Just as people with higher levels of education have fared better during the Great Recession, cities and regions with higher levels of human capital have experienced lower rates of unemployment and higher wages. But human capital, which takes into account only the level of a worker’s education, is a crude measure – some of the world’s greatest entrepreneurs, like Bill Gates and Steve Jobs, are college dropouts.

A while back, I wrote about research done by my colleagues at the Martin Prosperity Institute (MPI), that took data provided by the Bureau of Labor Statistics’ O*NET Project on actual skills (physical skills of the sort used in manufacturing, analytical or cognitive skills, and social intelligence skills like the ability to direct teams, form entrepreneurial new businesses and organizations, and mobilize people and resources behind common causes and objectives) and charted their relations to the economic performance of cities and regions.

Now new MPI research charts the effects of these skills on regional wages. Each region is ranked three times: by its share of occupations requiring analytical skills, social intelligence skills, and physical skills. As the above chart shows, the two types of skills most closely associated with knowledge and creative work – social and analytical skills – add substantially to regional wages. Physical skills of the sort associated with blue-collar work do the opposite. The MPI study concludes that:

Some cities, like Huntsville or Houston, rely predominately on analytical skills. Most cities that draw highly on analytical skills also rely on social intelligence skills, like San Jose, Boston, Washington, Durham and Boulder. The cities that rely the most on physical skills are places like Dalton, GA, known for its carpet manufacturing, Toledo, OH, a center of glass manufacturing, and agricultural and food processing centers like Bakersfield, CA.

Employment in city regions is shifting away from physical skills and towards analytical and social intelligence skills. Regions that successfully increase their share of jobs relying on analytical and social intelligence skills are more likely to prosper than regions that rely on the physical skillset associated with manufacturing.

There is much more to be gained, both in terms of creating better jobs and making cities and regions more prosperous, from strategies that shift the skill mix of people and places toward social and analytical skills than those that seek to add more manufacturing jobs. Efforts to increase the social and analytical skills used in service jobs not only bolster productivity and spur innovation, but can improve wages and contribute to overall regional prosperity.

From Silicon Valley to Shanghai, cities are increasingly seen as engines of economic progress. Cities bring together diverse groups of people and companies in ways that increase productivity and create the networks, clusters, and chance interactions that lead to the discovery of new innovations and the creations of new entrepreneurial businesses. Up until now, the economic performance of cities has been gauged in terms of the education or human capital level of residents or the kinds of work they do.

But new research by my colleagues at the Martin Prosperity Institute sheds lights on the relationship between cities and three underlying types of workforce skills – physical skills of the sort used in manufacturing, analytical or cognitive skills, and social intelligence skills like the ability to direct teams, form entrepreneurial new businesses and organizations, and mobilize both people and resources behind common causes and objectives. The chart below plots the distribution of these three sets of skills by city size.

The relationship between skill and size is striking. On the one hand, smaller cities have more physical skill. As the chart shows, physical skills are negatively associated with city size. On the other hand, bigger cities account for more social and analytical skills. Both sets of skills increase with the size of cities. Social intelligence skills in particular are found in the largest cities and metro areas. And the largest cities have increased the proportion of social intelligence skills they account for over the past decade. Larger cities not only draw more educated and innovative people, but more people with the critical social skills required to turn new ideas into successful enterprises and industries.

This is in line with Jane Jacobs’ early thinking that cities are containers for a diverse mix of people and skills. And it also helps us understand some of the deeper reasons for the success of larger cities, the plight of smaller ones, and our increasingly spiky economic landscape.

Across the world, two in 10 households have access to the Internet at home, according to a just released Gallup survey. Internet access at home was far greater in more economically advanced countries: Nearly eight in 10 people (78 percent) in countries where gross domestic product (GDP) is more than $25,000 have Internet access at home. Home Internet access drops off steeply in less affluent, less developed nations, according to the Gallup survey, especially in countries with less than $10,000 in per capita GDP. The survey is based on telephone and face-to-face interviews with approximately 1,000 adults, aged 15 and older in 116 countries, and was conducted in 2009.

The map above, by Zara Matheson of the Martin Prosperity Institute, shows the percentage of households with Internet connectivity, highlighting the top 10.

The study notes the connection between home Internet connectivity and both urbanization and economic development. “Populations in the most connected countries also tend to be highly urbanized, reducing the cost of extending Internet delivery modes – whether phone and cable lines or wireless towers – to a high proportion of residents. Two of the most connected populations in the world – residents of Singapore and Hong Kong – are entirely urban,” the study reports, adding that: “Internet access is clearly a function of economic development; as recent trends in China demonstrate, demand for electronics and online services grows as living standards rise along with disposable income levels.”

Home Internet connectivity is indeed a function of economic development, as my analysis with Charlotta Mellander finds, but it is also related to the transition from industrial to post-industrial societies.

Source: World Development Indicators for 2006.

Home Internet connectivity is closely associated with economic output measured as gross regional product per capita according to our analysis, with a correlation of .89. It is also closely correlated with total factor productivity (.87), the UN Human Development Index (.84), and the Global Competitiveness Index (.84) – various measures of the level and extent of economic development.

Source: World Development Indicators for 2006, calculations by Charlotta Mellander.

But other factors also appear to be at play. It is not just the level of economic development that matters, but its nature and type, notably the transition from older, industrial-style economies and societies to newer, post-industrial ones, as I noted in a previous post. Post-industrial economies are distinguished by more highly educated populations or higher human capital levels; higher levels of knowledge-based, professional, and creative class jobs; higher levels of innovation and R&D; higher levels of entrepreneurship and business formation; and a shift toward more open-minded and tolerant values – what Ronald Inglehart has dubbed “post-materialist values.” My recent research with Charlotta Mellander and Jason Rentfrow finds evidence that post-industrial socioeconomic structures and post-materialist values matter to the happiness of nations, especially of the most advanced nations, in addition to the effects of income and the level of economic development.

Source: Based on average level of education by Barro and Lee, 2001.

Home Internet connectivity is closely associated with the level of human capital (.73 ) and with the percentage of the workforce that are members of the creative class (.71).

Source: International Labour Organization 2000-2006 (an average).

Home Internet access is also closely associated with the level of innovation measured as patents (.86), research and development efforts (.89), and entrepreneurship (.69).

Source: USPTO, 2000-2006.

Home Internet connectivity is also closely correlated with happiness (.67) and slightly less so with more open and tolerant attitudes toward gays and lesbians (.48) and racial and ethnic minorities (.3).

Source: Gallup World Poll, 2008.

This is just a preliminary first-cut analysis. I point out that correlation does not imply causation and other intervening factors likely come into play. We hope to look at all of this in further analysis with more advanced statistical techniques. But, for now, we can say that while income and the level of economic development play an important role in home Internet connectivity, it is also related to the type and nature of economic development and the values it engenders. There is something in the nature of post-industrial economies that appears to work in addition to the effects of income. Perhaps it is that people with higher levels of education encourage people to be more connected. Or perhaps people in knowledge-based jobs feel they have to be more connected or their jobs require them to be connected at home as well as at work. Whatever it is, it is clear that not just the level of economic development, but the nature and type of development and the attitudes it brings into play matter to many facets of life today, from overall happiness and well-being to being connected online at home.

Economic crises like the current one have devastating economic and social costs, but they also give rise to major rounds of technological innovation. That’s why I call them Great Resets. There was a significant spike in patents in the wake of the Panic and Long Depression of 1873 – and subsequent decades saw the rise of major new innovations from the light bulb, phonograph, and telephones to systems innovations like electric power, telephone systems, and urban transit (i.e. street cars, cable cars, and subway systems). The Great Depression was far and away the most “technologically progressive decade of the 20th century,” according to the detailed research of economic historian Alexander Field, outpacing the high-tech boom of the late 20th century by a considerable margin.

Joseph Schumpeter long ago showed how economic crises give rise to the gales of creative destruction – as new entrepreneurial individuals and enterprises seize the opportunity to forge new business models, and new industries revolutionize and transform the economy. The British economist of innovation, Christopher Freeman, found evidence that innovations not only accelerate but bunch up during economic downturns only to be unleashed as the economy begins to recover, ushering in powerful new waves of technological change.

A study released today by the Kauffman Foundation (h/t: Ian Swain) provides additional evidence that our current crisis takes the form of a Great Reset. According to the study, 2009 was a banner year for new business startups. As the graph above shows, more than 550,000 new businesses were started over the course of the year. The report found that “the 340 out of 100,000 adults who started businesses each month represent a 4 percent increase over 2008, or 27,000 more starts per month than in 2008 and 60,000 more starts per month than in 2007.”  This represents the highest rate of new business startups in 14 years. The startup rate for African-Americans also surged to record levels, according to the study.

I have a new post over at BNET responding to Mike Mandel and a BNET piece earlier this week. The gist of my post is that when you look at real income levels and housing values, creative metros that score high on the 3T’s outperform others.

While we’re at it, The New York Times has a nice piece today on the rise of Boulder, Colorado, as a mecca for new high-tech startups. Here are some stats:

From 2007 to 2009, venture capitalists invested $1.9 billion in 275 Colorado start-ups, up from $1.6 billion in 247 companies from 2004 to 2006, according to the National Venture Capital Association. The money is coming from Colorado venture firms — including the Foundry Group, a prominent firm in Boulder — as well as from Silicon Valley and New York.

This comes on the heels of BusinessWeek ranking Boulder as America’s best city for startups. Vivek Wadwha provides a nice enumeration of the reasons behind Boulder’s high-tech evolution.

My own hunch, as I told the Times, is that: ” Boulder has reached this beautiful sweet spot, where it has many advantages of a university town — tech and talent and openness — but without many of the costs and traffic and congestion that may disadvantage incumbent centers of innovation.”

I also mentioned that Boulder has a general orientation toward excellence. It has long been a center for world-class athletes. It’s athletic scene is not just about big teams but individual excellence as well, in track and field and cycling. Centers of world-class athletes reflect an underlying commitment to individual excellence, execution, and performance that can work to attract excellent and ambitious people across the board. In this way, athletic scenes may reflect similar dynamics as world-class music scenes: Both reflect underlying community DNA that is oriented to excellence, diligence, and meritocracy that can and does attract and motivate all sorts of talented and forward-thinking people – like techies and entrepreneurs. Come to think of it, some of these places, say like Austin, have all three: cutting-edge music scenes, world-class athletes, and innovative and entrepreneurial high-tech clusters.

If truth be told, Boulder has been on my radar for some time. In the mid-2000s it started to top our lists in terms of the percentage of creative class workers and its scores on the 3T’s – technology, talent, and tolerance – coming in among the very top regions in the country. The 3T’s measure was originally designed to be a leading indicator of  rising, highly innovative, affluent regions – and I’m proud to see it working so well in this case.

And of course college towns, from Austin and Boulder to Raleigh-Durham and Madison, continue to be among the most resilient regions across the Great Reset. Boulder surely made the most of its natural and local assets to propel its ascent. It leveraged its university, knowledge, and creative assets across all of the 3T’s, seeing the university not just as a generator of technology, but as a talent magnet and a source of open-mindedness and tolerance – a place where different-thinking and different-looking kinds of people can fit in and thrive. It has long ranked highly as a place for gay and lesbian  people. It’s time that college towns and even big cities with abundant university and college talent realize the true economic assets they have.

Great Resets are also talent resets. America profited greatly from influxes of talented inventors like Nikola Tesla and entrepreneurs from Andrew Carnegie to Intel founder Andy Grove. And foreign-born entrepreneurs and technologists form the backbone of many high-tech fields and are the driving force behind one-third to one-half of Silicon Valley companies.

But talent resets also extend to arts and culture. In fact, America’s ability to attract foreign artistic and creative talent was central to its post-war rise as a major creative center. A new book by Dorothy L. Crawford (h/t Dan Silver) documents how European artistic and creative talent fled Nazism and took root not just in New York City but in Los Angeles, revolutionizing the creative climate there; the Nazi regime propelled a veritable slew of German musicians to emigrate to the L.A. region, where they set about revolutionizing modern classical music and film composition. This review by Lindsay Hansen shows the influence of Schoenberg:

An instructor at the University of California-Los Angeles’ (UCLA) music school, Schoenberg envisioned the creation of a unique, progressive music program that would rival all other programs, nationally and internationally. Mocking traditional music classes as lacking in rigor or breadth, Schoenberg claimed that he could teach “composing to tables and chairs.” Schoenberg wanted to educate a new generation of musicians who would be proficient in all areas of music, rather than merely skillful in a discrete portion of the musical world.

Or consider Erich Wolfgang Korngold, the Austrian-born composer and prodigy who wrote the scores for everything from A Midsummer Night’s Dream to Captain Blood:

Between 1934 and 1954 he worked on twenty-three films, for only sixteen of which – all for Warner Brothers – he composed the full score. No other film composer achieved the privileges granted to Korngold: His music remained his property; he had the right to refuse projects he felt were unsuitable; he was often involved in prefilming decisions; he could decide where music should be used in the films; he could work at home when he wished; he would have his own screen title; and his name appeared in advertising wherever the director’s name appeared. He was also–at $12,500 per assignment–the highest-paid composer at the time in Hollywood.

We’re in the middle of another talent reset right now. Will America once again step up, or is it in danger of becoming more restrictionist? One thing is for sure, the places that embrace the talent reset will prosper, while those that don’t…

As one looks around the economic landscape I am struck by the devastation. One number stands out above all others. One in five males between the ages of 25 and 55 is out of work! That is a staggering number. The numbers are not going back to anything “normal” anytime soon according to the IMF. Financial crises followed by recessions do not return to normal levels of employment for over a decade. Why you might ask? The answer I guess is that the levels of debt need to be worked down. Everyone owes everyone money and none pay anyone. Second, the recession destroys real capital. In this situation it was housing. It will take years to work off the excesses of the housing crisis.

So what does entrepreneurship have to do with the recession? If we take what we know today, entrepreneurs and innovation play a vital role in the economy. But can they help us in the great recession? In other words, what policy should we be pursuing to move the unemployment rate below 10 percent and back into the neighborhood of 5 percent? We know that new firms are important. They create most of the net jobs.  However, only a small percent, perhaps 4 percent, create almost all of the jobs in any given four-year period. And this seems to hold up in different times, different countries, and different industries.

So how do we forge a policy? Two stories are told out there. First we know that age and size are important variables. And we know that age appears to be more important than size. In other words, we should target firms based on age not size. The two stories out there are one by Zoltan Acs and the other by Carl Schramm. In a highly influential study, Acs found that the average high impact firm was about 20 years old and came in all sizes, small, medium, and large. Schramm, on the other hand, using a Census Bureau study, found that firms less than five years old created almost all of the jobs independent of size.  They both cannot be right.

However, if we are interested in short-term policy solutions and not real economic growth, we should help stimulate solo self-employed. They have a start-up rate that is three times as large as firms with employees. They start easily but also go out of business quickly. So an effective policy would be to make it easier for them to stay in business longer.

A simple policy would be to cut the self-employment tax, not over 15 percent of all new solo self-employed firms to zero for three years. If they hired any employees we should cut the employer share 7.5 percent for three years also. This would greatly increase the survival rate for these new firms. Of course this is not a long-term solution because many of these firm will contribute very little to productivity, economies of scale, or wealth creation. But they will pull down the unemployment rate.

The impact on the deficit would not be great since many of these people would not have survived to pay payroll taxes anyway. Once the economy picks up the issue of long-run growth can be addressed. But in the short run, let’s get people working.

In her September 3 blog post, “Creative Florida”, Rana Florida asked for thoughts about Florida tourism. As a resident of St. Petersburg, Florida, I thought I should respond.

Tourism has long been the golden goose in Florida but it is also a double-edged sword. We have no state income tax in large part due to the sales tax revenue that tourism provides. When the tourists come, the coffers fill and all is well. When we have downturns in the economy or other disruptions (such as hurricanes or 9/11) our budgets shrink. This volatility prevents us from having a predictable revenue stream which in turn means less long-term planning.

For better or worse, tourism also defines Florida. For many it is great to have that identity but I know a lot of creative class entrepreneurs in high-tech who lament that they can’t attract talent or VC interest because no one takes Florida seriously as a business environment.

But to me the largest impact of tourism is that it has made us lazy (I say this with love, Florida!). Tourism is easy money and we have coasted on that for too long. When the tourists just arrive with bags of money, why innovate? Why invest in our schools or our infrastructure? Why make the hard tax choices when we can raise the bed tax on hotel rooms or local tax on car rentals? We need to rethink tourism and make it a higher value experience, one that leverages the service economy and makes it more creative and innovative.

Florida had a wake-up call last year when, for the first time since WW2, we had a net outflow of population. That is a seismic shift in the underpinnings of Florida’s economy and I hope that it forces us to look at diversifying our economy and making the harder choices of developing industries beyond the beach and theme park.

What, exactly, is entrepreneurial strategy, anyway?

I regularly teach classes on entrepreneurship and new venture development, and more than occasionally drop in to provide my perspective on topics of interest to those forming or funding technology-driven, high-growth companies. Since I have been spending a lot more time up in front of students (and, thus, getting peppered with great questions), I have been giving a lot of thought to what passes for “entrepreneurial strategy” courses (or sections of courses). To me, it seems that the bulk of entrepreneurship pedagogy has, in a relatively brutish way, simply ported over the issues relevant in a typical strategic management class and attempted to convert those topics into material appropriate to the new venture setting. The more I think about it, the less persuaded I am that this is helpful for students; and I continue to have my suspicions that this approach forwards the research frontier.

Why we have decided to believe that the theories and questions in strategic management – relevant to large, established firms – apply equally well to either nascent or newly established firms merits further consideration. What evidence do we have that the same proscriptive advice we give in the case of large-firm strategy applies to nascent or newly established firms? And does that advice apply equally well for both innovative, high-growth firms (the software startup) and replicative entrepreneurship (a neighborhood bakery)?

In Innovation and Entrepreneurship, Peter Drucker notes, “I have not come across any discussion of entrepreneurial strategies. Yet they are important, and they are distinct, and they are different.” Consider that the next time you are perusing your local bookstore seeking insight on how to build a business.

Entrepreneurship seems to be the cure all for almost everything including the common cold. In a recent paper, the Kauffman Foundation found that the number of Fortune 500 companies and Inc 500 companies were founded in bear markets. A bear market is when stock prices are more or less falling and a bull market is one in which they are rising. Now this seems counter-intuitive at first. Would you not start a business when times are good? In bad times, if other firms are having trouble selling goods and services, why would you start another one? However, there is another aspect to this. If you lose your job you might have to start a business (a necessity entrepreneurship). But I do not think many of these would grow up to be Fortune 500 companies.

So how do we explain the Kauffman finding? Well, a quick look at bear and bull markets reveals a very interesting finding. Over the whole of the 20th century we found about three bear markets (the market rising) and about three bull markets (the market falling). Each is about 15 years, give or take a little. Keep in mind that a bear market does not mean recession. Recessions are short, but bear markets can last a very long time. In fact, the current bear market stated about 2001 so we are about halfway through if you take the more or less 15-year average. So it is not surprising if about half of businesses are started in bear markets. In fact, a quick look at the statistics suggests that the start-up rate of new firms is not very sensitive to recessions. They are around eight percent. They never fall by 50 percent and never rise by 50 percent.

So what does this finding tell us? Nothing I am afraid. It is business as usual. In good times and bad times Americans will start businesses. I would suggest that the creative class start-up rate is also very steady in the recession. The regional variation of this might also be very interesting.