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.

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