- 29 Jan 2020
- Managing the Future of Work
Beyond tax breaks and subsidies: Virginia’s Amazon gambit
Joe Fuller: HBS alumnus Stephen Moret led Virginia’s winning bid for a piece of Amazon’s HQ2 expansion. Unlike most states, the Commonwealth of Virginia doesn’t dole out generous tax incentives to win new business facilities. Instead, Moret relied on the state‘s talent pipeline and transit plans. In shaping his pitch, he was aided by scholarship, including his own, on talent clusters and the role of education in driving economic development. Winning a major portion of Amazon’s HQ2 investment advances Virginia’s plan to diversify its government-centric economy and boost the tech sector. Welcome to the Managing the Future of Work podcast. I’m Harvard Business School professor and visiting fellow at the American Enterprise Institute Joe Fuller. Stephen joins me today to discuss the value propositions of public investments in education and training for fostering growth. Such efforts are increasingly backed by sophisticated workforce analytics. He’ll also discuss his groundbreaking research on the role post-secondary education credentials play in shaping economic outcomes for students. Stephen was among the first scholars to probe in detail what drives the wage premium for college graduates. His research revealed that economic outcomes hinge heavily on what one studied and where one studied it, not merely completing a degree. Welcome back to HBS, Stephen.
Stephen Moret: Joe, it's great to be back. I've really enjoyed being here often, recently.
Fuller: Well, Stephen, let's start off by talking about Amazon's decision to locate at least a big portion of its HQ2 in Crystal City, Virginia. That was perhaps the single-most-discussed site location decision in the history of American business. I think over 200 cities and areas submitted the original proposals, but you all came out on top. Can you tell us a little of that story?
Moret: There were 238 proposals for it. Virginia was really wrapping up development of a new strategic plan for economic development of the Commonwealth, had a number of big goals in it, but there were two big themes that came out of that plan. One was a sense that there was an overreliance on the federal government for our economy and second that the tech sector broadly defined would be the biggest growth opportunity that we could pursue. So when we got that RFP on September 7th of 2017—it was a perfect fit. One of the things that I had realized over many years of working with a tech companies was that while there are many things they looked at, factors like quality of life and so forth were mostly important because they related to attracting and retaining talent. So we really saw that as the centerpiece of what we would do. Amazon itself, in fact, it said roughly half of its new jobs would be in a tech-heavy occupations. In particular, they were concerned about software development engineering. So we really tried to think creatively about how we could approach that project. Having worked on a number of big mega project competitions in the past, one thing that was clear to me very early was that many of our competitor states would offer probably $5 [billion] to $10 billion in incentives. While I only had been in Virginia about eight months at that time, one thing I knew is that Virginia was not going to offer $5 [billion] to $10 billion incentives for anything. So we pulled back out that draft of our strategic plan about the tech talent pipeline. We had two big ideas. The biggest one of course was to invest in dramatically expanding computer science education at the postsecondary level bachelor's and master's degrees. And secondly, we thought about this notion of kind of modeling the Cornell Technion sort of innovation campus in Northern Virginia. The question was: How do we convince state lawmakers to invest literally hundreds of millions of dollars to actually make that happen? Well now with the HQ2 project, we had the catalyst. While we did offer a relatively modest performance-based incentive, the centerpiece of our package was a $1.1 billion investment to enable universities to hire several hundred new faculty members in computer science and related fields and to produce at least 30,000 additional bachelor's and master's grads in computer science-related fields. That distinctive approach that we took—that was different than as far as we know any other state or city took—was the key differentiator that caused them to choose Northern Virginia.
Fuller: Stephen, let's go back for a second. Ever since Enrico Moretti's book about the new geography of talent, there's been a bit of a chicken-and-egg discussion going on here. Do attractive places to live with reasonable housing stock and good mass transit attract talent and that creates the basis for a growing dynamic economy? Or does growth really hinge on having that talent and that talent becomes a magnet for other talent and that's a reinforcing cycle? Do you have a point of view on that?
Moret: It's one of the great puzzles of economic development, which is that we can explain in great detail why Silicon Valley is so successful today or why Route 128 was so successful, but we can't really fully unpack how you get from point A to point B. In other words, how do you actually do that on purpose? Moretti talks about regional economies essentially have a trajectory to them. He essentially suggests that the only plausible sort of way to shift that trajectory at scale on purpose is what he would describe as a big push—essentially, a large coordinated effort to stimulate economic growth or new growth in a particular geography and he suggests essentially the government is probably in the best position to be able to do that. The Tennessee Valley Authority certainly had a very big impact in the geography that it served. There are others that we could talk about. Interestingly, Moretti's book, The New Geography of Jobs, is largely the inspiration for Virginia's HQ2 bid. We had submitted our proposal, I think it was October of 2017. A few months later we had been down-selected to the top 20. We had an opportunity to visit with a number of senior Amazon executives. I took the opportunity at one point to ask the most-senior executive there, “What do you guys think of the tech talent in Northern Virginia?” And he said, "Well, you know, I'm happy to answer that question, but you probably haven’t even heard of this book, The New Geography of Jobs, but it's really influenced how our senior team thinks about where we develop talent, how we develop talent." But, our biggest fear throughout the entire HQ2 process, literally right up until almost the moment we were selected, was that the relatively high cost of Northern Virginia could cause us to be eliminated.
Fuller: What sort of costs are you talking about?
Moret: In particular, labor costs. Also real estate, but labor costs. I mean, this is actually a theme that runs through the whole Moretti book is that you look at some of these superstar metros, we call them now—San Francisco, New York City, the DC metro and so forth—and that large agglomeration of talent and those higher productivity innovation levels essentially more than offset the higher costs. You could see the Amazon at the end of the day picked two of the highest cost markets in the country, partly because of the exact effects that Moretti was talking about, and in our case, largely because of our commitment to invest in that tech talent pipeline.
Fuller: Certainly becomes a question of supply and demand and what are those assets you most need that are least in supply. And we talk with employers all the time here at Harvard Business School and we consistently hear is it not just workers, it's workers with certain skills.
Moret: That's right.
Fuller: Those that are most sought after and if you need them, it's much cheaper to go where they want to be, than it is to try to track them to where your corporate headquarters happens to be or your data centers or your labs.
Moret: The skillsets are most difficult to attract are for traded sector enterprises—computer science, engineering, skilled trades and so forth—sub-baccalaureate credentials really are economic drivers. One of my strong beliefs is that those regions and states that really invest in those particular skillsets and capabilities actually will experience faster growth over time.
Fuller: Do you consider the investment in and take education, particularly postsecondary, that was integral to your bid? Is that one of Moretti's big pushes or did the area already have a lot of momentum and this just another way to grease the skids and keep it moving forward?
Moret: I think it was a bit of both. The DC Metro was already one of the most dynamic economies in the world. At the same time, though, a regional economy that has an overreliance on the federal government, it is actually an economy that's in need of a shift in its trajectory. [What] the HQ2 project helped to unlock in tech talent we think will support not just Amazon but many, many other firms in their efforts to grow and help them really shift toward a more diversified private sector centric economy in Northern Virginia.
Fuller: Stephen, before you moved up to Virginia, you were a leader in economic development in the state of Louisiana. Completely different set of competitiveness issues, completely different labor force. How do you think about the contrast between those two? And when you think about the successes in Virginia, what do they imply for jurisdictions that have Louisiana's makeup?
Moret: The most interesting similarity is that both Louisiana and Virginia have a very important concept in common—and that is what economists call the “resource curse”—and that we have one dominant industry that we enjoy primarily simply because of where we're physically located. With Louisiana, it's oil and gas. With Virginia, it's proximity to DC and all those federal government jobs. So in that sense, both states have a need to try to shift toward a more diversified growth-oriented, more dynamic, more innovation-oriented economy. Where they're similar is in how many states are similar, which is that you've got a collection of larger metros, smaller metros, and then largely sort of rural, somewhat isolated regions. In the country right now, as you're well aware, the big metros are winning the most. The midsize metros are doing okay. And in general the smaller metros and smaller rural regions are not doing that well, stagnant to negative growth. So even in Virginia with all of the great statistics, like most states, if you were to take out the big metro—in our case, the sort of the Northern Virginia part of the DC metro—everything looks very, very different, in terms of educational attainment, in terms of population growth, economic growth, and so forth. And in that sense, there are some similarities across the two states. They're just in different stages of their development. Virginia has one of the most highly educated populations in the country, some of the best public education institutions from pre-K all the way through doctoral programs in the country. Louisiana of course, relatively high poverty, relatively low educational attainment and so forth. Obviously talent is very critical, but the strategies that they employ are different. A good example of that is Amazon. A lot of places said, "Well, gosh, Virginia really did it right in not focusing on incentives, focusing more on a higher education investment," and I think that's true, but it's also important to note that we could do that because we were in a much stronger position than many of the other places we were competing with. Much different situation if you're talking about trying to take a largely rural state and move it forward.
Fuller: A highly educated workforce and associated educational institutions, research institutions—often described as the “med-plus-ed” type clusters—end up with almost an insurmountable head start. I'm curious, Stephen, given your background in diverse areas leading economic development, and given the fact that Virginia is a big place with lots of different sub economies, what's your reaction to research like Jonathan Gruber and Simon Johnson's "Jump-Starting America," which takes this issue straight on and says, "we're going to have to make substantial investments to allow those areas that don't have that type of human assets endowment to catch up, or else we're going to end up with a two-track economy?"
Moret: The advantages of the big metros in the United States right now and around the world appear to be generally strengthening, particularly when it comes to capturing the spoils of the innovation economy and all of the wealth and income and job opportunities that go along with that, but of course offset by the high cost of living. If we're going to position the small metro areas and rural regions of the United States for growth and for some level of participation in this great economy that we have overall, then we are going to need to do some things differentially significant. They talk about investments in basic research. I'd certainly strongly support that. I think that's a big part of the answer. Thinking about how we can make these smaller regions competitive is critical. I think there's a case, not just from a sort of geographic equity perspective, but even from a fiscal perspective. If we allow more of these regions to gradually move into a death spiral, there's going to be so much wreckage in the wake of that—whether it's the opioids issue that's a huge challenge for rural America and the country as a whole, increased social welfare costs, health care costs, dealing with closures of hospitals, schools, et cetera. How do we position every region of Virginia to at least grow a little bit, right? In general, the metros and the big metros are probably going to be the growth leaders, both in absolute and percentage terms, but if we can at least position these smaller regions for at least a little bit of growth, then you avoid getting into that death spiral and you really maintain those critical anchor institutions that are essential for future growth and vitality of those regions.
Fuller: There's surely an argument that those major metros are going to essentially start taking care of themselves, because they have this magnetic attraction to investment that not only leads to large companies wanting to invest there and build their talent bases there, but of course dynamic entrepreneurial economy, because the same people that bring talent and in-demand skills to large companies are also the people that often end up starting successful businesses. One of the byproducts of that, though, in many cities as, an increasing phrase I use is “barbell-ization” of the income distribution—that you end up with a local populous, highly paid cognitive workers with in-demand skills, highly mobile, almost volunteers more than employees. The employers have got to keep them interested because they've got plenty of alternatives. And then lower-waged service workers who provide the surround for those workers. But as we've seen a number of pieces, research most recently from David Autor at MIT, that middle part of the income distribution...
Moret: ...is shrinking...
Fuller: ... gets squeezed. It get squeezed because the cost of living, get squeezed because the employers can't afford everything from local tax burdens to the cost of real estate to the cost of labor. Any thoughts about how that will play out, particularly in a jurisdiction like the greater DC area?
Moret: I think one of the places that you see that rendered is in relatively high levels of underemployment of college grads. When you look at underemployment, it's 20 percent, 30 percent, in some cases, 40 percent depending on the region, the age of folks and so forth. With a sort of a limited number of jobs in the middle, the growth at the top, the growth at the bottom, and the folks at the bottom obviously challenged to be able to meet all their basic needs. While I think most of the answer is in various things we can do to help people to position themselves to better take advantage of economic opportunities that are out there, things we can do around economic development, around infrastructure to better connect people to jobs, we're getting into this sort of structural imbalance where it's creating, I think, some real political challenges for our country that could actually make it more difficult for us to maintain the dynamism that's been the hallmark of the US economy.
Fuller: Stephen, this brings us back to the subject of your own research. You were one of the very first scholars to start looking at what the actual impact of courses of study in various post-secondary education was and what school you undertook those studies in terms of economic outcomes. Historically, the meme in the United States was," You get a four-year degree, you're going to be a success.” You started to decouple that and see patterns that were very, very interesting.
Moret: I was very interested from many, many years ago in the role that higher education plays in enabling people to sort of achieve their own unique version of the American dream. Even now, in fact, increasingly over time, when we asked folks, "Why did you choose to go to college?" by far, the most common dominant reason is to get a better job or...
Fuller: Yup, make more money.
Moret: ...to be able to make more money.
Fuller: Yeah, absolutely.
Moret: Now, there are other reasons that they go and there are obviously other reasons to have a college education, but that is the one that dominates, particularly as we start to shift into having more first generation, more lower-income, more diverse populations, be able to achieve a college education. And so really at its core, the question I was interested in was: How consistently does higher education deliver on that promise? Not just in terms of earnings, although that was a big part of it, but also in terms of securing college-level employment. And then to what extent did those outcomes vary based on both field of study and geography? One of the relatively unique contributions that my research made was looking at, how it varies across states and the country and the role of metropolitan areas and so forth, and also by age. One of the beliefs that many people had before is that underemployment is a temporary thing. Well, what I actually found is that when you look over the entire life cycle, it's absolutely true that while underemployment starts high right out of undergrad—let's say average more than 40 percent for recent college graduates, for bachelor's or above, it does go down sharply, but then it kind of flattens out. So if you look at the country as a whole, about 30 percent of USadults, full-time employed adults with a bachelor's or above, are not working in a college-level occupation. The vast majority of them are not getting a significant financial return on their college education.
Fuller: So, their pay differential relative to people without a degree is fairly small.
Moret: Exactly. And in fact, if you really step back and look at the big picture for bachelor's education in the United States, first time full-time freshmen, perhaps 60 percent will graduate within six years. Of them, let's say maybe 60 percent, a little less than 60 percent will initially get a college-level job. So what does that mean? If we step back, of all those first time full-time freshmen, just a little over a third will graduate and get college-level employment. Two-thirds, roughly, will either not graduate or will graduate and will not be able to secure a college-level job. You put that against growing student loan balances...
Fuller: Exactly.
Moret: ... we're really starting to create a real, real challenge in this country.
Fuller: All of them are paying the same per credit hour or per semester, but the incomes are very, very-
Moret: Vastly different.
Fuller: ... vastly different, and of course, recent research also shows that those first jobs are much more indicative of career paths. And maybe the common up-by-your-bootstraps story of the United States indicated that yes, you could be a theater arts major and end up a CEO. Those are great stories, but they're much rarer than we'd like to think.
Moret: Yes. In fact, you're citing research by Burning Glass. They essentially looked at resumes, millions and millions of resumes, and were able to sort of track the career trajectories of individuals after they graduate from college. The folks that initially start out underemployed in their first job are likely to stay underemployed. And that is a profoundly important point. One of the most common things we'll hear folks talk about with higher education is, it prepares you for not so much your first job but your fifth, sixth and seventh job. But what the Burning Glass research showed is that first job for most people is a very high stakes job. If a person gets a college-level job, they're likely to stay in college-level jobs for the rest of their career. If they don't, some of them will ultimately make that jump, but most of them will not.
Fuller: Our research would certainly support that, particularly through the lens of how quickly the requirements of a job are changing, that people tend to keep up with the requirements of a job by having the job-
Moret: Exactly.
Fuller: ... therefore the employer is motivated to invest in them. They're being exposed to new technologies that are being introduced to the workplace for which they are trained. If you're on the outside looking in and you're relying on what you learned in school, that's going to age, get less relevant, faster than ever before, which makes that grade to jump shift into the higher level jobs steeper and steeper over time.
Moret: One of the most important roles that a college education plays in the development of someone's professional skills is in just simply connecting them to a professional job opportunity that will further develop those skills over the life of their career.
Fuller: If employers are anxious about their supply of skilled labor, and we can see that there is a very, very high—I'm going to use a manufacturing term—“scrap rate,” for college matriculants that they either get in the wrong discipline or they fail to launch, it suggests that employers would have a very active and kind of clear-eyed economic interest in trying to reduce that scrap rate and get more people through the system who are job-ready.
Moret: I think you're absolutely right. First of all, I do think in general that post-World War II business in the United States has largely withdrawn from the activity of developing talent and really investing in building talent, and it shifted to sort of this just-in-time hiring approach. There are a lot of reasons for that. But the point is that some of this is created by the business sector itself. Some of it is a result of not engaging enough with their local and regional higher education institutions to really articulate their needs and advocate for their needs. But a lot of it is that we haven't really created a better signal for business than the simple degree. So particularly in a situation like we have now where we have significant oversupply of college graduates relative to college-level jobs, there's really not much penalty on businesses to include a bachelor's degree as a filter. And probably most of the time it's not a bad filter. But boy considering the enormous costs that people are taking on to get what in many cases is simply a filter to get through to an interview, I think part of the answer is that we need to be creating new filters basically. I'm a big fan of college and not just college for employment outcomes, but many folks that are taking on these enormous debt levels and not getting the good outcomes, that's not a good thing for America. It's not a good thing for higher education, obviously not a good thing for them. What Ryan Craig talks about in A New U: Faster + Cheaper Alternatives to College and other venues is that the real breakdown is the last mile. Interestingly, we're seeing not only a growth in boot camps and related opportunities that part of their promise is a good employment outcome, but we're seeing more and more college grads themselves going back to boot camps to be able to actually get the skills and the networking connectivity to enable them to get a good employment outcome. So I do think business has a bigger role, but I also think a big part of the answer is we need to give them a broader set of options so that they can choose from those and not feel like they're limited to those sort of historical crutches.
Fuller: What about signals to the learner, to students? Your research showed widely varying outcomes for degree paths that might be deceptively similar on first blush to students.
Moret: Let's take business for example. People tend to think of business as sort of a sure-fire way into a good professional career track. But really if you look at the data, that's really true principally for individuals who graduate in a quantitative intensive business field like accounting or finance or MIS. For those folks that study marketing or general business administration at most colleges and universities in the country, their outcomes in terms of underemployment are actually quite similar to those who studied the liberal arts. Similarly, actually within STEM, we tend to talk about STEM as if it's one big thing and STEM is generally undersupplied in the country, but really when you talk to businesses and when you look at the labor market outcomes, the acute gaps are really for computer science and engineering specifically, not as much physical sciences and life sciences. We certainly need a lot of those grads, but the majority of individuals who graduate with a degree in physical or life sciences don't even work in a STEM area, and part of that is because there's simply not enough demand for the number of graduates that we're currently producing. So I do think a big part of the answer is we need to help make students more informed, help them to make better informed choices. At the same time, they're more likely to choose to study things that interest them and things that they feel like they're good at. You look at the liberal arts, we could talk about English, history, social sciences. Many, many of those grads do quite well. It's not that there's no demand for them in the labor market. The problem is that there's not enough demand for all of them. So how do we help them get the skills that they need to be able to have better outcomes? Even within the liberal arts, the folks that study more quantitative intensive fields have tended to have better employment outcomes. And I think that's part of what we're seeing is that general skills is not just sort of critical thinking and writing ability, but also some level of facility with quantitative analysis.
Fuller: And there also appears to be a correlation for those liberal arts majors obtaining good initial jobs and getting on that successful career path based on the selectivity of the undergraduate institution.
Moret: Yes.
Fuller: ...they attended, which suggests that employers particularly that have good jobs to fill, gravitate to schools of high repute and reinforce the cycle that we've seen manifest in lots of different ways.
Moret: We actually have to think about the skills that are actually being imparted. When we talked to businesses—you've seen these same surveys that I have—one of the most interesting things is that businesses are saying broadly, not only do they need more technical skills, but many of them are generally dissatisfied with the general skills that college grads possess in terms of writing ability, critical thinking ability and so forth. So a lot of our grads are not necessarily really well prepared to do college level work. Most of them are, I think, but many of them are not.
Fuller: What do you think are the major steps that we have to take as a country to have a sustained path, economic growth that's inclusive and brings more of our citizens along with them?
Moret: Part of it is really recognizing that increasingly talent is almost the entire thing. In economic development, we talk about sites, we talk about tax and regulatory policy. There's lots of other things, they do matter. But talent more and more is the critical driver and certainly as we think about trying to enable more of our citizens in the United States to have successful lives in which they can pay for their needs and so forth, enabling them to get well compensated, meaningful employment is critical. So we need to make talent development kind of a more central focus in what we do in this country, in states, and regions, and localities. In fact, even economic development organizations really, if you think about where we need to go, we need to be shifting to be more focused on talent, primarily talent attraction and talent development, talent retention and so forth. I think really emphasizing enabling more of our consumers if you will, of higher education to have a successful transition to the labor market. If we really think about—the more I've studied this over time, the more I think that there actually is tremendous value in any sort of rigorous field of study, but that many times we're just not helping people to make that successful transition to take what they've learned and put it into place. I think that really nailing career services, career exploration, internships, all the things that go into helping college students successfully transition to the workforce, not only good for our country, good for regional development actually could be the thing that really sustains and reinvigorates the liberal arts. I think in general, states need to be more careful as they think about increasing educational attainment that it doesn't get rendered just as more bachelor's degrees. And we need to think a little bit more strategically about better meeting the needs of business and industry. It doesn't mean pushing people away from the liberal arts, but it does mean if we have a consistent under supply of let's say computer science grads or certain sub-baccalaureate skilled trades, we really need to meet those needs because if we don't, we're actually I think, compressing economic growth. I do think we're going to see more activity with boot camps and I think that's great. I was actually visiting with a couple of top public university leaders just a few weeks ago and one of the things that they and their boards were talking about is how can we actually bring in some of those concepts, some of those last mile skill development efforts into our existing programs even as almost like an add-on to the liberal arts, such that they could sustain the way that they deliver education, their pride and central focus on the liberal arts, but also enable those grads to have a successful transition to the labor market. Those are some of the things that I think are critical. Of course, place-making, infrastructure, there's a lot of other factors that go into it. But I think the single most important piece is we need to make talent development and working toward a talent development ecosystem that works better, a central priority of states and regions in the country as a whole.
Fuller: One thing we certainly know that if business can find the talent, the human assets they need to do work, they will find another solution. They will find it by offshoring it. They will find it by automating around it. They will find it by writing code to replace people. And so if we don't solve these talent needs, the systems effects are pretty dire for employment opportunities and our economic growth. Stephen, thanks so much for coming back and joining us on the Managing the Future of Work podcast.
Moret: Great to be with you, Joe. Thank you.
Fuller: Thank you for listening to this episode of the Managing the Future of Work podcast. To find out more about our project on the future of work, visit our website at hbs.edu/managing-the-future-of-work.