Why isn’t the Innovation Economy creating more jobs? Part I

Short answer: Because there isn’t enough innovation. Here’s what business and government can do about this.

2.8 million

That’s how many new jobs America’s most technologically-advanced industries were supposed to create between 1998 and 2008.  Such ‘leading-edge’ industries as aerospace, telecom, pharmaceuticals, and semiconductor and electronic component manufacturing were all going to add workers over the next ten years or so, according to November 1999 projections by the Bureau of Labor Statistics (see the full list below).  Indeed, by my calculations, the 1999 BLS projections implied that employment in leading-edge industries would grow at a 3.4% annual clip, more than twice as fast as the rest of the private sector.

 At the time, this forecast made perfect sense. Riding the New Economy boom, the U.S. had become the innovative icon for the rest of the world, the country that knew how to do it right. The global division of labor was clear:  The U.S. would focus on breakthrough innovations and creating advanced goods and services, which would in turn create high-paying jobs. Meanwhile, production and routine innovation would be shifted to low-wage countries.

 To put it in another way: Innovation was supposed to drive job growth in the U.S. And why not? From railroads to electricity to automobiles to radio to airplanes to computers, breakthrough innovations have created entire new industries.

But that’s not what happened over the past ten years.  Instead of growing, the leading-edge industries actually lost 68,000 jobs from 1998 to 2008 (see below). 

In fact, since the tech bust, the leading-edge industries have never recovered.

This astonishing fact is our prime clue to the nature of the current jobs crisis.  Innovation makes up the main comparative advantage for the U.S., since we can’t compete on cost with lower-wage countries (at least not yet). If we are not generating jobs in the innovative industries, it’s no surprise that the jobs situation is going to be tough. 

Why is this happening?  Generally economists advance two explanations for weak job growth in these kinds of high-end industries.  The optimistic explanation is that strong productivity growth enables companies to do more with fewer workers. The pessimistic explanation is that competition with other countries, perhaps unfair,  is hollowing out our innovative industries.

I’m going to come back to these two explanations in my next post.  For now, let me  advance a disturbing hypothesis. I suggest that outside of a few high-profile exceptions,  a wide range of potential breakthrough innovations have fallen short of promise since 1998. That has produced many fewer jobs in the U.S., and diluted America’s comparative advantage abroad.

One important example: Scientific advances in biotech were supposed to usher in a new era of drug discovery. Instead,  many illnesses turned out to be more complicated than expected. Pharmaceutical companies have struggled with a diminished drug pipeline, rather than an expanded one. As a result, this past decade has been one of repeated drug company mergers and layoffs, so that pharma and biotech together created less than 80,000 U.S. jobs over the ten years from 1998-2008, or less than 8,000 jobs per year.

In addition, the lack of profitable results from expensive U.S.-based research and development has made it easier for companies to move big chunks of their R&D operations to China, India, and elsewhere. 

I explored this hypothesis in two of the cover stories I wrote while I was still at BusinessWeek, Innovation Interrupted and The GDP Mirage

If you are willing to accept the idea of an innovation shortfall,  then it changes the way we should deal with the jobs crisis. Some form of short-term jobs stimulus is obviously necessary, though I will leave Congress and the Obama Administration to debate the exact form. The one thing to say, though, is that the $15 billion Reid bill–which focuses on tax breaks for hiring unemployed workers and more money for infrastructure–will lead to more hiring in the short-run, but won’t do anything to stimulate innovation jobs over the medium run.

Addressing the innovation shortfall has to be a cooperative project between business and government. How?

*Elevate innovation to the top of the policy agenda. The first step is for President Obama and the rest of the administration to publicly give higher priority to innovation. Right now Obama ritualistically mention innovation once in a speech, and quickly goes on to other topics. In the latest Economic Report of the President,  innovation is relegated to the very end of the report, and in fact does not get a whole chapter to itself: The chapter is called “Fostering Productivity Growth through Innovation and Trade.”

Why is this important? Government is much better at stopping innovation than creating it.  Breakthrough products and services are a problem for government agencies, because they fall outside the status quo.  That’s why  even well-intentioned bureaucrats have to be given a signal from the top that innovation is important.  This is something that can be done right now, without additional funding.

*Broaden out government funding for R&D beyond healthcare. In recent years, federal funding for R&D has increasingly focused on healthcare,  and Obama’s latest budget continues that trend, as I showed in these two posts, here and here.  That can’t continue. By becoming increasingly focused on healthcare research, the U.S. is falling behind in other areas.

*Improve measurement of the innovative sectors of the economy  As management consultants often say, you get what you measure.  Right now our  system of economic statistics is still based on the structure set up in the 1930s.  So, for example, we have virtually no real time information on business spending on R&D in the U.S. during the downturn–a key piece of information for understanding where the economy is going. The good news is that some progress has been made in this direction.  However, a relatively small amount of money could accelerate the upgrading of the statistics.     

To come: This is the first in three posts on innovation and jobs.  In my next post, I will address productivity and trade as alternative explanations for the employment weakness in leading-edge industries. And then in my third post, I will talk about the state of innovation in the U.S. today, and whether it makes sense to talk about U.S. innovation  distinct from the rest of the world.

Comments

  1. I think a large part is the recognition innovation is costly and risky so the tendency is to let someone else do it and we can always capture the benefits by applying the innovation of others but others don’t have as much need to innovate beyond adaptation of existing advanced technology to more backward areas. People usually innovate because they must, not because they want to. People also often dismiss and distrust government innovation as unproductive and unuseful in part to free ride on private innovation. Innovation is treated as someone else’s job.

  2. Not sure why you blame pharma and biotech, the meager BLS forecast for pharma was actually exceeded by what happened. The laggard was IT, both hardware and software. Hardware was increasingly commoditized and outsourced, which is great for the consumer. I’m not sure what big innovations in hardware the BLS was expecting, that would lead to a lot more US innovation jobs in that field. As for software, the problem was micropayments. People may think micropayments are a minor tech that will make it possible for bloggers to charge for their posts or email sites to charge for their use. However, that’s only the frontend, once people are paying for such services, the money trickles down to IT services and hardware as those bloggers and websites pay for more servers and software. The last decade was a laggard because of the deep and fundamental economic stupidity of those in IT, that they could build something worthwhile on advertising revenue, copying google’s search ad model for non-search activity. What has developed is a short-term, built to flip model instead, where facebook aggregates hundreds of millions of users with a free service and just breaks even with maybe half a billion in revenues. Then the goal is to cash out by either selling to the greater fool, ie microsoft, yahoo, ebay, or google as we have seen over and over again with skype, zimbra, mysql, etc, or to cash out with an IPO to similarly foolish retail investors. Ultimately somebody has to monetize those users, which leads to sites plastered with ads or where they, god forbid, start subscription services, leading to an exodus to the next free site, as we’ve seen with Myspace. Micropayments is the innovation bottleneck for IT, we’ll see that boom happen only when they’re implemented.

  3. mutant_dog says:

    Will you be addressing the problem of Intellectual Property piracy as a contributor to a general lowering of financial incentives to innovate ?

    • IMO, Intellectual Property rights are a key contributor to the lack of innovation. They value the idea over the execution and put up a barrier for others to try to improve on execution.

  4. I cannot help but wonder if there is a link between the way we define success as “shareholder value” and the unfulfilled promise of innovation. The current corporate ideology is that all decisions must enhance shareholder value which is measured through a company’s stock price. Executive compensation tied to this stock price reinforces this priority.

    This is, first, a very short-term perspective that may make it difficult to pursue true innovation.

    Secondly, corporate valuations set by the stock market are hampered by the intangibles information gap which you have described quite well in the past. Intangibles form the ecosystem for innovation in an organization (as well as a community) so lack of information and attention could well feed each other in a vicious cycle.

    Is it possible to create incentives for continued innovation as long as the markets lack the information to see it?

  5. Steven Stevo says:

    Like many things in life, you cannot oversimplify complex economic issues such as this. It is misleading and inaccurate. There are millions of factors, many interrelated.

    The employment data you base your article on covers a period that spans two recessions, any sort of analysis on such a period is pointless. Especially when it starts right before the tech bubble. No one ever thought tech would return to those levels, and we’re well aware of the fact that it hasn’t. And where was employment at in 1998? My guess is unemployment was near historic lows. Did you expect unemployment to go to 0?

    And some perspective would be nice. Like considering how the rest of the world compares and how other US sectors (for example, manufacturing) compare. There are way too many other economic factors that are relevant here, both macro (for example, GDP) and micro (for example, profitability, value, etc.)

    And the important consideration here is that innovation has benefits in many areas of our lives, not just economically. For example, a cure for cancer sure would be a good thing, even if it were sold for free. The internet has certainly changed our lives, and the failure of pets.com, Netscape, etc. do not change that. When the media hypes of twitter and Facebook, they are discussing the social impact on our lives. Everyone knows these companies don’t turn a profit. And innovation itself impacts other industries, millions of companies in fact, and it’s impossible to measure these benefits. For example, technology certainly has reduced operational costs for a company like FedEx, the benefits of which extend to many different levels. It leads to an increase in equity value for FedEx, an increased ability to make capital investments, lower prices charged to consumers, who then potentially spend in other areas of our economy, and so on.

    Innovation is a dynamic concept. The profitability of the industries themselves are only one factor among many others, and the past certainly provides evidence of such. The airplane certainly was innovative. It certainly changed the world. The important thing is that the US foster an economy that promotes innovation. There are many reasons that companies like Microsoft, Apple and Google are in the US and not China, England or wherever. What are these comparative advantages that the US clearly maintains over the rest of the world? Establish that, and then speculate on the sustainability factor.

  6. Innovation is suppose to replace jobs lost through productivity improvements. Not jobs lost through off-shoring and out-sourcing.

    Our innovative economy was never strong enough to replace both. That is why we have a hole in our labor market.

  7. The 21st century has the challenge of replacing the jobs lost through productivity improvements on a global scale. I’ll be very curious to see future posts on trends here.

  8. Mike Reardon says:

    From what I’ve seen, World markets chose other processes to generated profits in their economies. Those investment choices are now obviously not sustainable but were Governments and the economies choices to generate larger profits. Our domestic product innovation was pushed down into fourth or fifth place and that undid major investments in product innovation as the generator of profits in the domestic markets. Those choices also restrained corporate need to expand or reward domestic labor.

    Over product innovation as the generator of wealth in our economy, the markets favored enhanced financial leverage, straight financial manipulation, transfer of manufacturing to lower wage nations, business process innovations, imported legal and illegal foreign labor, and expanded court ordered restructure allowing forgiveness of massive corporate debt obligation. That restructure in the end transferred corporate debts off to Federal Agencies. And then because of available World capital, even those removed obligations became more profits for other businesses.

    Its very strange but lately I really see full employment being passed as anything but a social need for the economy.

  9. The integral theme of the Android platform and indeed the Nexus One was to break the devices from carriers. While I would concur that the grounds for T-mobile not picking up customers is in all probability partly due to a deficiency of handsets, stocking more overpriced devices and locking up individuals in for two years just isn’t a forward looking approach. I work in retail and my experience is that people actually aren’t so turned away by the concept of sacrificing total retail for their telephones when they know they can have more control over their experience with the carrier.

  10. apply for VA loan says:

    outsizing and unions. thats why

  11. It is better have your blog at hand than just searching on the web all the time.

Trackbacks

  1. […] Why isn’t the “innovation economy” creating more jobs?  (Mandel on Innovation) […]

  2. […] That’s how many new jobs America’s most technologically-advanced industries were supposed to create between 1998 and 2008. Such ‘leading-edge’ industries as aerospace, telecom, pharmaceuticals, and semiconductor and electronic component manufacturing were all going to add workers over the next ten years or so, according to November 1999 projections by the Bureau of Labor Statistics (see the full list below). Indeed, by my calculations, the 1999 BLS projections implied that employment in leading-edge industries would grow at a 3.4% annual clip, more than twice as fast as the rest of the private sector. […]

  3. […] like i keep saying, venture's moral hazard is the flipside of wall st's. zero job gains from "innovation"Close […]

  4. […] Mike Mandel on why the innovation economy isn’t creating more jobs: “I suggest that outside of a few high-profile exceptions, a wide range of potential breakthrough innovations have fallen short of promise since 1998. That has produced many fewer jobs in the U.S., and diluted America’s comparative advantage abroad.” […]

  5. […] Why isn’t the “innovation economy” creating more jobs?  (Mandel on Innovation) […]

  6. […] interested in understanding the healthcare crisis and, indeed, the economic crisis.  As I have written, life sciences research has been the big bet of the U.S. economy, absorbing a rising share of […]

  7. […] America innovating?Michael Mandel, former chief economist for BusinessWeek magazine, recently wrote that “Innovation makes up the main comparative advantage for the U.S., since we can’t compete […]

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