WINTER 2004-2005

Employment Growth in America

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Employment Growth in America
What Determines Where Good Jobs Are Created?

By Christopher H. Wheeler
Economist
Federal Reserve Bank of St. Louis

Waiters and other workers in the personal service field were among those considered in this look at what promotes the growth of high- and low-paying jobs. (Photos by Dennis Caldwell)

Surveys often find that, among the many issues Americans deem important for the current and future well-being of the country, job growth ranks near the top.1 Employment, after all, confers enormous benefits to individuals, both economic (e.g., jobs provide an income) and otherwise (e.g., employment gives workers a sense of purpose and satisfaction) and, subsequently, to their communities.

Jobs, however, are heterogeneous in terms of quality. Some offer generous compensation and favorable working conditions, such as flexible hours and pleasant work environments. Others do not. Ideally, we would like to see job growth consist entirely of desirable employment opportunities. However, since that is an unlikely outcome, we would at least like to be able to promote as much good job growth as possible.

What, then, underlies the growth of good jobs? This article attempts to sketch a partial answer to this question by exploring the growth of high- and low-wage jobs across a sample of more than 200 U.S. metropolitan areas between 1980 and 2000.2

Types of Jobs
Jobs in this analysis refer to a set of approximately 200 industries identified in the decennial U.S. Census.3 At the upper end of the pay scale are industries like business management and consulting, paying an average hourly wage of $26.04, computer and data processing ($26.10 per hour) and security-commodity brokerage-investment companies ($26.22 per hour).4 On the other end of the distribution are jobs primarily in the retail trade and personal service sectors: eating and drinking establishments ($9.95 per hour), gasoline service stations ($10.39 per hour), and laundry and garment services ($10.64 per hour).

In all, the bottom 25 percent of jobs in the sample (roughly, the 50 lowest paying) accounted for approximately 25 percent of total U.S. employment in the year 2000, paying an average hourly wage of $12.04. The top 25 percent of jobs in the sample (the 50 highest paying) also accounted for roughly 25 percent of employment and paid an average of $21.82 per hour.

For the remainder of this article, the former are labeled “bad” jobs, the latter “good” jobs.

The Importance of Good Jobs
When cities create high-paying jobs, there is an obvious gain to the workers who fill them. Yet, the benefits of good jobs also extend to those at the bottom end of the earnings distribution. Analysis of the relationship between the growth of good jobs and bad job wages, for example, reveals that when employment in the good jobs category doubles, it tends to be accompanied by an 85-cent increase in the average hourly wage of the bad jobs category. Therefore, there appears to be some positive spillover effect from good jobs to bad jobs.

The creation of bad jobs, on the other hand, has precisely the opposite effect. As a city’s employment in the bad jobs category doubles, estimates suggest that the average hourly wage paid in the bottom 25 percent of jobs decreases by 60 cents. This negative association also applies to wages in the good jobs category. As the number of bad jobs doubles, the average hourly wage in the top quartile declines by $1.05.

Gains in labor earnings are, however, only one benefit from the creation of good jobs. A second is an increase in property values which, given the large fraction of U.S. assets accounted for by real estate, serves to augment personal wealth.5 Looking at 10-year time periods, a 10 percentage point increase in a metropolitan area’s rate of growth for good jobs is accompanied by a $10 increase in its median monthly rent (on residential units) and a $2,800 increase in its median house value.

There may also be a significant benefit in the form of reduced crime. Again, using 10-year growth rates, a 10 percentage point increase in the rate of growth for good jobs is associated with a decrease of nearly one crime per thousand residents.6 None of these outcomes, however, are significantly correlated with the growth of bad jobs.

Clearly, the growth of good jobs is highly desirable from a number of perspectives. The remainder of this article considers what characteristics of U.S. metropolitan areas are associated with the creation of these types of jobs.

Employers in the United States are increasingly looking for highly educated employees. Communities with more educated residents tend to see a growth in higher-paying jobs.

Local Market Size
Overwhelmingly, good jobs in the United States are situated in metropolitan areas. In the year 2000, metropolitan areas accounted for nearly 90 percent of the nation’s good jobs, compared with 83 percent of total employment and 81 percent of the country’s bad jobs. This fact suggests that the presence of good jobs may depend on the overall size of a local market.

Indeed, estimates show that the growth of good jobs tends to be somewhat faster in more populous cities. As a metropolitan area’s population doubles, the rate at which it creates good jobs over the next decade rises by roughly 5 percentage points. Of course, whether or not size itself is the driving mechanism in this relationship is uncertain. A variety of characteristics that are strongly associated with size (e.g., education, big city amenities) may be more important.

Education
One of the fundamental sources of good job growth is an educated labor force. Within the last three decades, the demand for highly educated workers has grown dramatically in the United States. In 1980, the average proportion of workers across all 200 industries with some education at the college level was 32 percent. By 2000, it had risen to 51 percent. In fact, no industry saw its proportion of college-educated workers decrease over this period.

At the same time, it is also true that high-paying jobs tend to have a particularly strong demand for college-educated workers. Among the top 25 percent of jobs in the sample, the average proportion of workers with a bachelor’s degree rose from 18 percent in 1980 to 36 percent in 2000. The average proportion of workers with a bachelor’s degree in the bottom 25 percent of jobs also increased over this period, although by a much smaller amount: 10.8 percent to 12.9 percent. These results suggest that the growth of good jobs can be expected to occur in cities with highly educated populations.

The evidence strongly supports this conclusion. A 1 percentage point increase in the share of a city’s adult population (i.e., at least 25 years of age) with a bachelor’s degree is associated with a 1.2 percentage point increase in the rate at which good jobs are created over the next 10 years. Other measures of education yield similar results. Cities with larger numbers of colleges and universities and employment accounted for by institutions of higher education (a measure of the extent of the university community) tend to exhibit a significantly faster growth rate for good jobs.

Education’s association with the growth of bad jobs, by contrast, is much weaker. A 1 percentage point increase in the share of a city’s population with a bachelor’s degree is accompanied by a 0.5 percentage point increase in the rate at which bad jobs are created over the next decade. In addition, the growth of bad jobs is not significantly correlated with the presence of colleges and universities. Therefore, cities with more educated populations tend to see the ratio of good to bad jobs increase over time.

Business management and consulting and computer and data processing were at the upper end of the pay scale for the jobs in this analysis.

Manufacturing's Legacy
Over the past two decades, manufacturing in the United States has decreased dramatically as a fraction of national employment, falling from 28.3 percent in 1980 to 14.4 percent in 2000.7 In light of this decline, it is not surprising that many manufacturing-based cities have not fared well in terms of job creation, particularly among high-paying jobs.

Metropolitan areas such as Detroit and Buffalo, each with more than 30 percent of its total employment engaged in manufacturing in 1980, actually experienced declines in good job employment between 1980 and 2000. On the other hand, Washington, D.C.; San Antonio; and Jacksonville, Fla., all of which had initial manufacturing fractions less than 15 percent, experienced an increase in good jobs in excess of 50 percent over the same 20 years.

Although anecdotal, this evidence reflects a pattern that also emerges from a more complete statistical analysis. Estimates indicate that a 5 percentage point rise in manufacturing’s presence in a city tends to be accompanied by a 2 percentage point decrease in that city’s total employment growth over the next decade.

Why has a strong manufacturing presence dampened subsequent employment growth across U.S. metropolitan areas? Part of the reason may be that workers who are displaced from manufacturing jobs tend to find new jobs (in either the same industry or a different one) at a lower rate than other workers. The Bureau of Labor Statistics has recently reported that, between 2001 and 2003, the re-employment rate for displaced manufacturing workers was 60 percent, compared with an overall mean of 65 percent for all displaced workers.8 This result may imply that the demand for the types of skills possessed by manufacturing workers has decreased more rapidly than it has for workers employed in other industries. Possibly for this reason, manufacturing’s legacy in many of America’s cities over the past two decades has been one of slow job growth.

Additional Labor Market Conditions Affecting Jobs
Undoubtedly, a metropolitan area’s rate of job growth also depends on how desirable employers find the local labor force. Beyond education and skill concerns, characteristics such as labor costs and unionization rates may influence the perceived profitability of a location and, therefore, the extent to which producers create jobs there.

Statistically, both the unionization rate and the average level of wages across a city’s workers have a negative influence on its subsequent rate of growth in total employment and the creation of good jobs. Estimates suggest that a 5 percentage point increase in unionization reduces employment growth over the next 10 years by roughly 3.5 percentage points (3 percentage points for good jobs). Increasing a city’s average hourly wage by $1 reduces growth by approximately 1.8 percentage points (1.6 percentage points for good jobs).

The second result, when combined with the fact that wage growth accompanies an increase in good jobs, illustrates an interesting economic mechanism. While metropolitan areas with inexpensive labor may attract greater numbers of good jobs, that growth tends to increase wages over time. This process gradually equalizes average wage levels across different geographic markets, thereby eliminating a city’s initial cost advantage over higher wage cities.

The types of entertainment venues a city boasts is one of the amenities associated with a slightly higher number of good jobs.

Personal Amenities
Where workers are willing to live and, thus, where employers are likely to set up production facilities depends on what amenities (e.g., entertainment, warm weather, education institutions) people desire in a location. Recent research has shown that cities offering a wide variety of consumer goods and services tend to exhibit faster population growth.9

In considering what causes good jobs to grow, this study looked at a set of entertainment-related characteristics (numbers of zoos, museums, art galleries, restaurants and bars, movie theaters and live entertainment venues), basic services (numbers of hospitals, elementary and secondary schools), weather (average January and July temperatures), and a measure of how “youthful” a city’s population is (fractions of the resident population ages 18 to 24 and 25 to 44).10

Of these amenities, only three turn out to be important in a statistical sense for total employment growth: the number of movie theaters, the average temperature during January and the average temperature during July. These last two associations very likely reflect the fact that employment growth in the South and West regions has outpaced that of the Northeast and Midwest in recent decades.

When looking at the growth of the highest-paying 25 percent of jobs, by contrast, many more of these amenities are statistically important. In fact, greater numbers of schools, hospitals and types of entertainment outlets are all associated with a (modestly) higher growth rate of good jobs over the next 10 years. On average, a 10 percent increase in the number of these establishments correlates with a 0.3 to 0.5 percentage point increase in the rate of good job growth.

Good jobs also tend to grow faster in metropolitan areas with younger populations. A 1 percentage point increase in the proportion of residents between the ages of 25 and 44, for instance, is accompanied by a 1.8 percentage point increase in the rate of growth of good jobs in the following decade. While some of this rather large association may be due to a true amenity value of cities with large numbers of young residents (e.g., holders of good jobs may value young, vibrant populations), part of it likely relates to the fact that cities with young populations also tend to be more educated.

Temperature, by contrast, is not as robust a predictor of good job growth as it is for the growth of total employment. Although higher temperatures correlate positively with the growth of high-paying jobs, the associations are weaker than for total employment, and the influence of average July temperature is statistically unimportant.

Conclusions
The benefits of job creation for both workers and their communities are enormous. Because those benefits tend to be even greater as the share of good jobs in total employment increases, identifying where and why good jobs grow is an important task. It is also an extremely difficult one, and this article has outlined only a partial set of results.

Among the potential determinants considered, the most important seem to relate to the characteristics of the local labor force: age, education and (as suggested by manufacturing) work skills. Developing a young, skilled work force is probably the most fundamental step one can take in the promotion of good jobs. Although such a finding is by no means new or surprising, it certainly bears repeating.

Economists to Study Community, Economic Development

Chris Wheeler is one of two new economists at the Federal Reserve Bank of St. Louis working for the Research and Community Affairs departments. He and senior economist Anthony Pennington-Cross will be studying community and economic development issues that affect the Eighth District. They will join senior economist Tom Garrett as regular contributors to Bridges. Wheeler came to the Bank in July from Tulane University in New Orleans where he was an assistant professor of economics. He received his doctoral and master’s degrees in economics from the University of Wisconsin-Madison in l998 and l995, respectively, and his bachelor’s degree in economics from Colby College in Waterville, Maine, in 1993. His research interests include urban and regional economics, labor economics, macroeconomics and economic growth.

Before joining the Bank in August, Pennington-Cross was a senior economist with the Office of Federal Housing Enterprise Oversight in Washington, D.C. He received his doctoral degree in urban and regional economics in 1997 from The George Washington University in Washington, D.C., and his bachelor’s degree in economics in 1988 from Oberlin College in Oberlin, Ohio. Pennington-Cross’ research interests include real estate finance and urban and regional economics.

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