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Fueling Economic Growth

On Campus
Spring 2014
Feature Story

A well-educated workforce is key to state prosperity.

By Noah Berger and Peter Fisher

Historically, U.S. economic growth and prosperity have been achieved through an implicit partnership of federal, state and local governments, a partnership that worked astonishingly well for a period after World War II.

The federal government provided overall economic stability and sought to ensure that the economy never veered too far from full employment. State and local governments assumed primary responsibility for the education system, which produced a more skilled and productive workforce. Federal and state governments invested both in infrastructure, and in basic research that provided enormous long-term benefits for the private sector. The end result was a long period of postwar productivity growth, the prerequisite for growth in the standard of living.

During the 1970s and 1980s, state and local governments across the country became convinced that they should play a more aggressive and expansive role in economic policy. Economic development became accepted as a major function of state and local government, and came to mean the direct promotion of private investment within the borders of a state or city. This led to escalating competition for a limited supply of private capital investment through increasingly generous incentive packages.

State economic development wars squander resources

While cutting costs to business has become the principal focus of economic development policy in many states, more and more states are cutting programs across the spectrum to lower state taxes. In many cases, these ideas are promoted as a way to attract employers from other states—to steal jobs by offering incentives to business leaders.

But evidence has shown that, in the long run, these strategies are inefficient and ineffective. 1 State and local taxes on business are simply too small a share of total business costs to play a significant role in location decisions; other factors—labor skills, wages, access to inputs and markets—are much more important. Yet business tax breaks are expensive, and they take money from investments in education and infrastructure that increase productivity and support growth.

As public resources are squandered on unproductive state efforts to capture private investment at the expense of other states, it becomes more difficult to fund the kind of education system innovations needed to raise U.S. educational performance to the levels of other advanced industrial societies. Furthermore, investments in public research universities are important to enhancing the nation’s rate of innovation as the products of basic research are spun off in new private ventures, and to maintaining or recapturing our leadership role in new technologies. Inadequate investments in education weaken the ability of a state to develop, grow and attract businesses that offer high-skill, high-wage jobs.

Strong state education systems are not just good for the national economy; they are good for the citizens of the state. Ultimately, state economic policies seek to improve the lives of the people in the state, which means creating conditions in which people can get jobs that pay enough to support a family and provide economic security. This leads to a virtuous cycle, as working people who can afford to buy goods and services support local businesses and the local economy.

More education vs. low taxes:
What the research shows

What can state governments do to boost the economic well-being of their people? That is the central question of state economic policy. We believe—and our research shows—that education investment, not low taxes, is key to state prosperity.

When we look at data from across the country, two clear conclusions emerge:

  • There is no correlation between the overall level of taxation in a state and the ability of the economy to support high-wage jobs; and
  • There is a very strong correlation between how well-educated a state workforce is and the ability of the economy to support high-wage jobs.

Looking at Figure 1’s graph of overall tax levels and median earnings (a measure of wages that includes both hourly and salaried employees), one might suspect that there are just too many differences among states to see a clear correlation on any one variable.

It turns out, however, that when we look at how well-educated a state workforce is, Figure 2, we see an extremely strong correlation with economic strength: States with a well-educated workforce have higher median wages than states with a less educated workforce.

Overwhelmingly, high-wage states are states that have a well-educated workforce. There are virtually no outliers: There are no states with a well-educated workforce that don’t have relatively high median wages, and there are no states, with the exception of Alaska and Wyoming (which have resource-based economies very different from the rest of America), that have high wages and a poorly educated workforce.

To some degree, this finding is simply stating the obvious. We know that individuals with higher levels of education will generally earn higher wages (see Figure 3), and it makes sense that what is true for each worker would be true for the workforce overall.

In our modern economy, employers who pay good wages generally need well-trained and better-educated workers. By improving the overall level of education of its workforce, a state can increase the productivity of firms in its economy. That allows firms to increase both profits and wages. As economist Timothy Bartik has shown, 2 an increase in labor supply increases labor demand, because additional labor attracts employers, and additional higher-skilled labor attracts employers with more skilled jobs.

Ultimately, the wealth of a society can increase only if the economy becomes more productive. A more productive economy can support both higher wages and higher profits, as well as shorter work weeks and a better quality of life. So the question of how to increase productivity needs to be at the center of any debate about state economic development.

Why are states shortsighted?

As obvious as this fact is, education often receives less attention in state economic policy discussions than do taxes, regulations and business incentives. Why? In part, it could be that states seek quick fixes, and building a well-educated workforce can require a long-term commitment. But there’s another reason why education may not be receiving the attention in state economic development debates that the data suggests it should: The pattern we see today, where there is an extremely strong correlation between the level of education of a workforce and the wages of the people in that state, is relatively new. As recently as the late 1970s, many of our highest-wage states had very few workers with college degrees.

In the 70s, states with heavy industry and strong unions had high-wage economies with good jobs for many workers regardless of their level of education. But in today’s world, states that want to build strong, high-wage economies cannot ignore the importance of providing all their people with the opportunity to receive a high-quality education (and the related supports all children need to reach their full potential).

At the national level, there are a number of policies that can raise wages across the board: appropriate fiscal policies during periods of underemployment, equitable labor laws that allow workers to organize, trade policies that aim to raise living standards in the United States and abroad, and regulatory policies that protect our economy. But very few of these tools are available to state governments. States can enforce labor standards, like minimum wage laws and sick leave provisions, that make life significantly better for lower-wage workers and have a modest positive effect on the overall economy. But along with those steps that can improve the lives of working people immediately, states can build long-term economic strength by investing in strategies that improve the education, skills and productivity of all of their people.

Providing expanded access to high-quality education and related supports, particularly for those young people who today lack such access, will not only expand economic opportunity for those individuals, but will also likely do more to strengthen the overall state economy than anything else a state government can do.

References

1. Peter Fisher, “Corporate Taxes and State Economic Growth” (Iowa City, Iowa: The Iowa Policy Project, 2013), www.iowafiscal.org/2011docs/110209-IFP-corptaxes.pdf; Robert G. Lynch, Enriching Children, Enriching the Nation: Public Investment in High-Quality Prekindergarten (Washington, D.C.: Economic Policy Institute, 2007), www.epi.org/publication/book_enriching/; and Michael Mazerov, “Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth: A Reply to the Tax Foundation” (Washington, D.C.: Center on Budget and Policy Priorities, 2013), www.cbpp.org/files/6-17-13sfp.pdf.

2. Timothy J. Bartik, “What Works in State Economic Development?,” in Growing the State Economy: Evidence-Based Policy Options, 1st ed., ed. Stephanie Eddy and Karen Bogenschneider (Madison, Wis.: University of Wisconsin, 2009), 1529, research.upjohn.org/bookchapters/18/.


Noah Berger is president of the Massachusetts Budget and Policy Center. Peter Fisher is the research director at the Iowa Policy Project and professor emeritus of Urban and Regional Planning at the University of Iowa, where he is a retired member of the Cedar Rapids Teachers’ Federation. This piece is adapted from a report,
“A Well-Educated Workforce Is Key to State Prosperity,” published Aug. 22, 2013, by the Economic Policy Institute. Go to http://bit.ly/1jTeiyf
.