Where private sector employers spend the least

My last post looked at the top 10 states for private sector employment earnings (both wages and employer paid benefits) per capita. The component of per capita income that everyone wants and should be the goal of state and local economic development policy. In this post we look at the bottom 10 states on the metric. Here are the bottom 10:

So what can Michigan learn from the top and bottom 10 states in terms of growing per capita income (a top priority for both Governor Snyder and Business Leaders for Michigan)? First is that the key is growing private sector employment earnings per capita. Something Michigan has not done for two decades. That has to change. And to do that the data are clear we need both to get better educated (particularly the proportion of  adults with a four-year degree or more) and get more concentrated in the growing and high wage knowledge-based sector of the American economy. Those two characteristics, and not adherence to a low cost/small government/anti-union agenda, are the keys to growing per capita income.

Connecticut is ranked 40th and Mississippi 17th in the Tax Foundation’s new State Business Climate Index. Mississippi is a right to work state, Connecticut is not. So the prevailing ideology would predict that private sector employment earnings per capita would be far higher in Mississippi than Connecticut. Wrong! In an increasingly knowledge-based economy private sector employers most highly value citizens of a state with high education attainment, not the lowest cost or the weakest unions states. The bottom line: you can’t get Connecticut’s economy by following Mississippi’s policies.

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Where private sector employers spend the most

To their credit both Governor Snyder and Business Leaders for Michigan have set high per capita income as one of the state’s economic goals. Far too many political and business leaders are fine with lots of low paying jobs as the goal.

I’m sure each would agree that the key to realizing that goal is increasing private sector employment earnings (both wages and employer paid benefits). The other categories of personal income are public sector employment earnings; interest, dividends and rent; and transfer payments. Michigan is 36th in private sector employment earnings per capita. Fifteen percent below the national average.

In our latest progress report for the first time we broke per capita income down into its component parts. The top 10 states in 2009 private sector employment earnings per capita are displayed in the table below.

These are the states Michigan needs to model itself after if we want to achieve Governor Snyder’s and Business Leaders for Michigan’s goal of higher per capita income. They have an economy that everyone wants for Michigan: high income largely from the private sector, with a low reliance on government revenue (both public sector employment earnings and government transfer payments) for their personal income. They are not low cost/small government/right to work states that we are told over and over again are the model for Michigan. So if those are not the common characteristics of the states where private sector employers value state’s citizens the most, what is?

• they are over-concentrated, compared with the nation, in the proportion of wages coming from knowledge-based sectors;
• they have a high proportion of adults with a four-year degree
• they have a big metropolitan area with even higher per capita income than the state; and
• in that big metropolitan area, the largest city has a high proportion of its residents with a four-year degree or more.

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2012 Predictions

Surprisingly I have received lots of requests for my annual predictions. So here goes a little late.

Our work is focused on the long-term. How Michigan and its citizens can better position themselves to do well economically in a flattening world. I certainly don’t claim any special ability to predict year to year results. If there is anything we have learned in our work it is that unpredictable, disruptive events that cause big changes are occurring more and more frequently. Being able to adjust quickly to new realities is now a major competitive advantage for communities, enterprises and individuals.

That said it is highly likely that 2012 will be the second consecutive year of job growth in Michigan. Good news after an unprecedented decade of annual job loss. As I wrote in last year’s predictions: “The chief reason for those employment gains is once again the domestic auto industry. The same engine that has driven Michigan for the past century.” An engine that was restarted largely by the $83 billion federal government bailout. No bailout, no turnaround. End of story.

Other sectors – some auto related, some not – will also see job growth. All in all, on the jobs front, modest progress is the likely outcome. Good news!

Another area of good news will be the continued rebirth of Detroit in its downtown and midtown neighborhoods. For the rest of the City it will almost certainly be another year of decline. Huge problems still plague the City. But with foundations and corporations leading, the core of the city is beginning to attract new residents and businesses.  And greater downtown Grand Rapids should also enjoy a year of growth as well. Both cities – in their greater downtown area’s – are likely to see more young professionals and business moving in. This is important not just to our two biggest cities, but their regions and the state as well.

But in the arena that matters most to our long term success, the news is almost certainly going to be not so good. That arena is public policy.  The one prediction that I made last year that came true is in that arena. I wrote: “What appears to be the preeminent vision (in Lansing) of a successful future Michigan is an economy still anchored by factories, farms and tourism. And a policy agenda to get us back to our past success largely through smaller government and weaker unions. If I had to predict where we will go in 2011 it is towards that vision and agenda.”

Of course, unfortunately that is what occurred and is likely to occur again in 2012. I hope I’m wrong. An agenda – as I wrote in my last post – trying to restart a 1.0 and 2.0 economy will leave Michigan one of the poorest states in the country. Not good news to me. What about you?

My hope for 2012 is that we will get more of the kind leadership that the Senate Democratic caucus showed in their Michigan 2020 plan of putting out an alternative agenda(s) to the low tax/small government/weak union/lowest costs places win agenda that is the dominant thrust of public policy today in Lansing. It is almost certain that that agenda will rule the day in Lansing in 2012. Having an alternative agenda is an important step to reversing a policy course that is likely to leave Michigan with a shrinking, rather than growing, middle class.

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1.0/2.0 politics in a 3.0 economy

The two terrific articles on manufacturing in America I wrote about in my last post dramatically demonstrate how futile it is to try to recreate a mass middle class in a factory-based economy. Those days are gone. Factory work is no longer a source of long-term job growth. Nor of mass middle class jobs.

As reported by the New Times in an article entitled Factory jobs gain, but wages retreat: “But for a new generation of blue-collar workers, even those protected by unions, the price of employment is likely to be lower wages stretching to retirement. … The shrunken pay scale for newcomers — $12 to $19 an hour versus $21 to $32 an hour for longtime workers — threatens to undo the middle-class status of even the best-paid blue-collar jobs still left in manufacturing.”

But it doesn’t stop politicians – from both parties – trying.  In fact, centering their economic strategies for the country and state on recreating that economy. Most Republicans are advocating policies for a 1.0 (farming and oil, gas and coal extraction) and 2.0 economy (factories) with low wages and a small safety net. And the Democrats the same economy but with high wages and a large safety net. The Democrats want alternative/green energy products (batteries, solar panels, wind turbines, etc.) to be a core of a renewed factory-based economy.

Even Governor Snyder – who understands better than any elected official in Michigan the importance of moving to Michigan 3.0 – centered his State of the State address on 1.0 and 2.0 industries. In an insightful post Rick Haglund writes: “Still, the speech was a disappointment to those looking for details on how Snyder intends to continue implementing what he calls “Michigan 3.0″–the era of innovation. Strangely, he spent time praising the economic growth of sectors from Michigan 1.0 and 2.0–agriculture, manufacturing, mining and tourism. No mention at all of knowledge jobs in health care, financial services, and business, professional and technical services. And no discussion of whether the governor will propose using some of the budget surplus on new investments in education and cities.”

As we have documented in our annual progress reports on MIchigan’s economy, if the state’s economy (the country’s too) is anchored in “agriculture, manufacturing, mining and tourism” we are going to be both a slow employment growth and low income state. Is that what we want?

Both job growth and high wage are increasingly concentrated in knowledge-based sectors. As New York Times columnist Tom Friedman writes:

In a world where the biggest returns go to those who imagine and design a product, there is no higher imagination-enabling society than America. In a world where talent is the most important competitive advantage, there is no country that historically welcomed talented immigrants more than America. In a world in which protection for intellectual property and secure capital markets is highly prized by innovators and investors alike, there is no country safer than America. In a world in which the returns on innovation are staggering, our government funding of bioscience, new technology and clean energy is a great advantage. In a world where logistics will be the source of a huge number of middle-class jobs, we have FedEx and U.P.S.

If only — if only — we could come together on a national strategy to enhance and expand all of our natural advantages: more immigration, most post-secondary education, better infrastructure, more government research, smart incentives for spurring millions of start-ups — and a long-term plan to really fix our long-term debt problems — nobody could touch us.

That is the economy and the agenda we need to pursuing. It is the only reliable path to a future America with a broad middle class. But to get there will take a complete reorientation of the policy agenda of both parties. As long as we are debating which party can best restore the economy that is being obliterated by globalization and technology the country and Michigan are going to get poorer.

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The reality of factory work in America

Two terrific articles describe the present and future of factory work in America. The first from the New York Times on Apple’s production system. The second a more comprehensive look at American manufacturing from the Atlantic. Both have the same bottom line: employment in American factories is not now or in the future a major source of job growth in America and the low skill factory work that was the backbone of the American middle class last century that remains here will pay less than in the past. The reason: not politics or policy, but globalization and technology.

At the core of Michigan Future’s work, from our founding twenty years ago, has been the conviction that globalization and technology are mega forces that are continuously reshaping the economy. That by orders of magnitude they are more powerful than politics or public policy. And that the places that will do the best economically are those that align with – rather than resist – what now is described as a flattening world.

In no sector of the economy is that more true than manufacturing. Globalization, of course, means that more and more people across the planet will have the skills to compete with Americans for work. And technology increasingly invents new machines that also compete with Americans for work. Not to mention creating new industries that make obsolete old industries. The two articles do a terrific job of describing how those mega forces are reshaping what factory work can be done in America competitively and for that which remains how it will be structured with fewer workers and more machines.

As the Atlantic article describes the basic facts are:

We do still make things here, even though many people don’t believe me when I tell them that. Depending on which stats you believe, the United States is either the No. 1 or No. 2 manufacturer in the world (China may have surpassed us in the past year or two). Whatever the country’s current rank, its manufacturing output continues to grow strongly; in the past decade alone, output from American factories, adjusted for inflation, has risen by a third. … Yet the success of American manufacturers has come at a cost. Factories have replaced millions of workers with machines. Even if you know the rough outline of this story, looking at the Bureau of Labor Statistics data is still shocking. A historical chart of U.S. manufacturing employment shows steady growth from the end of the Depression until the early 1980s, when the number of jobs drops a little. Then things stay largely flat until about 1999. After that, the numbers simply collapse. In the 10 years ending in 2009, factories shed workers so fast that they erased almost all the gains of the previous 70 years; roughly one out of every three manufacturing jobs—about 6 million in total—disappeared. About as many people work in manufacturing now as did at the end of the Depression, even though the American population is more than twice as large today.

Both articles are terrific at describing the realities of global manufacturing. If you care at all about the future of factory work in America they both are must reads. Both articles explore the calculus companies go through to decide whether to make a product in American or places like Mexico and China. The Atlantic concludes the products that will continue to be manufactured here are precision products and those made in small batches. Clearly many industries – like consumer electronics – are never going to make their products in American again.

The Atlantic article adds a description of the calculus that goes into deciding when to invest in machines to replace American workers. And makes clear that there are machines today that can do even more of the work that American factory workers now do, but for the moment are too expensive to replace relatively  low wage American factory workers. But as the price of the machines go down, more jobs will be automated.

What does all of this mean for factory floor employment in America? The Atlantic article sought answers in a fuel injector plant in South Carolina. As they explain there are two types of factory workers there. Quoting the plant manager: “Unskilled worker,” he narrates, “can train in a short amount of time. The machine controls the quality of the part. “High-skill worker,” on the other hand, “can set up machines and make a variety of small adjustments; they use their judgment to assure product quality.”

The unskilled workers in the plant make $13 an hour. Their job is to work with “machines that can work in only one way and require little judgment from the operator. … Computers eliminate the need for human discretion; the person is there only to place the parts and push a button.” These jobs are still in America as the article describes for two reasons: “First, when it comes to making fuel injectors, the company saves money and minimizes product damage by having both the precision and non-precision work done in the same place. Even if Mexican or Chinese workers could do Maddie’s (a low skilled factory worker) job more cheaply, shipping fragile, half-finished parts to another country for processing would make no sense. Second, Maddie is cheaper than a machine.”

The skilled worker’s job is much different. The article describes a worker that went through two years of education at a community college that included learning algebra, trigonmetry, calculus and computer programming. That prepared him for a job that pays around $19 an hour (50% more than the unskilled workers) and involves overseeing “several machines, performing on-the-spot quality checks and making appropriate adjustments as needed.”

The inescapable conclusion from these articles is that the number of low skilled factory workers in America is going to continue to decline. And what remains will pay around than the $13 an hour that Maddie earns or lower. At the same time there is a need for more high skilled factory workers. Products will still be made here in factories which are increasingly machine driven and staffed by far fewer and higher skilled workers who will make decent incomes.

America faces the twin challenges of too many workers with the skills to do low skilled factory work and too few workers with the skills to do high skilled factory work. Our ability to tackle either challenge is hindered greatly by an unwillingness to accept these realities. Rather we continue to search for how we can recreate the high paid, low skilled, mass employment factory-based economy of the past. Not possible! Factory work in America is going the way of American agriculture: highly productive, with few, mainly higher skilled, workers.

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Quick updates

Some interesting press coverage of topics I have written about recently. Worth reading.

On the topic of welcoming to all (see my pledge of allegiance post) the Governor’s signing of the domestic partner benefit ban was a big step backwards. Two columns – one by Brian Dickerson in the Free Press and other by Tommy Allen for Mlive – capture how wrong and harmful that decision was. The Dickerson column says it all in its title: The good governor sides with the bigots. As does the title of the Allen column: Domestic partner benefit ban: Can Michigan experience economic recovery when we enshrine discrimination?

On places doing well economically despite supposedly high (to listen to the small government ideologues crushing) business costs check out a fascinating account in Bloomberg Business Week on Silicon Valley and an Economist article on New York City. These are two places that the right always pontificates about are in a state of permanent decline. As companies and people supposedly flee high tax/big government/high costs places. Wrong! Here is what Business Week says about Silicon Valley:

It was never clearer than in 2011 that Silicon Valley exists in an alternate reality—a bubble of prosperity. Restaurants are booked, freeways are packed, and companies are flush with cash. The prosperity bubble isn’t just a state of mind: Times are as good as they’ve been in recent memory. The region gets 40 percent of the country’s venture capital haul, up from 31 percent a decade ago, according to the National Venture Capital Assn. And the U.S. Bureau of Labor Statistics recently reported that growth of the area’s job market led the nation, jumping 3.2 percent, triple the national rate.

Some of that job growth is auto related. Ford just announced that they will be joining many auto companies in Silicon Valley. Why? Concentrated talent.

And then there is New York City (check out my recent posts here and here)  which as the Economists writes is doing well and is positioning itself to do even better in the future with their investment in the new Cornell/Technion campus. As they write:

Some $1.2 billion was invested by venture-capital firms in New York in 2010. The Big Apple even overtook Massachusetts in venture-capital funding for internet and tech start-ups, making it second only to Silicon Valley. And in the third quarter of last year, it surpassed it in venture capital in all categories. Between 2005 and 2010 employment in New York’s high-tech sector grew by nearly 30%. Google alone has about 1,200 engineers in the city.

Finally, as you know a central conclusion of ours from the years of research we have done on the characteristic of the most prosperous places around the country is that, with the exception of a few energy production states, the states that do well are anchored by a vibrant central city. As our Governor says Michigan can not succeed if the city of Detroit isn’t succeeding.

Dome Magazine published a terrific series of four columns by Craig Ruff on the importance of cities to Michgian’ success. You can find the first here. Definitely worth checking out all four. Ruff sums up how important this is to Michigan’s success this way: “Does Michigan need cities? Unequivocally, I say “yes.” Getting there is a whole ’nother kettle of fish. Why we, virtually alone and voluntarily, turned vibrant cities into detritus defines us and, very sadly, forecasts our future.”

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Let the marketplace set higher education prices

Economics 101: The marketplace sets prices that balance the interests of those buying and selling a product; price controls don’t work; consumers are rational. Seems like our politicians and the media either didn’t take or forgot Economics 101 when it comes to public higher education.

State policy makers have moved from a bad idea, jawboning Michigan public universities to hold down tuition, to an even worse setting tuition caps and the media is constantly writing that Michigan parents and students are being screwed by too-high tuition at Michigan’s public universities. (Neither policy makers nor the media seem to care about even higher tuition and tuition increases at our private universities.)

For those interested in why college costs for in-state students at Michigan’s public universities is so high read the recent Bridge feature story. The primary reason – as they document – is state budget cuts to higher education over the past decade. Leaving Michigan in the bottom five in terms of state support per student.

What I want to focus on in this post is the issue of whether higher education – even with seemingly high tuition – is worth the costs or not and who should determine that value proposition: customers or government. The Bridge article features two cousins, one at the University of Michigan Ann Arbor paying $16,888 per year and the other at the University of North Carolina Chapel Hill paying $8,423. They describe the difference as a college user tax paid by Michigan families.

The assumption is that UM and UNC provide basically the same education. Back to Economics 101: the marketplace is telling us something very different. Non-resident tuition and fees (Bridge uses more than tuition and fees in their cost calculations) at UM Ann Arbor for incoming freshmen is $18,794 per semester, at UNC Chapel Hill it is $13,416. These prices are set by supply and demand based on paying customers – from anywhere on the planet – determination of what they get for their money from the two universities. Customers are telling us that UM Ann Arbor is worth a more than $5,000 (30%) per semester premium in price over UNC Chapel Hill.

Incoming in-state freshmen at UM Ann Arbor pay $6,220. A more than $12,500 (more than 65%) discount from the market price that students and parents from across the globe are standing in line to pay. Remember that UM Ann Arbor is turning away thousands each year who are willing to pay full price. For any other consumer purchase this would be considered a deal of the century price, not a tax! (Think buying a $50,000 luxury car at $17,500. Good deal or tax?)

And not only do in-state students get a huge discount from market prices they also are getting a terrific investment that pays high returns for a career (something like 40 years). As a recent Brookings study documents higher education is a far better investment than stocks, bonds or owning a home. Its not even close. As I wrote in a  previous post, this is even true if one has to take out substantial college loans:

… taking out loans for college is a good investment. And for those who are dedicated to getting a college degree is a far better option than not going to college because they cannot afford the tuition. Somehow as a society we have decided that college loans are a burden but taking out a loan to buy a home is a good investment. We urge new college graduates to buy a home at the same time that we bemoan the so called crushing burden of college loans. … Now there is evidence (the Brookings study) that not only is that not true, but that college is a better investment than stocks and bonds as well.

Should Michigan policymakers increase state aid to higher education and therefore increase the in-state discount?  Of course. We strongly believe the state should reverse the more than a decade of disinvestment in our terrific public higher education system. We have argued for years these cuts are stupid. How we could have fallen to the bottom five is mind boggling. College attainment is not only the single best predictor of individuals economic well being but also of state prosperity. It certainly is one of the keys to returning Michigan to prosperity.

But a lower in-state discount (its around 75% at UNC Chapel Hill) is not a tax.  And certainly not a justification for price controls. Back to Economics 101. Price controls – tuition caps – long term will lead to one of two results, both harmful. For those institutions with more demand than supply, they will take more students from outside of Michigan. For those who do not have waiting lists of students willing to pay market rates, they will reduce quality.

The basic lesson we need to learn is that in a highly competitive market place like higher education – there are thousands of choices at all price points and quality varieties – prices are set most efficiently by customers, not government. Customers are far better at figuring out what price is a good value and what isn’t than government.

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Progress on public investments?

Finally some good news on the public investment front. As you know, our research has led us to believe that public investments in preparing, retaining and attracting talent are the key to positioning Michigan and its citizens for prosperity in a flattening world. What has been so frustrating for years is that business and political leadership in the state talk about the importance of college attainment as a – if not the – key to Michigan’s future success and then advocate/adopt policies that take us in the wrong direction. Even worse has been the absence of anyone willing to put on the table an alternative to the tax  cuts/small government agenda that has dominated our public policy for more than a decade. That may be changing.

Kudos to the Senate Democrats – led by Gretchen Whitmer – who have just released their Michigan 2020 plan. It makes college attainment the state’s economic development priority. It would provide substantial tuition payments dierctly to students to pay for a college education at Michigan’s universities  and community colleges. The annual investment would be $1.8 billion. And it is more than paid for. The Senate Democrats should be praised for advocating for more revenues. Through closing tax loopholes that don’t produce jobs, collecting sales tax on internet purchases (a la Indiana) and reforming the state contracting process. A major step in the right direction!

John Austin, chair of the State Board of Education, in a Dome article lays out a more expansive public investment agenda in an article that provides ideas on how to use the state budget surplus to grow the Michigan economy long term. Worth reading! He proposes increased spending in the areas of education, innovation, infrastuture, cities and the outdoors. All of which are essential to preparing Michiganders for the economy of the future and creating Michigan as a place where mobile talent wnats to live and work after college. Austin writes:

But for long-term job creation, Michigan needs more than a “business-friendly” tax and regulatory environment. We need strategic investment in Michigan’s assets that are the foundations of economic growth, and that the private sector doesn’t pay for: well educated people; strong, affordable universities driving innovation; clean lakes and rivers; modern transportation and communications infrastructure; cities with vibrant arts, culture, parks and libraries.

Also, in a reversal of course, good news on M1. Governor Snyder and Mayor Bing are back on board to make the Woodward light rail line a reality. Detroit’s business leadership and the Kresge Foundation have been great in insisting that this is an essential element to Detroit’s and the regions’ economic revival.

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