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The skilled and well-educated workforce of the New York metropolitan area has played a large role in enabling the region to withstand adverse economic shocks and adapt successfully to a services economy. A further expansion of this “human capital” will enable the metro area to meet the challenges ahead: attracting new firms, maintaining immigration flows, and competing successfully with fast-growing metro areas in other parts of the country.
Over the past several decades, the NewYork metropolitan area economy has proved to be both adaptable and resilient. During this time, it has successfully managed the transition from a manufacturing-intensive employment base to one increasingly dominated by services. And it has accommodated this shift to the services industries in such a way that the level of employment has expanded. Further, it has survived a major economic shock—the September11 attacks—with seemingly little permanent damage to the earnings advantage long enjoyed by its workers.
Despite this adaptability to change, NewYork faces a number of challenges that could adversely affect its prospects for growth. These challenges include maintaining immigration flows and meeting the needs of lower skilled immigrants, attracting firms despite the high cost of doing business, and coping with competition from other parts of the country.
In this issue of Second District Highlights, we take a closer look at the metro area economy’s adjustment to change in recent decades and the challenges that confront New York now. We suggest that a rise in the skill and education levels of the metro area workforce has contributed significantly to the resilience of the economy to date, and that an ongoing expansion of this “human capital” is necessary to cope with the challenges ahead. To illustrate our argument, we consider how two industries that depend heavily on highly trained workers—finance and biotechnology—are faring in NewYork. While both industries have a strong presence in the metro area, their continued growth is not assured. Indeed, NewYork faces significant competition from other parts of the country as it seeks to retain existing, and attract new, firms in these fields.
Evolution of the NewYork Metropolitan Area Economy To understand how the metro area economy has evolved, we look first at broad population and employment trends. The population of New York City rose steadily during the first half of the twentieth century, but since 1950 it has hovered near 8million residents. In 2000, according to Census Bureau data, the city’s population reached a high of 8.1million. In contrast, the population of the surrounding metropolitan area has been characterized by strong growth over the past four decades. Led by these gains in the counties outside NewYork City, the overall population of the New York metropolitan area climbed from approximately 15million in 1950 to almost 22million in 2000.1
Employment trends within the NewYork metropolitan area have followed a similar “split” pattern, with NewYork City and NewJersey exhibiting different job growth trends. Since 1960, aggregate payroll employment in NewYork City has been relatively stable at about 4million jobs, roughly in line with the city’s flat average population level during this period. In fact, in 2000, the overall level of employment in the city was virtually identical to the level of employment in 1960. Over this same period, however, the total number of jobs in NewJersey doubled—an employment growth rate below that of the nation but above that of a number of other states in the Northeast.
Despite these differences in population and employment growth, both NewYork City and NewJersey have experienced a dramatic shift in the industrial composition of jobs away from manufacturing and toward services.2 Manufacturing’s share of total employment in NewYork City fell from 27percent in 1960 to 7percent in 2000, roughly matched by an increase in the services sector’s share of total employment (Chart1). The shift has been attributed to a variety of factors, most notably the relatively high operating costs in the area and the long-term movement of population centers away from the northeastern United States.3 In NewJersey, the change in employment composition was even more extreme than in either NewYork City or the nation, with manufacturing’s share of employment falling from 40percent in 1960 to about 12percent in 2000. Unlike the city, NewJersey experienced this change in the composition of jobs during an ongoing expansion in total employment; like the city, NewJersey saw the declining share of manufacturing employment offset by a roughly equivalent rise in the share of services jobs.
Closely associated with this shift in the industrial composition of employment was a rise in the average skill level of workers. This rise was most evident in NewYork City, where the average wage of workers was more than 60percent above the average wage of workers nationwide in 2003, up from a 20percent differential in 1980 (Chart 2). The rise in the relative wage of workers in the city, together with a roughly constant overall level of employment, implies some combination of relatively higher productivity growth for workers in existing jobs and a shift toward higher paying occupations. Thus, it appears that the city has been able to adapt its employment base in spite of the substantial declines in manufacturing employment. Moreover, the lack of any substantial and sustained decline in relative wages in 2002 and 2003 suggests that even a major economic shock—the September11 attacks—may not have permanently damaged the city’s earnings advantage.4 A similar increase in relative earnings is evident in NewJersey, although relative earnings have not risen to the same extent as in the city.
The NewYork metro area’s ability to maintain its growth fundamentals—through those economic advantages and prudent policy choices that have aided the ongoing transformation of the economy—will help determine its long-term growth prospects. One way of assessing an area’s prospects is to see whether its industry mix is favorable for growth, that is, if the industries that have located in the area are expected to grow. To gauge the prospects of the current industry mix, we conducted an exercise for NewYork City in which we compared ten-year employment growth projections (2002 to 2012) for various U.S. industries with the relative concentration of these industries in the city (Chart3).5 Relative concentration is measured by a location quotient—an industry’s share of employment in NewYork City divided by its national share. As this exercise suggests, many of the city’s key industries—securities, education, and professional, scientific, and technical services—are characterized by a combination of a relatively high location quotient and a relatively high projected national job growth rate. Thus, the city’s industry mix should contribute positively to growth going forward.
Key Challenges to Metropolitan Area Job Growth Although the city’s job growth prospects appear favorable, its ability to keep up with the nation’s projected growth rate cannot be taken for granted. In the past, job growth rates in many of the area’s industries have fallen short of national growth rates. Thus, the challenge for policymakers is to help ensure that the area remains an attractive environment for industries primed for expansion. A key means of achieving this goal, the research literature suggests, is through a high concentration of human capital—that is, a skilled and highly educated workforce.
The presence of such a workforce has been shown to be essential in maintaining sustained growth in a metropolitan area. Among metropolitan statistical areas (MSAs), for example, the correlation between population growth from 1970 to 2000 and the share of adults with college degrees in 1970 is 0.30. Further, in metropolitan areas where more than 25 percent of adults had college degrees, the average population growth rate between 1980 and 2000 was 45percent. In contrast, in metropolitan areas where less than 10percent of adults were college graduates in 1980, population grew on average by only 13percent.6
Glaeser and Saiz (2003) argue that human capital encourages economic growth in cities through various channels. First, through its consumption value: highly skilled neighbors are valued as an amenity because they raise property values and induce similarly skilled individuals to locate nearby. In addition, highly educated individuals attract other amenities—for example, theaters, concert halls, and museums—to a metropolitan area, further enhancing the desirability of that location.
Second, growth is directly related to the production value of human capital. It has long been argued (starting with JaneJacobs) that human capital facilitates the flow of ideas and enhances the productivity gains that arise from the geographic concentration of producers and consumers; this process in turn induces further growth. These gains are transmitted both among firms within a given industry and across industries, through a sort of cross-fertilization process.
Third, and perhaps most important, a high concentration of human capital enables a city to absorb negative shocks more easily and to “reinvent” itself at times of structural change. Long-run urban success is not defined as linear growth at a steady pace, but rather as the ability to respond successfully to challenges. At any given point in time, a city’s growth hinges on a few critical industries (for example, the financial sector today). Inevitably, however, such areas of specialization decline or are challenged by competitors. Thus, a high concentration of human capital is especially critical at times of transition because it provides the flexibility and skills that enable the city to reorient itself toward new enterprises.
The NewYork metropolitan region will need to continue developing ways of attracting, retaining, and producing highly educated workers if it is to adapt to economic changes and continue its past success as an urban area. In 2000, NewYork ranked fifth among the ten largest metropolitan areas in the United States in percentage of the population with at least a college degree—ahead of large urban centers like Houston and Los Angeles, but behind the Washington,D.C., metropolitan area, Atlanta, Chicago, and Dallas–Fort Worth (Table1, columns3 and 4). Thus, the competition from other large and growing urban centers is intense, and maintaining an edge is by no means an easy task.
Another challenge will be to maintain immigration flows at their current high levels. Immigrants bring fresh ideas and provide a constant stream of innovations. They also play a major role in sustaining population growth.
In 2000, 2.9million of the 8.1million residents of NewYork City were foreign born. More important, in that year a higher proportion of the city’s population—more than 36percent—was foreign born than at any time since the 1920s. The history of immigration in the twentieth century has been characterized by ebbs and flows: the fraction of immigrants in the city reached a peak around 1910 at roughly 40percent, steadily declined until the 1970s, and then started rising again at a brisk pace. The same pattern is evident in the larger metropolitan region. With respect to countries of origin, immigration flows into the NewYork metropolitan region are very diverse—no single group constitutes more than roughly 10percent of the population. This diversity in itself contributes to the influx of new ideas.
Nevertheless, while immigration flows are critical to both population and economic growth, they can also create their own challenges. Recent immigrants to the NewYork metro area are better educated than their predecessors, but the fraction of immigrants with at least a high school diploma, like the fraction with at least a college degree, still lags behind the corresponding fraction in the native population (Chart4).7 Thus, one task for policymakers will be to meet the education and training needs of the less-skilled immigrants already resident in the area.
A second task will be to continue improving the area’s attractiveness to high-skilled immigrants. Individuals and households, like businesses, decide where to locate on the basis of the relative advantages of alternative locations. In the case of new immigrants, this choice of a destination is subject to “network” effects: If a specific location is perceived as a less favorable environment than others, a sudden and large shift of immigration flows away from that location could occur. Given this potential for losses to multiply, much is at stake for the NewYork metro area in competing successfully for skilled immigrant workers.
Competitor Cities Metropolitan areas are in ongoing competition to attract firms, both successful old-line businesses and new and expanding firms. The NewYork metropolitan area is at a disadvantage as a location for some types of activities because of its relatively high cost of doing business.8 For other activities, however, the area’s relatively high costs are offset by its relatively strong productivity, demonstrated by its high human capital and relative wages.
Policymakers will want to stay attuned to the competitive pressures from other locations as they seek to maintain an attractive environment that will encourage firms to take advantage of the area’s productivity. The nature of the competition to attract firms to the area is illustrated here with two examples: the financial services industry in NewYorkCity, one of the city’s core strengths and an engine of growth in the economy; and the biotechnology industry in NewYork and NewJersey, one of several newer industries with a presence in the area and potential for further growth and development. Our discussion of each example highlights the nature of the competition for firms in these industries and the key role that human capital plays in that competition.
Finance Industry The financial services sector, which includes finance, insurance, and real estate firms, is important to NewYorkCity not only as a source of jobs but also, increasingly, as a source of earnings (Chart5). In fact, the share of total city earnings accounted for by the sector in 2000—more than 35percent—was almost triple its 1970 share. However, one of the key features of NewYorkCity’s financial sector is its declining share of nationwide finance employment—at 6.5percent in 2000, this share was less than half its size in 1960.
Part of the decline in NewYorkCity’s share of finance jobs nationwide reflects the ongoing relocation of back-office jobs to lower-cost locations within the metropolitan area. But there is also broader-based competition for financial services jobs among the nation’s metropolitan areas. However, no single area appears to be significantly increasing its share of nationwide financial services employment at the expense of New York City. In fact, the two cities with the largest concentrations of financial sector employment outside of the New York City area—Chicago (4.1percent) and Los Angeles (3.1percent)—also experienced a decline in their share of nationwide financial employment between 1980 and 2000. More generally, the biggest gainers in terms of employment share were several relatively fast-growing, lower-cost areas in the southwestern UnitedStates, including Dallas, Phoenix, and SanAntonio.
While the area’s declining share of nationwide financial sector jobs might be viewed as a sharp reduction in NewYorkCity’s competitiveness, the city’s share of nationwide finance sector earnings presents a more encouraging picture. Substantially higher than the city’s share of employment, this earnings share reached 17percent in 2000, up from 15percent in 1970. Although finance sector employment in New York City is roughly one and one-half times that of Chicago and twice that of Los Angeles, the income generated by the city’s finance sector is substantially larger than these employment ratios suggest—three times that of Chicago and more than four times that of LosAngeles. Thus, the city has retained and expanded the higher-paying, relatively sophisticated activities in the sector even as it has shed relatively lower-paying jobs.
A comparison of the educational makeup of the finance workforce in NewYork and other major metropolitan areas suggests the higher-value-added nature of jobs in NewYork’s finance sector. Almost 55percent of workers in the metro area’s finance sector have a bachelor’s degree or higher, a figure matched only by the finance workforce in the Washington,D.C., metropolitan area (Table1, column5). By contrast, 49percent of the finance workforce in Chicago and 42percent of the finance workforce in Los Angeles have a bachelor’s degree or higher.
While it may be difficult to challenge NewYorkCity’s finance sector as a location for sophisticated financial sector activities, the city cannot presume to be able to withstand any and all challenges. Sharply rising costs in the city would increase the desirability of relocating to other U.S. cities. Moreover, competitive pressures might come from abroad. London, for example, might pose a future challenge because it also hosts many large financial firms that conduct relatively sophisticated activities on a global basis, as well as an array of financial service providers, exchanges, institutions, and supporting services.9 Further, advances in information and communications technology in the industry could affect the number and types of jobs in the city over the longer term. On the one hand, new technology could expand the scope of activity and thus be a potential source of job growth in the city, particularly in the development of relatively sophisticated financial products. On the other hand, electronic trading, which has not yet had a vast negative effect on jobs and activity in NewYorkCity, might over time build volume and reduce employment at existing exchanges.
Biotechnology Industry Biotechnology—the use of biological processes or techniques in the development of agricultural, industrial, and pharmaceutical products—is a relatively young industry. It was created in 1973, when researchers at Stanford University and the University of California at San Francisco filed several patents. These patents were then licensed to start-up firms to encourage the commercial use of academic research. Many biotech firms were originally formed in clusters around research universities or government laboratories.
In 2001, there were roughly 1,500biotech firms in the country.10 Two-thirds of the industry was concentrated in eight states; NewJersey ranked fifth in the country, while NewYork ranked seventh. One-third of the industry was concentrated in five metropolitan areas: Boston, SanDiego, SanFrancisco, Washington, D.C., and Raleigh-Durham (Table2, reproduced from Feldman ). The degree of concentration has been growing over time. For instance, three states accounted for 38percent of the industry in 1991, 40percent in 1997, and 42percent in 2001. This geographic concentration is indicative of the presence of agglomeration economies and local intellectual spillovers. That is, firms benefit from the circulation of ideas and industry-specific know-how that arises when other firms in the same advanced technological niche are located nearby.
The existing empirical literature on the biotech industry also suggests that so-called anchor firms may be crucial to developing and sustaining clusters of biotech firms. Anchor firms are established firms that offer product lines predating the biotechnology revolution as well as newer products based on biotechnologies. Many anchor firms, for example, are pharmaceutical companies. Research universities and laboratories appear to be necessary but not sufficient for the sustained growth of biotech clusters, whereas anchor firms are a sufficient condition for such clusters.
While the NewYork metropolitan region is not among the top five metro areas for the biotech industry, its share of the industry has grown in recent years. In 2001, the NewYork Primary Metropolitan Statistical Area (PMSA) and NewJersey’s Middlesex-Somerset MSA moved into sixth place in the country for the presence of biotech firms, up from an eighth-place ranking in 1997 (Table2). Furthermore, the New York metropolitan region has a number of the features that are thought to draw biotech firms. Specifically, the region has both an established presence in the pharmaceutical industry, which can provide an anchor for biotech clusters and large hospitals, and medical centers, which can provide the capability for research and clinical trials. Finally, the presence of a strong financial sector is beneficial for the establishment of start-up firms.
However, the New York metropolitan area also faces some challenges. Stiff competition comes from other metropolitan areas such as Boston, SanDiego, and SanFrancisco, with their concentration of research universities and specialized, skilled labor; from Raleigh-Durham, because of its association with Research Triangle Park; and from WashingtonD.C., which benefits from its proximity to the U.S. National Institutes of Health. Further, while the NewYork metropolitan area ranks first among the ten largest U.S. metropolitan areas in share of highly educated workers in finance, it ranks only fifth in the biotech industry (Table1, column6). Finally, the recent stem-cell initiative in California11 could draw highly skilled, specialized researchers and technicians away from the Northeast and other parts of the country.12
Such competition can be especially challenging for the NewYork metropolitan area because it is not currently one of the leaders in biotech endeavors. As we have seen, biotech firms benefit from proximity to other firms that specialize in the same processes. Thus, those metropolitan areas that already have a large concentration of biotech firms will have an advantage over other metro areas in attracting new firms. Indeed, the established centers of the biotech industry could induce a whole cluster of firms to move to that location, thus eliminating the possibility that such a cluster might act as an “engine of growth” for the NewYork metropolitan region.
Conclusion The NewYork metropolitan area faces a number of pressures that could constrain its future growth and development. It faces ongoing competition from other metro areas as a prime location for jobs and economic activity. To sustain population growth, it must provide an environment that will attract new residents, both from within the United States and from abroad. To draw new firms—particularly in fast-growing fields such as biotechnology—it must offset the disadvantages posed by the high cost of doing business.
One key means of meeting these challenges will be a continued expansion of the area’s human capital. In the past, New York’s skilled, highly educated workforce has been essential to maintaining the city’s ability to absorb negative shocks and to reinvent itself at times of structural change. The task for policymakers now is to find ways to boost the skills of the current workforce and to attract new workers with superior education and training.
1. In this discussion of population trends, the NewYork metropolitan area is defined as the five counties of New York City; Fairfield, Litchfield, and NewHaven counties in Connecticut; Nassau, Suffolk, Rockland, Westchester, Dutchess, Orange, Putnam, Sullivan, and Ulster counties in NewYork; and Bergen, Essex, Passaic, Hudson, Middlesex, Morris, Somerset, Union, Hunterdon, Mercer, Monmouth, Ocean, Sussex, and Warren counties in NewJersey.
2. Services here are defined as the services industries in Standard Industrial Classification (SIC) categories 70 through89.
11. In November 2004, California passed a controversial bond measure that devotes $3billion to human embryonic stem-cell experiments. Currently, this initiative is by far the largest stem-cell project in the UnitedStates, whether privately or publiclyfinanced.
12. It should be noted that NewYork and NewJersey are considering their own statewide stem-cellinitiatives.
An earlier version of this article was presented at "Beyond Post 9/11: A Colloquium on the Future of the Port Authority of NewYork and NewJersey," held at the Woodrow Wilson School of Public and International Affairs, Princeton University, March4,2005.
Feldman, Maryann. 2003. “The Locational Dynamics of the U.S. Biotech Industry: Knowledge Externalities and the Anchor Hypothesis.” Industry and Innovation10, no.3 (September): 311-28.
Glaeser, Edward, and Albert Saiz. 2003. “The Rise of the Skilled City.” Harvard Institute of Economic Research Discussion Paper no.2025.
Orr, James, and Rae Rosen. 2000. “The Financial Services Sector in London and NewYork: NewYork.” In The London–NewYork Study: The Economies of Two Great Cities at the Millennium, 11-34. London: Corporation ofLondon.
About the Authors James Orr is a research officer and Giorgio Topa a senior economist in the Microeconomic and Regional Studies Function of the Research and Statistics Group.
Chart 1 Manufacturing and Services Sector Shares of Employment in NewYorkCity, NewJersey, and the Nation
Sources: U.S. Bureau of Labor Statistics; NewYorkState Department of Labor; NewJersey Department of Labor.
Notes: The services sector comprises the industries in SIC categories 70 through 89. Data for NewJersey cover the entirestate.
Chart 2 Average Earnings per Employee: NewYorkCity and NewJersey Relative to the UnitedStates
Sources: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; NewYorkState Department of Labor; NewJersey Department ofLabor.
Note: Data for NewJersey cover the entire state.
Chart 3 New York City Industry Concentration and Projected Growth of IndustryEmployment
Sources: U.S. Bureau of Labor Statistics; NewYork State Department of Labor.
Notes: Industry concentration is measured by a location quotient, calculated as the ratio of an industry’s share of employment in NewYorkCity to its share of employment nationwide. The size of the bubble representing a given industry reflects that industry’s share of NewYorkCity employment.
Table 1 Educational Attainment in the Ten Largest MetropolitanAreas
Percentage of Population Aged 25 to 64
Percentage of Workforce
At Least High Schoola
At Least Collegeb
At Least Collegeb
Metropolitan Statistical Area
Source: Minnesota Population Center, University of Minnesota, Integrated Public Use Microdata Series.