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March 30, 2006

Midwest labor markets: Not as bad as we thought?

By now, it is common knowledge that the Midwest labor market is softer, on average, than the rest of the nation. In our Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin, the unemployment rate has been running one half percentage point higher than the nation for the past two years. Reported payroll job growth has been running poorly as well—at approximately one-half the national rate. The Midwest’s manufacturing sector has also been weak, dragged down by ongoing restructuring among domestic car makers and parts suppliers.

This March, a glimmer of better news was delivered by the U.S. Bureau of Labor Statistics, who rebenchmarked revised monthly state payroll job numbers back from December 2005 to January 2004. The BLS rebenchmarks the employment data each year to take into account more comprehensive data that becomes available on the number of jobs in each state.

Recent revisions boosted the two-year growth of total employment for the Seventh District, while the U.S. was revised downward slightly. The chart below displays revisions by state from the fourth quarter 2005 back two years to the fourth quarter of 2003. After revising District jobs upward by 78,000 for the fourth quarter of 2005, job growth was found to be 1.5% versus 1.0% prior to revision. U.S. payroll jobs were revised downward slightly (by 158,000). Even after this convergence, the pace of reported job growth for the District lies at one-half the national pace!

Click to enlarge image.

On the beleaguered manufacturing side, favorable revisions were repeated. District manufacturing jobs were revised upward by 13,000 for the fourth quarter of 2005, which raised the pace of decline from a 1.2% decline to a 0.7% decline. For the U.S., revisions eliminated 54,000 jobs, and lowered the pace of growth from –0.3% to a 0.7% decline, thereby matching the District pace over the two-year period.

Click to enlarge image.

In may seem incongruous that pace of the the District’s manufacturing sector matched that of the U.S., while the District’s total employment growth was only one-half of the U.S. This results from the fact that manufacturing jobs are much more concentrated in the District—by about 43%. A falloff in District manufacturing activity is also keenly felt across service sectors such as transportation and distribution.

Considerable statistical noise remains in these numbers. Next year, the payroll numbers will be revised once again, and these revisions will include the fourth quarter of 2005. This means that the payroll job performance reported here will also be revised. Stay tuned.

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Posted by Testa at 2:15 PM | Comments (0)

March 22, 2006

Auto Parts Issues & Conference

A conference discussion on the issues facing automotive companies, workers, and communities will be held on April 18–19, 2006, in Detroit, at the Chicago Fed’s new branch building. The conference will center on the auto supplier industry. Suppliers employ three times as many workers as assembly operations, but as an industry, it is little known to most of us. However, as assembly operations are changing owners and shifting geographically, the responsive behavior of auto suppliers will have important implications and impacts for many Midwest workers and communities.

One of the conference organizers, Thomas Klier of the Chicago Fed, has been studying the behavior and geography of the North American automotive industry for over a decade. During that time, never have the questions and uncertainty about the industry’s future footprint in the Midwest been as portent for the region’s economy as today. The traditional assembly companies (the Big Three) and their (more-sizable) suppliers have been pulling in production from the coastal United States to the Midwest. At the same time, the Big Three and suppliers have seen their market share shifting southward from the Midwest to transplant assembly companies and their suppliers. This leaves the upper Midwest with an ever-greater concentration of the most vulnerable segment of the North American automotive industry.

Thomas offers the following analysis of the shifting geography of Big Three and transplant assembly operations to put this matter into perspective.

Click to enlarge image.

The U.S. auto industry’s footprint has been changing for a considerable time. Since the early 1980s the domestic auto producers have been losing market share to transplant producers setting up plants in the U.S. and Canada as well as a growing number of imported cars. Subsequently the Big Three closed most of their coastal and southern plants (red stars in the map) and pulled back to their traditional Midwest home.

The transplant assembly facilities opened since 1980 have been sited in the interior of the country, primarily in a north–south corridor formed by interstate highways 65 and 75, between the Great Lakes and the Gulf of Mexico. Since 1990, many of the new assembly plants have been located in the Deep South, centering on Alabama and Mississippi. That trend continued with last week’s announcement by Kia, a Korean automaker that is part of Hyundai Automotive Group, to build a new assembly plant in southwestern Georgia.

Table 1 highlights these geographic shifts with data for the last 6 years. A unit of observation is an assembly line (a measure of the output of an assembly plant, as assembly facilities can have multiple lines). Since 2000, the Big Three closed 8 assembly lines in the U.S. During the same time the so-called transplants, carmakers which are headquartered outside of North America, opened five assembly lines. None of these were sited in the three traditional auto industry states of Michigan, Indiana, and Ohio.

Click to enlarge image.

The Big Three restructuring summarized in table 1 includes two major capacity cutbacks by Ford (including the announcement from January of this year), GM’s announcement from November of last year, and Chrysler’s restructuring from several years ago.

The combined effect of these on the footprint of the Big Three assembly operations is a significant increase of their concentration in the core auto states (the share of Big Three assembly lines located in Michigan, Indiana, and Ohio will increase from 43% in 2006 to 51% by the time the recently announced restructurings will have been put into place) at a time when the domestic carmakers are substantially trimming output and capacity.

The April 18-19 conference in Detroit will discuss these trends in much more depth. More importantly, many of the nation’s experts will address questions that are key to the Midwest's economic future:

  1. What are the indications and plans for a turnaround of the Big Three assembly companies?

  2. How important are Big Three losses with respect to the region’s automotive parts industry, and in what ways?

  3. How are auto parts companies restructuring to put themselves on a firmer footing going forward?

  4. What role will changing labor-management relations and working conditions play in the re-configured auto parts industry?

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Posted by Testa at 10:39 AM | Comments (1)

March 20, 2006

Chicago Survey

Chicago is arguably one of the most-studied places in the world. The origins of this examination likely began with the world’s interest in Chicago’s rapid growth following the Great Fire over 100 years ago, and the subsequent phoenix-like re-birth. Serious sociological study of neighborhoods began with Jane Addams’ documentation of immigrant enclaves here and with the venturing of the University of Chicago’s social scientists outward from Hyde Park. This tradition continues today by social scientists, political scientists, and economists of every stripe. At least two periodic conferences that I know of examine Chicago. Some one-time Chicago self-examinations coming up this year are in celebration of the 97th anniversary of the publication of the great Burnham Plan of Chicago.

And so, any journalist setting out to survey Chicago’s position and prospects is favored in having many people to interview and much source material to draw on. The downside is that, in drawing conclusions and implications, there are also many experts peering over the journalist’s shoulder prepared with well-informed critique. Such a journalist, then, will either be highly accomplished, or else should have a great store of hubris.

Journalist Johnny Grimond of The Economist has just written the first survey of Chicago and its surrounding area for that well-respected magazine since 1980. For the most part, the survey article is about all that could be hoped for by the denizens and students of Chicago. In some respects, it is a love letter to Chicagoans. The prism of comparison of Chicago today to the Chicago of 1980 reveals a city that has moved on from economic despair and survived a period of profound economic restructuring and political turmoil. In this perspective, its achievements are remarkable. Unlike other industrial belt cities, Chicago has survived the greater region’s manufacturing decline and replaced it with high-level service functions and urban livability. Moreover, in doing so, much of its success has emanated from a revived central core outward, rather than becoming solely a suburban ring economy.

Rather than further re-hash the survey article’s findings, I suggest you have a look at it and perhaps contribute your opinions about it here. In my opinion, it will be shame if The Economist’s survey does not provoke a broader dialog among Chicagoans about the future and what, if anything, to do about it. What do you think are Grimond’s errors of commission and omission in assessing Chicagoland and its prospects? Is Chicago poised for prosperity, or has it merely experienced a short-lived respite from long-term decline?

At the end, Johnny Grimond notes a few possibilities for further success, namely further development of its professional services sectors and better commercialization of its educational and technological assets. However, Grimond is somewhat pessimistic in observing that the Daley era may be coming to an end, with nastier politics ahead and no evident leadership handoff in sight. And like its counterparts, Chicago has not cracked the puzzle of easing inner-city poverty and upward mobility. And so, he concludes that “Chicago’s current success may be about as good as it gets.… Chicago, like almost all America’s older cities, still faces the prospect of decline, or at best stasis, unless it can find the elixir of urban life—how to grow richer without growing bigger.”

What do you think?

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Posted by Testa at 10:39 AM | Comments (3)

March 14, 2006

Global Chicago: Da Bulls, Da Bears, Diversity

Chicago United is a 38-year old group devoted to “Enriching the economic fabric of the Chicago region by building sustainable diversity in business leadership.” On March 10, I participated as a panelist at the first of a three-part series titled “Chicago: A Global City, A Global Perspective on Diversity.” Together with my co-panelists Paul O’Connor and Saskia Sassen, we addressed whether Chicago had become a global city and, more importantly to the Chicago United audience, whether Chicago was working effectively from the standpoint of diversity as a business imperative in the global marketplace.

Here are my thoughts, though I’d like to hear yours as well!

The Chicago metropolitan area (Chicago) lies on the razor’s edge with respect to its future. So-called globalization lies at the heart of what has brought Chicago to its critical crossroads. To put it simply, depending on both its own actions and on the fates, Chicago can possibly become a backwater business capital city of a shrinking and largely unimportant region of the United States. Alternatively, Chicago can become an independent city of global importance, a city that attracts the world’s most talent business makers, artists, policy makers, and idea-creators. As such, Chicago could even become the portal that helps revive a surrounding Midwest region which is sorely in need of revival and re-invention.

Globalization means that the world’s economy has become more integrated and intertwined, and its regions more subject to frequent and profound shifts and changes. This is so because communication costs and transportation costs have fallen dramatically. For example, costs of shipping a ton of cargo dropped by three-fold from 1920 to 1960, and containerization and transport by larger and larger ocean-going ships continue to pressure prices downward today. Air shipping costs have dropped by 80% since the mid-1950s. And while many of us complain about airline deregulation and recent security procedures, personal air travel is now much more affordable to average Americans.

Communications cost declines are even more dramatic. The cost of a three-minute phone call from New York to London was once the equivalent of $350 in 1930 in today’s terms. These same communications facilitate both cargo and personal logistics, as well as propelling traded services, information, and capital around the world.

On top of this, most of the world’s nations have agreed to lower barriers to the flow of goods, capital, intellectual property, and sometimes travel and immigration.

How has globalization impacted Chicago? The pressures and challenges are great. Chicago can be characterized as the business capital city of a shrinking economic region. Chicago was borne of the gathering of farm products and natural resources, the sorting and shipping of these products, the financing of these products, and the supply of business and legal services to farms and agri-businesses throughout the Midwest.

In parallel, Chicago became a great manufacturing city as result of its transportation/hauling capability and facilities. Chicago gathered Midwest resources and transformed them more productively than any place on earth. So did other Midwest cities, but Chicago also became the business capital of these lesser cities in supplying them business, financial, and legal services.

Without belaboring the point, these same activities are today shrinking as sources of household income and jobs for both Chicago and its surrounding Midwest. For the most part, technical progress has diminished the need for workers here in Chicago in these activities, even while the attendant productivity gains have raised standards of living both here and around the nation. Growing world trade and import competition have contributed to local pressures and shrinkage. Prices for commodities and routine manufactured goods have declined, too, as both farming and manufacturing have become hugely productive—victims of their own success. And so, income and job growth generated from these activities are now weaker.

Does Chicago have a bright future? Its future likely rests with its ability to grow and develop linkages beyond its immediate region. It must produce services—high valued and sophisticated services-- that are valued in markets far from the Midwest. In the process, it can possibly lead the surrounding region to new markets as well. This is Chicago’s vision of becoming a successful global city.

In re-inventing itself as a global city, Chicago must attract (and also grow locally) the world’s business makers and highly skilled occupations and entrepreneurs.

Thankfully, super large cities such as Chicago are favored in recruiting skilled workers and entrepreneurs, and developing them locally. That is because learning and the networking necessary for career advancment is more attractive in places with many and diverse skilled work force activities. So too, the U.S. work force has become more composed of two-earner families, mostly due to rising labor force participation of women over the past 35 years. Because large cities such as Chicago offer large and diverse work force opportunities, employers can more easily attract highly skilled and specialized workers. Urban amenities are also attractive to many highly skilled or educated workers, perhaps blunting the pull of warmer climates elsewhere.

Within the Midwest, Chicago and the Twin cities are the magnets for highly skilled young workers, ranking 11th and 5th respectively among U.S. metropolitan areas in the proportion of its population aged 25-34 having college degrees.

Chicago also continues to attract immigrant population. Arguably, the single most important indicator of a region’s future and prospects for success is whether people are “voting with their feet” in choosing it as a place of promise. Within the Midwest, thanks to ongoing in-migration of Hispanic, Asian, East European, and other peoples, Chicago’s 17 percent foreign born population far outdistances other Midwest metro areas in its proportion of foreign born. These are people who bring new ideas and new ambitions to the Chicago area.

What signs are there Chicago’s industry base is well-poised for the emerging global economy? Chicago’s economy can look at several promising aspects. Business and legal services were the growth engines of Chicago’s economy in the 1980s and 1990s, outdistancing the growth of such jobs in every other U.S. metropolitan area. Management consulting, accounting, public relations, and the like represent services that Chicago is now selling around the nation and the world. The combined number of jobs in finance, legal, and business services in Chicago surpassed those in manufacturing by the early 1990s.

So too, Chicago’s financial exchanges have shaken off their competitors in many regards along with their institutional sclerosis. They are once again healthy and growing, seeking global partners and markets.

Chicago’s world class universities can count among them the leading business, medical, and professional schools.

In bringing in customers for these businesses, and in sending out its agents, Chicago’s O’Hare airport has been a critical vehicle, replacing what the rail hub once was to Chicago. The early innovation of McCormick Place (and later expansions to it) has made the region a global meeting place for business, commerce, and culture. Rising tourism has followed from around the nation and the world.

But, what must Chicago do if it is to continue to re-invent itself for a global economy? Among other things, Chicago cannot attract the world’s most ambitious and talented people, it cannot grow the world’s innovative and globally expansive businesses, unless it works well on the inside. Part of this working well as a city requires key infrastructure such as highways and land use planning that allows circulation of people in getting around, as well as providing public services and goods to Chicago’s residents. Metropolis2020 and other efforts and trying to lead Chicago into successful resolution of these challenges. It also involves creating the type of amenities that are world class, such as Millennium Park and Lakefront park improvements.

But perhaps more importantly, Chicago must be recognized as an oasis of opportunity for persons of every color, culture, and sex to realize their dreams and ambitions. Otherwise, business builders such as John Johnson and Oprah Winfrey will emerge elsewhere. The new generation of idea makers such as those who were pre-cursors of Genetech and Netscape will continue to move elsewhere, as will the rising stars of sports and culture such as Daniel Barenboim and Donald Young.

How can we nurture a culture of openness and opportunity here? Recognizing and understanding the threats and opportunities are half the battle. Organizational initiatives such as those of Chicago United are helpful.

We might also do well to focus on our opportunities rather than on our problems. As President Eisenhower has been quoted as saying, “If a problem cannot be solved, enlarge it.” In this instance, it is perhaps easier for us to join together when we are all going forward, when we are growing economically, intellectually, and spiritually. Accordingly, ambitious economic growth agendas and initiatives for Chicago going forward should be considered.

At the same time, as we participate in Chicago’s life and economic growth, we must all stretch ourselves personally so that we include those of us who may not live next door, or who may not look or talk or act as we do. Growth and success will make it easier for us to do so.

Walt Disney once said “Change is inevitable, growth is optional.” In the context of greater diversity and inclusion, a corollary is that neither change nor growth are inevitable. Rather, we must push ourselves to make them both happen. In doing so, however, we will find that inclusion and growth are mutually re-enforcing.

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Posted by Testa at 2:25 PM | Comments (1)

March 9, 2006

Economic Development Strategy

What is regional economic development? Economic development is a set of strategies (EDS) that try to improve the well-being of people who live in an identified place. Conceptually, the place may be a region of the world, a nation, a sub-national region, a state, metropolitan area, city, or neighborhood. In the United States, EDS are most often applied to geographic areas that are smaller than the national level, especially from communities on up to states or multi-state regions.

We can think of several very general EDS along the following dimensions:

  1. Enhancing economic opportunities for people in a specific geographic area through heightened labor demand (e.g., usually through jobs development or the attraction of firms and capital); i.e. “bringing jobs to people.”

    The marketing and promotion of regions are common EDS, along with more fundamental fashioning of a region’s business climate to attract investment and firm start-ups. An understanding of decisions about firm location and investment location is important for those regions that attempt to hike local labor demand by lowering firm costs of doing business through favorable tax or fiscal incentives. A useful introductory collection of essays on firm location decisions and economic policy can be found in Henry W. Herzog, Jr., and Alan M. Schlottmann, 1991, Industrial Location and Public Policy, Knoxville, TN: University of Tennessee Press.

  2. Improving workforce skills and education, thereby creating opportunities for people to qualify for existing jobs.

    The literature here is vast and varied. For a broad policy perspective, see the essays on returns to education by Nobel Laureate James J. Heckman. Among his recommended policy interventions are to “catch ‘em while they’re young” (invest in early childhood education), though his writings are nearly comprehensive concerning other possible actions such as adult workforce training and the efficacy of school reforms (e.g., voucher programs).

  3. Accomplishing both of the above for an economically depressed area.

    Perhaps to meet the most common demand for an economic development strategy a region would need to employ a dual approach. That is, to raise local work force skills at the same time that local job opportunities are created for those skills. Obviously, this is a tall order, especially in that these two achievements most likely must take place in the same time period.

  4. Linking more closely existing jobs or labor demand to available workers through several means.

    These would include providing easier transportation (more convenient commuting), greater affordable housing closer to job sites, and improved labor market information or lower transaction costs for filling or matching existing jobs. The so-called jobs mismatch hypothesis suggests that housing segregation or residental building patterns isolate low-income workers from job opportunities.

    For an introduction to academic studies of jobs mismatch, see Katharine L. Bradbury, Yolanda K. Kodrzycki, and Christopher J. Mayer, 1996, “Spatial and labor market contributions to earnings inequality: an overview - Special Issue: Earnings Inequality,” New England Economic Review, May-June.

  5. Having people migrate to outside regions of greater opportunity.

    Such a strategy is seldom advanced by politicians and policymakers. Local residents, even in depressed areas, rarely want to leave their home regions, and local politicians do not often find it in their interests to encourage “their votes” to migrate. Yet, migration is an important mechanism to improve well-being on the world stage, and in highly mobile places such as the U.S.

The theories and ideas behind existing EDS typically derive from economic theorists and their academic studies of the mechanisms described above. However, historically, economics discipline/theory has generally developed as a nonspatial discipline. It was not until the latter half of the 20th century that theorists widely began to include space in economic models and thinking.

Theory and empiricism on urban and regional behavior, especially with U.S. applications, can be found in several American journals, the most prominent of which are:

Journal of Regional Science and
Journal of Urban Economics.

For “more applied” and practitioner’s journals of U.S. EDS and applications see:

Economic Development Quarterly and
Growth and Change.

Several general books on EDS and associated case studies are helpful and accessible to those with basic economics training would find them readily accessible:

Timothy Bartik, 1999, “The market failure approach to regional economic development policy," in Approaches to Economic Development: Readings from Economic Development Quarterly, Thousand Oaks, CA: Sage Publications.

Timothy Bartik, 1991, Who Benefits from State and Local Economic Development Policies?, Kalamazoo, MI: W.E. Upjohn Institute.

Peter K. Eisinger, 1988, The Rise of the Entrepreneurial State, Madison, WI: University of Wisconsin Press.

Popular discussion and application of EDS centers on several areas. Economic clustering is perhaps most discussed. Clusters often denote a highly concentrated group of firms in the same industry or a group of firms or business activities that closely interact through trade or the sharing of technology, infrastructure, or work force. When and where such clustering gives rise to competitive advantage, high productivity, and rapid growth, it is of great interest to those regions who hope to nurture their own clusters or to build new ones in their region.

Economist Alfred Marshall, for one, first discussed the importance of proximity in fostering “centers” or “clusters” of industry and economic growth. Urban and regional economists have been writing/modeling these phenomena and the interactions between geography, scale, and trade, for 40 years or so. Economist Paul Krugman belatedly discovered the urban-regional literature for the mainstream economic profession and set it down in mainstream economic journals, such as the Journal of Political Economy and the American Economic Review, as well as a book, especially within the context of international trade.

In the context of regional development strategy, these ideas have been recently popularized by Michael Porter of the Institute for Strategy and Competitiveness and are being applied in the EDS of many states and regions. Porter’s website contains the theory and information on cluster strategies and also includes descriptions of applications from the U.S. and across the world.

The theory of cluster formation and strength is especially popular in strategies to create and promote centers of technology activity and technology transfer, following Silicon Valley’s success. For examples, see:

Andrew Reamer, 2003, Technology Transfer and Commercialization: Their Role in Economic Development, Washington, DC: U.S. Department of Commerce, Economic Development Administration.

Richard K. Lester, 2005, Universities, Innovation and the Competitiveness of Local Economies, MIT, Local Innovation Systems Project.

Jerry Carlino, 2001, "Knowledge Spillovers: Cities' Role in the New Economy," Federal Reserve Bank of Philadelphia, Business Review, Fourth Quarter.

Owing to the success of some prominent high-growth technology centers such as the San Francisco Bay area, many regions have also sought to foster entrepreneurial activity among local workers and business people in hopes that high-growth new businesses or industries may be created.

Ideas about globalization trends have also permeated EDS. It seems that everyone is now reading and citing Thomas L. Friedman’s The World is Flat: A Brief History of the Twenty-first Century. In it, Friedman’s thesis that heightened globalization has eliminated many local economic advantages for communities in the developed world, as well as made most goods and services “tradable,” is taken to its extreme. While globalization has indeed exposed many regions to heightened competition, the world is far from flat. It is still quite mountainous or “spiky”; it is full of clusters where location matters. Far from existing in obscure and competitive flatness, specific places maintain their prosperity and competitive edge through cluster relationships where infrastructure, technology, specialty activities, entrepreneurial culture, human capital, and quality of life are quite significant.

Economist Edward L. Glaeser believes the world to be spiky and has explored the relative prosperity and sources of growth of large cities in the U.S. economy. Large cities tend to be clusters of highly educated workers and occupations, and the income or wage premiums for highly educated workers has been surging in recent decades. One recent paper by Glaeser finds that the share of the adult population with college degrees increased more in cities with higher initial schooling levels. This divergence may be driven by the tendency of skilled entrepreneurs to innovate in ways that employ other skilled people.

Below is the ranking of the largest U.S. cities by share of work force having college degrees. A few Midwest cities, such as Minneapolis, Cincinnati, and St. Paul, sneak in near the top. Some other Midwest cities are listed for reference.

Source: U.S. Census Bureau, American Community Survey

City leaders themselves have surely noticed the tendency of such cities to grow rapidly, and accordingly, they have been active in trying to boost their attractiveness to educated workers. Since young workers are more mobile, efforts have been chiefly directed toward them.

One who especially believes that places should aspire to a high quality of life and robust entrepreneurial culture is Richard Florida. His book is especially popular in discussions of urban development. Florida’s thesis is that returns to human capital and entrepreneurial activity reign supreme; physical capital is secondary. Cities should encourage in-migration of creative types including artists, gays, techies, and business-builders. High quality of life, urban amenities, and social diversity are economy-builders.

The table below is drawn from Joe J. Cortright, who has also been researching the correlations between an educated work force and economic growth. Shown here are the share of young adults having a four-year degree or higher, not for cities, but for entire metropolitan areas. In the Midwest, the Chicago and Twin Cities metropolitan areas are the regional magnets for the young and educated.

The range of possible EDS is very large. Regions themselves vary along many dimensions so that, in fashioning EDS, local investment, institutions, and programs are (ideally) chosen to complement a region’s own characteristics and position. However, even with well-crafted EDS, success is far from certain. Regional economies are often buffetted by events and forces that are impervious to local EDS. In such an uncertain world, investing in general education and health at an early age seems to be all the more attractive. For one, these assets are portable if out-migration becomes necessary or desirable.

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Posted by Testa at 11:50 AM | Comments (2)