Nobel Prize winning economist Michael Spence recently published a piece in Foreign Affairs Magazine that has potential relevance for Florida’s economic development strategy.  This piece, Globalization and Unemployment: The Downside of Integrated Markets, emphasizes that, to address the problem of unemployment, the U.S. economy needs to focus on economic growth at the high end of the tradable sector of the economy, and de-emphasize the middle and lower ends of the tradable sector and the non-tradable sector.  Spence’s reasoning suggests that Florida should continue to promote the tech sector’s growth but should also work to encourage sophisticated manufacturers to locate in Florida and grow their existing operations here.

The tradable sector of the economy produces goods and services that can be consumed anywhere, such as engineering and consulting services and manufactured goods.  The non-tradable sector produces goods and services that must be consumed domestically, such as health care, retail, construction and the hotel and restaurant industries.  According to Spence, over the last two decades, 98% of the job growth in the U.S. economy has been attributable to the non-tradable sector.  While the non-tradable sector grew by 27 million jobs between 1990 and 2008, the tradable sector grew by only 600,000 jobs.

Despite the non-tradable sector being the primary source of job growth over the last two decades, Spence argues, the U.S. economy cannot continue to rely on the non-tradable sector as the primary source of new jobs as “the non-tradable sector is likely to generate fewer jobs than is expected of it in the future.”  Spence looks to the value added per employee in the tradable and non-tradable sectors of the U.S. economy to suggest that, despite the fact that most new jobs over the last 20 years have been created in the non-tradable sector, the tradable sector will increasingly be the primary engine of job growth.

According to Spence, value added per employee in the non-tradable sector grew from $72,000 to over $80,000 between 1990 and 2008; however, during this same time period, value added per employee in the tradable sector grew from $79,000 to $120,000.  That is, value added per employee grew by about 12% in the non-tradable sector between 1990 and 2008, but grew by nearly 52% in the tradable sector.  Given the low growth of value added per employee in the non-tradable sector, it is perhaps not surprising that, during the last few years, the non-tradable sector appears to have lost much of its capacity to create jobs.  At the same time, employment continues to grow in certain “parts of the tradable sector most prominently, finance, computer design and engineering and top management at multinational enterprises.”  Like the top end of the manufacturing chain,” Spence writes, “these expanding industries and positions generally employ highly educated people, and they are the areas in which the U.S. economy continues to have a comparative advantage and can successfully compete in the global economy.”

Thus, “employment opportunities and incomes are high, and rising, for the highly educated people at the upper end of the tradable sector of the U.S. economy, but they are diminishing at the lower end.”  According to Spence, “if the non-tradable sector continues to lose its capacity to absorb labor, as it has in recent years, and the tradable sector does not become an employment engine, the United States should brace itself for a long period of high unemployment.”  Moreover, the recent rise of the Occupy Wall Street movement demonstrates the social discord that income inequality can cause.  If high-paying tradable sector jobs are not created for more people in “the 99%,” there is a risk of a growing income gap between individuals employed in relatively high-paying jobs in the tradable sector and those employed in relatively lower paying jobs in the non-tradable sector, which would further exacerbate income inequality in the U.S.

Spence’s analysis has special relevance to Florida.  Florida, perhaps more than any other large state, has seen much of its past economic growth come from non-tradable activities, such as the hotel and restaurant industries, real estate and construction.  Although, due to Florida’s natural beauty and role as a winter getaway and retirement spot for so many, tourism and real estate development will undoubtedly remain a major contributor to our state’s economy, Spence’s article provides further evidence for what many of us have long known: our state needs a more diversified economy.

Notable efforts have been made to diversify our economy.  For example, the Scripps Institute and the Max Planck Florida Institute have brought high end tradable sector jobs to northern Palm Beach County, while Miami’s ever growing role as a trade and financial hub of Latin America has had a similar impact on that city.  These more recent developments have built upon existing activities in the high value add portion of the tradable sector of our economy, such as United Technologies Corporation’s major aerospace manufacturing and research and development facility near West Palm Beach.  We should not lose sight of the large number of quality jobs that manufacturing enterprises such as these have provided to Floridians.  That is, while our state should continue to encourage the growth of an innovative research and development-focused tech sector, we should also work to grow our sophisticated manufacturing sector.

Germany’s highly productive manufacturing sector, which has largely been built around the production of high value-added goods with respect to which customers tend not to be overly price-sensitive may provide a model for Florida.  The German manufacturing sector includes firms (many of which are small and family-owned) that build the sophisticated tools required by manufacturers in emerging markets and other, typically larger, firms that produce high-end commercial goods (most notably, high quality automobiles).  Florida’s status as a right-to-work state and its geographical proximity to Latin American markets would be additional advantages as we work to grow our high value add manufacturing sector.

Spence’s article provides further evidence that Florida’s focus on attracting high-tech businesses is a prudent economic development strategy.  The continued growth of Florida’s high-tech sector and a renewed focus on high value-added manufacturing, combined with an ongoing commitment to improving our education system so that it will prepare increasing numbers of young Floridians for positions at the high end of the tradable sector of the global economy, should bode well for our state’s economic future.