides a more holistic level of analysis that communities need to apply to their own situations. It means to me — and only me, perhaps — that the Hudson Valley needs to focus more thoughtfully than it ever has before on finding its own sweet spot in relation to the New York City economy. Opportunities for innovative coagglomeration will surely follow.

Post Your Thoughts