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September 24, 2008

Supply-side efforts at building skilled workforce

By Britton Lombardi, Associate Economist

Wage growth continues to grow more sharply for educated workers, but how can states and cities build their work force in this direction?

For one, a “grow your own” approach to enhancing the local supply of educated workers may be helpful. States tend to have some advantage in retaining individuals who grew up and went to college within the state. A study found that 54% of students that were both residents of the state and attended college in-state were working in the state 15 years later. The number falls to 35% if the student residents attended college in another state. The percentage drops to 11% for non-residents who attended college in the state. A recent policy report for the Milwaukee area suggests that a potential way for states to make use of this home state advantage would be to increase their high school graduation rate and better prepare their students for college. Even if these students do not attend college, the policy report notes that a rise in the high school graduation rate would raise average incomes and would help fill jobs being left open by retiring baby boomers. Nonetheless, states and cities will see the greatest returns to education if these high school graduates do obtain a college education and either stay in-state or return home after college.

How are states doing in "grow your own" initiatives? The chart below plots state college enrollment versus educational attainment of the workforce. The state’s college enrollment rate is weighted by the state’s average high school freshman graduation rate, which reflects a state's tendency to graduate its high school students. Therefore, the x-axis number is the interaction between the percentage of high school graduates that go to college and the percentage of students that completed all four years of high school. On the vertical axis, we measure educational attainment of the state's workforce as the weighted average of years of schooling per worker. The horizontal and vertical lines in the graph (in blue) are the U.S. averages.



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The states positioned in the top right quadrant of the chart have an above average educational attainment per worker and are sending a higher proportion of students to college than the U.S. average. Four of the five Seventh District states (Illinois, Iowa, Michigan, and Wisconsin) reside in this quadrant. Although Indiana (bottom right quadrant) has lower than average years of schooling, the state seems successful in preparing and sending its students to college as seen from its above average enrollment rate. It appears as though the District states, which tend to be high-income states, have been successful in educating their own and sending them to college. There is some slippage in this measurement since a large and variable share of those who enroll in college go on to complete their degree.

Educating a state’s own individuals does not guarantee the young professionals’ retention or return to the state after college. Therefore, states should also focus on the migration of these young professionals into and out of their state, especially as the young, college-educated professional cohort is the most mobile of any cohort in the U.S. A special Census Report calculated that 75% of young and single and 72% of young and married college-educated professionals between the ages of 25 and 39 relocated between 1995 and 2000. Therefore, a part of a state’s future economic success is tied to attracting these young professionals from other states. In the next chart, states are plotted based on their 3 year average net migration rate of young professionals versus the state’s weighted average years of schooling. For the Seventh District, Illinois and Wisconsin (top right quadrant) have average years of schooling above that of the U.S. average and are importers of young educated professionals as seen through their positive net migration rates. Iowa, Michigan, (top left quadrant) and Indiana (bottom left) have negative net migration rates. These states seem to be exporters of young college-educated professionals.



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For the two charts above, the educational attainment of the existing work force was put on the vertical axis for two reasons. The educational attainment level reflects the past success of the state’s educational system in producing an educated work force. In addition, educational attainment will vary with the industry mix of the state economies since industries tend to have varying workforce skill demands. In turn, a state's industry mix is determined by a host of historical developments in the state’s development process. Indiana, for example, ranks among the top 3 states in manufacturing concentration, a sector which historically has not required a post-secondary education (though this is changing to some degree).

As states compete for these young professionals, they may need to offer unique opportunities to set themselves apart. From an economic development standpoint, cities can be an integral part of a state’s effort to increase their level of human capital since cities can be the gravitational force that brings young professionals to the state. Based on the table below, 17 of the 20 largest metropolitan areas had a positive in-migration of young well-educated professionals between 1995 and 2000, including two Seventh District metropolitan areas: Chicago and Minneapolis-St. Paul. Cities have the ability to attract young well-educated residents because they still offer powerful benefits to their inhabitants.Cities eliminate the distance between people and ideas by allowing ideas to be shared in both formal and informal settings, thereby increasing the opportunities for innovation. As such, cities have become centers of learning for young college-educated professionals just starting their careers. As studied by Ed Glaeser, professionals come to cities to take advantage of the knowledge externalities provided by interactions with other well-educated and successful individuals to enhance their own productivity. Glaeser found that workers tend to learn faster in cities and enjoy higher wage growth. The density of educated individuals living in a city creates informational spillovers, thick labor markets, and division of labor leading to specialization. Cities also reap the benefits of these individuals through their overall increased productivity and innovation.



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Since cities can play an important role in regional economic development, the Milwaukee area policy report suggests a combination of two ways for cities to enhance their efforts to increase their pool of human capital through migration. First, the city should try to enhance the available job opportunities to young professionals that match their career and personal goals, as these individuals want to learn, network, and develop professionally. The report recommends that local businesses and civic organizations join forces to share resources and ideas to spur innovation and growth to create or improve jobs. Secondly, the American city has been transforming into a cultural and entertainment center. Young, college-educated professionals place special emphasis on amenities offered by a city. They expect high-quality and unique recreational opportunities such as restaurants, sporting events, live music, and nightlife venues. Therefore, cities might need to augment or diversify their recreational offerings to retain and attract these young professionals and provide a vibrant and livable city.

These days, states and cities must select from a wide and complex array of economic growth and development policies to find the strategies that are most appropriate for their situation and circumstances. Increasingly, they are favoring policies related to skilled work force availability.


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Posted by Testa at 10:11 AM | Comments (1)

September 11, 2008

University Cities

By Graham McKee and Bill Testa

It’s very clear by now that wages and incomes have risen sharply for U.S. workers who have attained greater education. One recent study indicates that the premium of hourly wages of college graduates over those with only a high school diploma has climbed from just over 30% in 1950 to over 60% today. This lesson has not been lost on recent high school graduates. The U.S. Bureau of Labor Statistics reports that in October 2007, 67.2% of the class of 2007 high school graduates were enrolled in a postsecondary educational program.

So, how have rising returns to education affected the economic growth and well-being of places? Not surprisingly, eminent scholars have proffered that those local economies having highly educated work forces have outperformed as measured by relative income and employment growth. In particular, research papers by Edward Glaeser (and others) provide documentation that a large initial work force share having a college degree in a metropolitan area tends to give rise to strong subsequent growth in jobs and income.

Metropolitan areas and other local areas in the Northeast and Midwest have taken especial note. Here, the economic performance of many cities has been hampered by an industrial composition steeped in traditional manufacturing. While the skill and educational requirements of factory jobs have been notably climbing as of late, the economic structure of many Midwest places has not developed from a strong base—that is, one having the advanced business, finance, and professional services that tend to employ highly educated and highly compensated workers.

One place in the region where we still might expect to observe the propulsive power of educational attainment would be in the Midwest’s college and university towns. Both nationally and regionally, colleges and universities have enjoyed rising demand for their services—both research and teaching. Per the graph below, enrollments as a share of the U.S. population continue to rise during the current decade, reaching almost 6.5%—a level of 18 million by October 2007 (versus 8.2 million in 1970). So, too, research and development (R&D) performed by colleges and universities has also climbed over same period, rising from a 9.2% share of all U.S. R&D in 1970 to a 13.7% share in 2006. More recently (measured in nominal dollars), university R&D rose by 50% over the period 1999–2006.



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Such trends have driven direct employment in academia higher. According to surveys conducted by the American Association of University Professors, over the past three decades, “while the number of tenured and tenure-track faculty has grown 17 percent, the ranks of contingent faculty (both part and full time) and full-time nonfaculty professionals have each tripled, and the count of administrators has doubled.”

In addition to direct employment, university research has often acted as a catalyst for growth in the private sector. Technology transfer from university labs to start-ups and early stage firms has become a growing activity. Moreover, many such firm start-ups take root locally in university towns themselves. The emergence of industrial research parks adjacent to or close by universities offer testament to this phenomenon—with those in proximity to Stanford University and the Massachusetts Institute of Technology (MIT), as well as the Research Triangle Park in North Carolina, being the prominent prototypes.

To identify those Midwest metropolitan statistical areas (MSAs) in the Great Lakes region where universities make up a large share of economic activity, we look at the R&D expenditures of all universities in each MSA in seven states—Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, and Wisconsin. On a per capita basis, the top ten metropolitan areas by R&D expenditures for 1979 are reported in the graphs below (by rank from highest to lowest). How did these metropolitan areas subsequently perform as measured by population growth and per capita income?

In answering this question, it must be recognized that much more than university activity has transpired in these metropolitan areas. Even metropolitan areas that we tend to associate with major universities (e.g., Lafayette, Indiana, with Purdue University) are major manufacturing and commercial centers in their own right. And so, we cannot then simply attribute their relative demographic and economic growth over the past few decades to university presence with much confidence. Nonetheless, on the whole, it is interesting to note that these metropolitan areas outperformed the seven-state region, on average, over the 1979–2006 period. As shown below, average population growth of university towns (see black vertical line below) has easily outgrown the average population growth of all metropolitan areas in the region (see horizontal maroon bar). The per capita income performance of university towns has not been as sharp (below).



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The comparative growth of these Midwest university towns, as shown in the graphs, perhaps reveals the local benefits from higher educational activity. Still, the questions and issues related to the economic development of such places remain difficult. How can university locales best leverage local universities for growth? Host cities have been active along a number of fronts. To name a few, localities have developed complementary real estate adjacent to campus to stimulate retail and residential attractiveness. Universities have also partnered in commercial parks and ventures to stimulate private business investment and further research activity, and in some instances, the region has partnered with a local university to train the local work force in specialized areas or to develop technology and know-how into a local industrial specialty.

Given these observations, more challenging questions remains. How can the positive effects of university R&D spillovers benefit states and even multistate regions? (That is, how can such spillovers in university towns spill over more widely?) And even if such spillovers were realized, how much and what types of public support should be proffered to colleges and universities? And if colleges and universities are to receive subsidies based on the impact of their economic development on broad regions, how should the costs of public support be allocated among the various subregions who share in the subsequent benefits?


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Posted by Testa at 11:20 AM | Comments (0)