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The future of the American worker depends on research and innovation.

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Reuters

Innovation is the engine that sustains the American economy and its workforce. Over the past three decades, traditional manufacturing employment has collapsed, while employment in innovative industries has skyrocketed. But the United States is not investing enough in research and innovation. As a consequence, our salaries and our jobs are not growing at the rate they should.

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At the heart of the problem, there is a serious failure in the market for knowledge. It stems from the fact that the creators of new ideas are not always fully compensated for their efforts, as some of the benefit of their research inevitably accrues to others in the same industry.

Consider, for example, the introduction of the iPad. Because the product was completely new, nobody really knew its market potential. Apple carried substantial risks, because it had invested significant resources in the iPad's development. Indeed, when Steve Jobs unveiled the device in front of a select group of journalists and opinion leaders in San Francisco in 2010, many industry analysts were skeptical, arguing that the iPad was just an expensive gadget and therefore destined to remain a niche product. Some ridiculed it as an out-sized iPhone without the phone, and predicted that it would generate little interest. After the launch, however, it became clear that the iPad was going to be an international sensation, and many competitors -- including Samsung -- immediately started developing their own versions. Essentially, those competitors benefited from the information generated by Apple's risk-taking.

This matters not just for Apple's profits, but for the future of the American economy. Although patents in theory protect intellectual property, in practice, innovative companies that invest in research appropriate just some of the benefits of their efforts. This is an unavoidable feature of the way innovation is created today and the speed at which new ideas and new knowledge spread in the tech industry.

The magnitude of these knowledge spillovers is substantial. In two of the most rigorous studies to date, economists Nick Bloom of Stanford and John Van Reenen of the London School of Economics followed thousands of firms and found that the spillovers were so large that R&D investments of one firm raised not only the stock price of that firm but also the stock price of other firms in the same industry.

Part of the spillover is global in scope. For example, an increase in R&D investment by U.S. firms in the 1990s translated into significant productivity increases for U.K. firms in similar industries, with the majority of the spillover accruing to firms with an American presence. But a significant part of the spillover is local, because it occurs between firms that are geographically close. So new knowledge generated by American companies benefits other American companies.

Presented by

Enrico Moretti

Enrico Moretti is professor of economics at the University of California, Berkeley, where he holds the Michael Peevey and Donald Vial Career Development Chair in Labor Economics. More

Moretti is the director of the Infrastructure and Urbanization Program at the International Growth Centre (London School of Economics and Oxford University). He is also a research associate at the National Bureau of Economic Research (Cambridge) and a research fellow at the Centre for Economic Policy Research (London) and at the Institute for the Study of Labor (Bonn). His research interests include labor economics, urban economics, and applied econometrics. His new book, The New Geography of Jobs, has been featured in The Wall Street Journal, Forbes, and The Atlantic, as well as on MSNBC and CNBC.

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