April 7, 2019
Diverging Regional Economies
Last week I spent several days listening to and presenting research on regional economies. It was interesting primarily because many of the studies focused on the economic divergence of regions in the developed world. Like many folks, I believe this issue is driving significant political discord and is quickly becoming the most pressing and chronic economic problem of the day. A bit of background along with some findings of my research will help frame the issue.
For most of American history, regions became more alike in their economic structure. Certainly from the end of the Civil War through about 1980, there was what economists call ‘convergence’ between regions. The South got more like the Midwest, the Midwest more like the Northeast, and the West more like everyone else. Cities within those places especially became more alike in terms of income and wealth.
In the 1980s that convergence ended. For the past four decades or so, regions have faced divergence across the big measures of economic vitality, such as per capita income and gross domestic product. Why this is occurring remains a matter of some disagreement, which is why economists try to understand it better.
Several months ago, I prepared a study with a statistical model that covered every US county from 1969 through 2016. What I wanted to learn was how changes in labor demand for footloose firms (essentially manufacturing) affected the counties in which they were located. There has been some research on this, but there are no recent studies that examined the symmetry of employment changes. Despite the fact that factory employment has been in broad decline for a half century, individual counties experience increases and decreases. In fact, there have been a great deal of ups and downs in factory employment, which allowed me to measure the effect of those changes in each direction.
I found that at about the same time regional convergence ended in the 1980s, the local effect of new factory jobs dropped way off. This was especially true in rural places, where a new factory locating 100 new jobs in a county would really only result in about 27 new jobs. However, the loss of a 100-worker factory cost the community 112 jobs. As an aside, these “small upside benefits but huge downside risks” argue for a complete rethinking of economic development strategy across the Midwest.
The study I presented last week took a more detailed look at the effect of those job shocks on the places they were occurring. There was a lot to this study, so I’ll just focus on the key points. As it turns out, the places that saw new factory jobs were about twice as productive as the places that lost jobs. That means new jobs are going to already economically “better” places, and leaving places that are already more distressed. This is a strong evidence for regional divergence. Economically strong places are getting more jobs, and economically weak places are losing them.
A second major finding addressed housing. Growth in employment caused minimal increases in house prices, but a big increase in new home construction. Job losses did the reverse, causing large reductions in home prices with little response in housing supply.
Finally, my study looked at the long-term effect. It turns out that a single bout of job losses caused a lengthy decline in wages, employment and population. The effects of one job loss persisted for five to 10 years. The challenge, though, is that each year of job losses carried with it not only years of decline, but an increased probability of more job losses. For many, especially Midwestern counties, this explains overall decline that has persisted since the 1960s.
This research has many important implications. First, it warns that we are in the midst of a period of diverging economic fortunes that will cause some places to grow robustly, and others to languish. That should come as little surprise to most Midwesterners. Second, it suggests that the strongly held belief that economic salvation is just one more factory away is mistaken. The places that are most eager to attract new factories are, in fact, far less likely to get them. When they do, they likely pay less and carry much bigger downside risks when they close.
Finally, these studies suggest that the only policies that will ultimately bring economic relief to troubled places are those that make these places more productive. Making a city more productive necessarily requires better schools and an inflow of better-educated workers. There is no evidence that any of the other policies makes any difference.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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