Making Rochester a knowledge economy? Beware of unintended consequences

When looked at in terms of certain metrics, our city of Rochester is not a happy place. For instance, it is one of the most racially segregated cities in the U.S. The poverty gap between whites and people of color is huge. Some would argue that local racism is systemic.

Despite these ills, many continue to be bullish about Rochester. The University of Rochester’s Duncan Moore argued in 2012 that the institutions of higher education in Rochester have had and will continue to have a positive impact on the region’s economy. In his 2019 book, MIT economist Jonathan Gruber contended that Rochester had what was needed to become a major driver of national economic growth. And in his 2023 State of the City address, Mayor Malik Evans argued that Rochester could become a powerhouse of the 21^st century economy of knowledge and innovation.

The argument that making a place a center of knowledge and innovation will have positive effects is not new. Indeed, it has been made by many in the social sciences. That said, two points are worth emphasizing. First, we now know that the economic gap between cities with strong knowledge-based economies and those specializing in traditional industries is widening. Second, and particularly relevant for Rochester, new research by Enrico Berkes and Ruben Gaetani demonstrates that there is a causal connection between the rise of the knowledge economy and an increase in economic segregation in urban areas.

The implication here is that taking steps to promote a knowledge-based economy can make matters worse in some ways. This seems counterintuitive. So, what is the argument? Let us find out.

This research uses data from 1990 to 2010 to analyze whether there is a relationship between an expansion in knowledge-based activities in a city and changes in economic segregation in this same city. Why might such a relationship exist in the first place? This is because of two reasons. First, research has shown that innovation and creative jobs depend greatly on localized knowledge spillovers. Second, knowledge workers tend to care greatly about the existence of local amenities such as good schools, quality restaurants, and fitness centers.

The painstaking empirical research conducted by Berkes and Gaetani shows convincingly that an expansion of local innovation activities (what they call an “innovation shock”) results in a salient increase in economic segregation. Notably, this negative result does not depend on the specifics of how innovation activities and economic segregation are measured. Several alternate measures yield the same negative result. This result arises because of a rise in the geographic sorting of households along the income dimension.

Why does this residential sorting in cities take place? The best explanation is that when new knowledge becomes available and gives rise to innovation possibilities, the incentives faced by firms to locate close to each other go up and this matters more than any negative impacts from congestion. In other words, a larger “innovation shock” gives rise to more clustering of knowledge-intensive jobs in neighborhoods that are marked by a high initial density of workers in knowledge-intensive occupations.

This clustering of employment matches changes in the residential choices of knowledge workers. Specifically, in response to an enlargement of local innovation activities, knowledge workers relocate in the proximity of census tracts that experience an inflow of knowledge-intensive jobs, possibly to reduce their commuting distance from these novel employment opportunities. Put differently, because knowledge workers care greatly about local amenities and less about rents, this relocation can contribute to amplifying the impact of employment clustering on economic segregation.

The bottom line is this: Those who want Rochester to become a strong center of knowledge and innovation need to think carefully about the point that as knowledge-based activities increasingly become the main propulsive force in our city, the geographic divide between individuals with different levels of income may well continue to widen, in the process intensifying differences in terms of access to education, health, and consumption amenities.

Amitrajeet A. Batabyal is a Distinguished Professor, the Arthur J. Gosnell professor of economics, and the interim head of the Sustainability Department, all at Rochester Institute of Technology, but these views are his own. The Beacon welcomes comments and letters from readers who adhere to our comment policy including use of their full, real name. Submissions to the Letters page should be sent to [email protected].