How Amazon Could Help Upstate New York

One of the Thanksgiving meal discussions at my house involved Amazon’s new HQ2 and why Governor Cuomo didn’t get the company to locate its new facility in upstate New York.  And, though my argument that upstate metropolitan areas lacked technology focused labor pools of sufficient size to be seriously considered by a technology based firm creating 25,000 jobs was received with skepticism, that is one of the real difficulties that upstate metropolitan areas faced in the competition.

But, my former colleague and friend from Empire State Development, Dave Catalfamo points out that with some effort from the Cuomo Administration, some of the benefits offered by Amazon might be more widely shared.  So, I’d encourage you to read the “Put Amazon to Work” on his blog, Exiled in Albany, for some ideas.




Amazon HQ2 – A Good Deal for New York?

It is not surprising that the decision by Governor Cuomo to give Amazon $1.8 billion in grants and refundable tax credits to come to New York City for half of their second headquarters generated controversy.  Some have questioned the need to subsidize Amazon given New York’s labor pool advantages[1], and the amount of money given the company to lure them to New York.  Others have questioned why New York would pay billions to encourage a business to locate in the part of New York State that is already doing well when the economy of much of the rest of New York is stagnant.  Residents of the area express concerns about likely higher housing prices and additional congestion resulting from the project.

To be sure, the process used by Amazon to choose its second headquarters sites, aptly dubbed “the hunger games” was structured to create a bidding war between potential locations.  And, there is no doubt that granting location incentives to businesses like Amazon has many downsides:

  • It shifts the costs of existing government services to other taxpayers in unfair ways.
  • It imposes additional subsidy costs on taxpayers who do not benefit.
  • It creates an expectation by other businesses considering relocations or expansions that they can get the same kinds of subsidies that Amazon received.

New York’s offer to Amazon consisted of a $505 million capital grant toward the $3.686 billion project cost and up to $1.2 billion in refundable tax credits through the state’s Excelsior program.  Virginia offered an incentive package including nearly $600 million in cash grants, plus $195 million in infrastructure improvements.  Amazon’s project cost in Virginia is expected to be $2.5 billion.

But, the benefits of the Amazon project to New York are real – 25,000 jobs paying an average of $150,000 annually to employees.  In fact, the Amazon project is by far the largest business attraction opportunity in memory.  Even in a metropolitan area as large as New York’s, the economic impact is significant, adding $3.75 billion in payroll spending to the metropolitan area each year, with a total annual economic benefit to the state of about $7.5 billion.[2]  The state estimates that the project will generate $560 million annually.  The cost of incentives would be paid back with additional tax revenue in about three years.

It is helpful to understand the challenges faced by state leaders in responding to Amazon’s second headquarters project.  The process involved in the Amazon location decision differed from virtually all previous corporate location decisions because of Amazon’s decision to create a public bidding war between locations.  That meant that every large city in the United States would put together an incentive proposal for Amazon HQ2 – 238 in all.

In most business attraction cases, companies work with site selection consultants that help them identify needs and wants. The consultants winnow down potential sites to a small number that receive serious consideration.  From that point, negotiations between companies, consultants and government take place confidentially.

Amazon eventually announced publicly that it had reduced the list of locations being considered to 20.  Once confidential discussions began between Amazon and state and local governments, information about competitive offers became harder to obtain.  But there was reason to believe that a successful incentive offer would have to be substantial to be successful.

Decision makers in state and city government knew that New Jersey’s proposal would receive serious consideration (New Jersey offered $7 billion in incentives).   Because much of New Jersey lies within the New York metropolitan area, it shares the same labor pool advantages offered by New York.  And, as Amazon’s ultimate decision demonstrated, the Washington D. C. metropolitan area had many of the same advantages offered by New York City, including a large pool of technology workers (Amazon received an $8 billion proposal from Maryland).

When governments negotiate corporate location incentives, they face some inherent disadvantages because they have less information than the business.  Government negotiators can estimate tax incentives available from competitive locations, but do not know how the company values them.  State and local negotiators cannot be certain what discretionary incentives are being offered by competitors.  Nor does government know how the company views the advantages and disadvantages of the sites that it is considering.  Finally, they cannot know whether companies are telling the truth when they make representations about other offers that they have received.

The difference in sizes between the New York’s and Virginia’s incentive packages probably reflects several factors.  It’s likely that one reason New York provided more assistance is the fact that Amazon’s New York project will cost almost $1.2 billion more than the Virginia project.  A second factor may be that New York advertises the availability of Excelsior tax credits.  Because these benefits are visible to the public in New York’s business marketing materials, businesses considering New York locations expect to receive them as a matter of course.  As a result, they are not a subject of negotiation.

Additionally, long-term tax credits like the Excelsior program do not use public dollars efficiently.  Research shows that long-term tax incentives are heavily discounted by businesses considering new locations because benefits paid soon are heavily favored over those in future years.[3]  Reducing or eliminating reliance on tax credit programs like Excelsior could save the state money for future business attractions.

It could be argued that state’s like New York should refuse to engage in incentive wars like Amazon’s, but such a course of action would be difficult from a political perspective.  Any governor or mayor who took his or her state out of a competition for thousands of jobs would provide potential future opponents with campaign fodder.

From a public policy perspective, although there are significant negative tradeoffs associated with a public subsidy of the magnitude that was provided to Amazon, the reality is that 25,000 good paying jobs are too many to give away to another location.  Even with the very large public subsidy provided to Amazon, there is a substantial net economic and fiscal benefit to the State from securing the jobs for New York.

In the end, financial incentives alone did not determine the choices that Amazon made.  In fact, Amazon passed up larger incentives from direct competitors to New York (New Jersey) and Virginia (Maryland).  But, to conclude from that New York or Virginia could have landed Amazon’s HQ2 without the use of incentives is wishful thinking.

[1] A recent Brookings Institution brief shows that the New York Metropolitan area has by far the largest number of workers in computer and mathematical occupations.  https://www.brookings.edu/blog/the-avenue/2018/11/13/for-amazon-hq2-location-decision-was-about-talent-talent-talent/

[2] Estimates derived from:  https://www.governor.ny.gov/news/governor-cuomo-and-mayor-de-blasio-announce-amazon-selects-long-island-city-new-corporate

[3] [17] Timothy Bartik, 2009. “What Works in State Economic Development?” In Growing the State Economy: Evidence-Based Policy Options, 1st edition, Stephanie Eddy, and Karen Bogenschneider, eds. Madison, WI: University of Wisconsin, pp. 19.




The Finger Lakes – Economic Challenges and Strategic Response: An Assessment

This research is a case study of employment challenges facing the Rochester Metropolitan area and the Finger Lakes region, and an analysis of the region’s strategic economic development plans and reports, developed in response to Governor Cuomo’s challenge to regions seeking economic development funding.  While the report finds reasons why the region’s recent weak economic growth may improve, there are real concerns about the focus of its strategic economic development plans, and the absence of meaningful outcome/impact measurement and analysis.

Employment History

The Rochester area, among all the metropolitan areas in New York State, was historically most dependent on a few large manufacturing employers.  Rochester companies like Kodak and Xerox were industry leaders that pioneered dominant imaging technologies in the 20th Century.  The 2011 Finger Lakes Strategic Plan[1] reported that in 1983, Eastman Kodak had 60,400 employees in the region, and that “Kodak, Xerox, Bausch + Lomb, and General Motors employed nearly one fifth of the local workforce and indirectly had an impact on half of the region’s economy.”  Today, according to Greater Rochester Enterprise,[2] Kodak employs 1,750, and Bausch and Lomb 985, while Xerox, according to the Rochester Democrat and Chronicle, employs 3,400.[3]  General Motors employment in Rochester is 880.[4]  Together, these companies now account for about 1% of regional employment.

Over the 47 years between 1970 and 2017, manufacturing employment in the Rochester MSA declined by 63% – from 152,511 to 56,546.  The number of manufacturing jobs decreased in every decade, except the 1970-1980 decade. In 2017, 11% of Rochester MSA employment was in manufacturing industries, compared with 10% nationally.

The presence of large manufacturers in the 20th Century was good for employee incomes as well.[5]  In 1970, average worker earnings were 12% higher than the national average.  Because of the shift of employment from manufacturing to lower paying service sector occupations, Rochester area average worker earnings in 2016 were 8% lower than the nation.[6]

Like other rust belt areas, and neighboring Buffalo-Niagara Falls and Syracuse, Rochester’s employment growth since 2000 has been nearly non-existent. Rochester area employment grew by less than one percent by 2017, while Buffalo grew 1.4%, and Syracuse lost 2%.[7] Employment growth for the nation was 12% during the period.

Manufacturing employment declined substantially between 2000 and 2017 in the United States, upstate New York and the Rust Belt. In upstate New York,  Rochester and Syracuse were most affected, each losing more than 40% during the period.  Buffalo lost more than 35% of its manufacturing jobs.  These locations and most rust belt metros lost greater percentages of manufacturing jobs than the United States, which lost 28%.

Automobile manufacturing industries experienced a sharp employment decline with the bankruptcies of GM and Chrysler in 2009.  But, the federal bailout led to a substantial increase in employment after that.  As a result, automobile manufacturing employment grew by 25% between 2010 and 2016, compared with 5% for other manufacturing industries.  Metropolitan areas like Detroit, and others in Michigan and Ohio that have high concentrations of manufacturing had stronger manufacturing employment recoveries than those in New York.

Since the recession of 2008-10, manufacturing employment in Rochester, Buffalo and Syracuse has seen smaller declines or has stabilized.  Buffalo’s manufacturing employment has been stable for the past four years, while Syracuse has seen a rebound after losing New Venture Gear/Magna in 2012, and Rochester’s decline has slowed.  In Rochester, continued job losses in chemical manufacturing (primarily Kodak) accounted for 4,402 jobs lost between 2010 and 2017.[8]

While manufacturing employment declined significantly after 2000, employment in other private sector industries continued to grow in Rochester, Buffalo, Niagara-Falls, other rust belt metropolitan areas and the nation.  Nationally, private sector non-manufacturing employment grew by 19%, the Rochester MSA grew by 13%, Buffalo-Niagara Falls by 9.7% and Syracuse by 5.8%.

Overall, the Rochester MSA’s performance since 2000 is near the middle of the group of rust belt metropolitan areas, even though only Flint and Ann Arbor, Michigan and Youngstown, Ohio lost greater percentages of manufacturing employment.  Rochester’s weak manufacturing performance was offset by relatively strong employment growth in non-manufacturing industries, compared to other rust belt metropolitan areas.

Industry Performance from 2010-2017

Industry Sectors

Most service industries in the Rochester MSA saw growth between 2010 and 2017.  Employment in health care and social assistance increased by more than 8,000, professional and technical services grew by 3,861 and educational services increased by 3,250.  Nine industry sectors had employment growth of more than 10%.  Industry sectors  with significant employment decreases were management of companies and enterprises, losing 1,148, Information, losing 1,318 and manufacturing, losing 4,165.

Manufacturing losses were concentrated in two industries – chemical manufacturing, largely Kodak, which lost 4,402 jobs between 2010 and 2017, and machinery manufacturing, which lost 1,720.  The losses in chemical manufacturing were larger than the overall employment losses in manufacturing.

The performance of industries within the manufacturing sector varied.  The region saw significant employment growth in computer and electronic product manufacturing (1,268), and two food related industries – food manufacturing and beverage and tobacco product manufacturing (these industries grew by 1,661 employees).  But, other manufacturing industries each lost more than 500 employees:  machinery manufacturing, chemical manufacturing, miscellaneous manufacturing, transportation equipment manufacturing, and electrical equipment and appliances.

Industries with Largest Employment Gains

The industry showing the largest employment growth (5,453) in the Rochester area between 2010 and 2017 was professional and technical services.  Employment within the industry sector was primarily in four sub-sectors:  engineering services, information technology services, management, scientific, and technical consulting services and scientific research and development services.

Education and health related industries, so-called “eds and meds” also had relatively large employment growth. Hospital employment grew by 4,445 (18%) while educational services employment grew by 3,250 (13%).   Nursing and residential care facilities and ambulatory health care services each grew by more than 1,500 employees.  It should be noted that a large portion of the growth in employment in the health care industries is from health care use by area residents, not from service users from outside the region.

Fast Growing Companies

The Rochester metropolitan area had 22 companies on the Inc. 5000 list of fastest growing privately held companies for 2017.  The number of companies is 34% higher than would be expected from the area’s population.  Twenty of the Inc. 5000 growing companies in the area were service businesses, two were manufacturers.  Information technology services, particularly software services, was about one-third of the total, suggesting that the area has potential strength in this industry.

Finger Lakes Regional Economic Development Strategy

In 2011, Governor Andrew Cuomo restructured the delivery of economic development assistance to create a formal role for regional economic development councils in the decision-making process.  The regional economic development awards temporarily replaced the process of state legislative grant-making though so-called “member items.”[9]  That process required local organizations to request funding from individual state legislators.  Funding was allocated by party leaders within the legislature.  The new, executive branch-controlled process involves regional council members in the decision-making process, though the project scoring system allocates 80% of points to the state agencies administering projects, and only 20% to the regional councils.

As a part of the restructuring, in 2011 regions developed strategic plans.  The 2011 guidance document, “A New State Strategy for Economic Growth” required public involvement, an assessment of current conditions, issues and opportunities, creation of a vision statement, development of strategies and implementation agendas and monitoring and evaluation of effectiveness.[10]

In 2015, Governor Cuomo created a regional competition for $1.5 billion of state funding, with $500,000,000 awarded to each of three regions.  The purpose was to “create and maintain high-paying permanent private sector jobs and to lure private sector investments in amounts that are significant to the region.”[11]  The initiative required regional applicants to develop transformative regional strategies to create significant employment and income growth.  The Finger Lakes Regional Economic Development Council, along with Central New York and the Southern Tier received funding through the 2015 round.

The Finger Lakes 2017 Progress report describes the region’s strategies,

    • Three industry clusters, or pillars, that will act as the core drivers of job and output growth: (1) Optics, Photonics, and Imaging (OPI); (2) Agriculture and Food Production; and (3) Next Generation Manufacturing and Technology.
    • Three core enablers that will facilitate economic growth within the key pillar industries: (1) Pathways to Prosperity: Workforce Development; (2) Entrepreneurship and Development; and (3) Higher Education, Research, & Healthcare.
    • And four foundational strategies that will support the pillar and enabler strategies enhance the region’s quality of life and help the region attract and retain jobs: (1) Global NY; (2) Tourism & Arts; (3) Infrastructure & Transportation; and (4) Sustainability.[12]

Although some funding through the regional strategies involves traditional economic development assistance to business such as capital projects and worker training, most of the region’s effort is focused on developing broad based initiatives in support of economic growth – ranging from support for industry related research and manufacturing process improvements to entrepreneurial assistance, institutional capacity for workforce development and civic improvements.

Only 17% of regional “priority project” grants – projects designated by the Finger Lakes Regional Economic Development Council as important elements of its strategic plan went to businesses.  Most grants were given to non-profit organizations (60%), followed by universities and colleges (19%).

Analysis

At the outset it must be acknowledged that the Rochester metropolitan area’s economic performance since 2011 continues to be weak.  In fact, the Rochester MSA, along with Buffalo and Syracuse, had less employment growth between 2011 and 2018 than rust belt metropolitan areas in Ohio and Michigan, except for Youngstown.[13]  Also of concern is the difference in average wages between growing and declining industries.   The average wage in growing industries in the Rochester MSA was $45,752 in 2017, while in industries with declining employment it was $53,786.[14]

The regional strategies are works in progress.  Many of the projects initiated through the regional strategy have not yet been completed.  But, if the Governor’s approach is to have significant employment benefits, they are yet to be realized.

In this section, I examine strengths and weaknesses in the Finger Lakes Regional economic development strategy and in the overall strategic planning and implementation process as implemented by New York State.

Industry Targeting

The 2017 Finger Lakes Progress Report states that “Three industry clusters, or pillars, that will act as the core drivers of job and output growth: (1) Optics, Photonics, and Imaging (OPI); (2) Agriculture and Food Production; and (3) Next Generation Manufacturing and Technology.”

Much of the region’s funding reflected its stated priorities.  Photonics/Optics and Imaging received the largest amount of funding, $148,155,000 through 2016.[15]  $147,000,000 was granted to the AIM photonics facility.  Advanced manufacturing projects received the second largest amount – $69,457,000.  Higher Education, Research and Health Care received $39,498,000

The Finger Lakes regional strategies between 2011 and 2016 supported several of the region’s fast-growing industries, particularly education and research.  But, the emphasis overall in the strategic plans was on support of manufacturing related initiatives.  59% of regional funding went to advanced manufacturing and optics, photonics and imaging.  Manufacturing is important to the Finger Lakes economy – average wages are high, and the region benefits from the income that results from the sale of manufactured products outside it.  Consequently, regional efforts to help local manufacturers improve their competitive position should be key elements of the region’s employment retention strategy.

But, to identify next generation manufacturing and optics, photonics and imaging as two of the region’s three pillars driving job and output growth is unrealistic given the weakness of the area’s (and the nation’s) manufacturing performance in the past forty years.  Though it is true that the Finger Lakes region is far less dependent than it was on a few large manufacturers like Kodak and Xerox, without the employment losses at those businesses, the region’s manufacturing employment growth during the recovery since 2010, like that of the nation, continues to be slow, and has lagged service sector growth.  Manufacturing, including photonics, optics and imaging may grow, but because of its size and long-term growth, the fate of the region’s service sector is most important to future job creation.

In one significant way, the practice of grant making differs from the conception of the 2011 and 2015 strategic plans.   Higher education and health care received about 11% of all funding – nearly $40 million.  The plans view higher education and research as enablers – ways to develop the workforce to encourage employment growth in photonics/optics/imaging, advanced manufacturing and technology and agriculture/food processing.  But, in fact, higher education and research are among the region’s largest industries and are also among those that have shown the most employment growth since 2010.  Future planning efforts could benefit if they viewed growing traded service industries, including higher education and research and professional and technical services as employment drivers.

Optics, Photonics and Imaging

Optics, photonics and imaging is by far the largest manufacturing initiative in the Finger Lakes strategy.  Greater Rochester Enterprise lists optics, photonics and imaging companies in the greater Rochester region.  Companies on the list in related industries employed about 11,000 workers in the region in 2018.[16]  Because the industry grouping contains Kodak and Xerox, employment has declined substantially over the past 40 years.  To support future industry growth, the Finger Lakes region has made substantial efforts to support photonics initiatives at universities and other research and development institutions.

The most significant funding initiative through the regional strategies has been the American Institute for Manufacturing Integrated Photonics partnership.  The AIM Photonics initiative is a $600 million public-private partnership that will receive $250 million of state support and $110 million from the Federal Government.  The initiative is the region’s largest single bet for future employment growth.

The largest portion of AIM Photonics Initiative funding in the region – $147 million – went to create a photonics test, assembly and packaging facility in Rochester for industry partners.  The objective of the effort is “invest in nurturing start-ups, enable small businesses and attract large enterprises” in order to “create thousands of jobs.”[19]  The Finger Lakes regional strategy includes some significant efforts to support entrepreneurs and small businesses in the field.

To attract major industry companies to build large manufacturing plants, the region must develop industry intelligence, relationships with key industry players and build a long-term marketing campaign.  In addition, appropriate sites for manufacturing facilities should be evaluated, permitted and basic site infrastructure development should be undertaken.  Finally, attracting such a facility would require a large grant from New York State.  Even so, because there is intense competition for major manufacturing plants, because electronics manufacturing has largely moved off-shore, and because the region does not have growing major regionally based stakeholders in photonics, success could be elusive.

A Strategic Plan, or a Strategic Planning and Implementation Process?

Strategic plans are of no real value if they do not guide actions, effectively measure outcomes against goals, and use knowledge gained in the implementation process to guide future action.  Though the 2011 guidance for regional strategic plans required “monitoring and evaluation of effectiveness,”[20] regional plans have focused primarily on describing the funding status of projects, rather than outcomes.

Finger Lakes 2017 Annual Report – Progress

The 2017 Finger Lakes Progress Report section titled “Progress” begins, on pages 5-9 with a series of charts showing economic conditions in the region.  Though the section is labelled “progress,” the charts do not examine the impacts of actions taken by the regional councils and the state in funding projects.  Instead, we cannot know whether the conditions described are a result of regional initiatives or would have occurred in their absence.

The second section of the “Progress” section is a listing of funded projects.  In this section, projects are identified with the amount of state funding received, total project cost, and project status (i. e., progressing on schedule, complete, etc.)

The final section provides aggregated data about project funding and status.  In this section, there is a table on page 17 labelled “job creation to date”.  But the data is provided without information about its source.  Does the table show the estimated number of jobs created and retained based on contractual commitments to the state or are they actual jobs as measured by Empire State Development in its post-funding employment compliance reports?[21] Equally important, the measures of actual or projected job creation and retention are not tied to specific goals, project categories, or projects.  As a result, the chart is of no value in assessing progress against program or project goals.

Finger Lakes 2017 Annual Report –“Implementation Agenda”

The following section of the 2017 Annual Report labelled “Implementation Agenda” looks at specific regional strategies.  The sections detail activities undertaken by regional entities in support of major initiatives.  For example, the first portion of the section, “Workforce Development” explains how workforce development is delivered in the Finger Lakes region, describing the steps being taken to address the need to help workers acquire marketable job skills.  The quantitative data provided shows intermediate program activity but does offers little information about how many workers were able to get jobs because of the assistance provided.  Here is an example:

“In the past program year, the three workforce development boards

and their community partners have achieved a record of success in several areas. Collectively they:

      • Hosted 125 recruitments and job fairs attended by 6,000 job seekers.
      • Funded skills training for 800 workers and job seekers.
      • Served 20,000 customers at their career centers throughout the region.
      • Helped 14,700 job seekers find employment (latest data from the 2016 program year).
      • Served more than 1,000 youth with employment and job readiness services.
      • Hosted multiple special events and programs such as Finger Lakes Works with their Hands, Health Care Career Day,
      • Rochester Work’s Criminal Justice Partnership, Agricultural Career Day, and del Lago Casino & Spa recruitment days.”[22]

 The section then provides a number of vague assertions about program effectiveness.

“Employers are moving the Finger Lakes forward.

  • Through initiatives such as the Young Adults Manufacturing & Training Employment Program (YAMTEP).

Economic developers are moving the Finger Lakes forward.

  • In partnership with Monroe Community College, Monroe County is leading the charge to train the local workforce with the new LadderzUP program. The program recruits, trains, and places workers into the most in demand careers in the region.

Secondary educators are moving the Finger Lakes forward.

  • The Hillside Work – Scholarship Connection has been a consistent beacon of hope for at risk youth in the region for thirty years.
  • Students that fully participate in the program maintain employment and graduate at a rate of over 90%.

Post-secondary educators are moving the Finger Lakes forward.

  • Rochester Institute of Technology (RIT) Electronic Assembly Training program trained 10 veterans and 10 dislocated workers in 20 days to enter the electronic assembly industry.

The community is moving the Finger Lakes forward.

  • Catholic Family Center, Action for a Better Community, and Community Place of Greater Rochester have partnered to offer two adult mentoring programs to the community.”

The data provides no useful information to evaluate the effectiveness of the region’s workforce development efforts because it does not measure outcomes/impacts of specific programs or kinds of assistance, (i. e, how many training participants were able to secure employment in the field for which they received training).  Given this, it isn’t possible to know how much impact the initiatives have had on worker skill deficits in the region or do any measurement of costs and benefits.

Another portion of the Implementation Agenda section, “Higher Education, Research, and Healthcare Work Team presents a series of charts described as performance indicators.  Several of the charts[23] appear to show that the region is not meeting goals but offer no discussion of the data or how the region intends to address the failures. In  other cases charts present data that is not relevant to the goal in the chart title.  For example, The first chart presents “Goal 1 – increase enrollment” in regional colleges and universities:

The data shows that enrollments have declined by about 5,000 over the 2011-2015 period.  Clearly, this goal is not being achieved.  But, the text provides no discussion of this issue, or how it might be addressed. Instead, the reader is provided with six pages of project descriptions, like the one below. None of the items provide specific information about which priority goal is being addressed, what specific strategic goal related benefit is to be derived, or a status description showing progress to a specific goal.  For example:

The Chart, “Goal 2: Increase R&D” similarly shows that R&D has been declining in the Finger Lakes Region since 2011.  Again, no discussion of the data is presented, nor is a specific strategy to remedy the shortfall identified.

 

 

The chart labelled, “GOAL 4: Increase STEM Graduates” is supposed to show area progress in increasing the number of STEM (Science, Technology, Engineering and Mathematics Graduates), But, the chart doesn’t measure change in the area’s ranking, or in the number of STEM graduates over time.  Even the static data that is presented doesn’t show which year the data is taken from.

Evidence Based Policy Implementation

The Governor’s regional planning and grant program could potentially provide a rich source of data for regional and state decision-makers to measure project impacts, evaluate what works and what doesn’t, and to use the information to guide future actions.  The Evidence Based Policy Making Collective[24] provides useful guidance as to how an effective implementation and evaluation could work.  The Collective argues for this process:

Monitor program delivery

      • To clearly define the key components of a program model and track the inputs, activities, outputs, and outcomes of program service delivery through process evaluation and performance management
      • To check whether services are delivered as intended, in terms of both quantity and quality, and whether programs are meeting their goals

Use impact evaluation to measure program effectiveness

      • The systematic collection of information about a program to identify (or estimate) the specific contribution of that program to intended outcomes
      • That specific contribution, in the language of evaluators, is known as a program’s impact5…

A process by which measurable goals are specified, and relevant data is collected and evaluated is essential to understanding the real impacts of programs and to making informed decisions about program continuation or termination.  Unfortunately, that process does not exist in the Governor’s regional planning and funding competitions.

Since State and regional decision-makers are operating in the dark about the specific contribution to the intended strategic outcomes of the projects that received more than $4 billion in funding provided by state taxpayers, to strengthen future decisions, much improved definitions of project goals and appropriate impact measures are absolutely necessary.  If the Governor’s regional partnership initiative is to continue, it is imperative that the state mandate substantial improvements in data reporting, performance analysis and evaluation.

Conclusion

The Finger Lakes, since 2000, has been hard hit by the collapse of employment at several large manufacturers.  Because relatively few jobs remain at these companies, the region has less concentrated risk of losing jobs at one or a few companies.   At the same time, the Finger Lakes region has had faster service sector growth than other upstate metropolitan areas west of Albany-Schenectady-Troy, available data suggests a strong entrepreneurial culture, and strong knowledge-based industries, all of which could strengthen its future employment growth.

The region’s strategic economic development plans and annual reports are concerns, though.  The plan has an unrealistic view of the potential for manufacturing employment, particularly optics, photonics and imaging, to create regional employment growth, while giving short shrift to those service industries that are growing.

Of equal concern is the total absence of any kind of outcome/impact measurement or program evaluation.  This weakness is not unique to the Finger Lakes strategies and reports.  Several regional economic development strategies and reports have the same weakness. For example, see the Central New York Region Report:

Given the $4 billion that has been spent of the regional economic development grant competitions, the Governor and legislature should mandate effective impact measurement and evaluation as a condition of participation in the next round of funding.

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[1] “NEWYORK OPEN FOR BUSINESS – Seneca County CCE.” 14 Nov. 2011, http://senecacountycce.org/resources/finger-lakes-redc-strategic-plan. Accessed 20 Jun. 2018.

[2] “Top Optics, Imaging & Photonics Companies – Greater Rochester ….” http://www.rochesterbiz.com/Portals/0/Top%20Optics%2C%20Photonics%2C%20and%20Imaging%20Companies%20in%20the%20Greater%20Rochester%2C%20NY%20Region%2C%202018.pdf. Accessed 20 Jun. 2018.

[3] “Fate of local jobs uncertain after Xerox, Fujifilm announce merger.” 31 Jan. 2018, https://www.democratandchronicle.com/story/money/business/2018/01/31/fuji-xerox-fujifilm-merger-cost-savings-jeff-jacobson/1081916001/. Accessed 20 Jun. 2018.

[4] “GM Corporate Newsroom – United States – Company – GM Media Site.” 4 Jun. 2018, http://media.gm.com/media/us/en/gm/company_info/facilities/component-fac/rochester.html. Accessed 20 Jun. 2018.

[5] United States Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts, https://www.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

[6] Author’s calculations from BEA data.

[7] Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.  https://www.bls.gov/data/

[8] Source:  U. S. Census Bureau, County Business Patterns.

[9] The practice of making grants directed by the legislature later returned, see:  https://www.empirecenter.org/publications/inside-albanys-secretive-slush-fund/ and https://www.politico.com/states/new-york/albany/story/2015/10/partisan-spoils-persist-in-new-legislative-earmark-program-026317

[10]“A New State Government Approach to Economic Growth” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2011-redc-guidebook.pdf

[11] “Competition Guidelines:  New York Urban Revitalization Initiative, April 2015” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2015-uri-guidebook.pdf

[12] Finger Lakes Progress Report 2017, p. 8.  https://regionalcouncils.ny.gov/sites/default/files/2017-12/2017ProgressReportFingerLakes.pdf

[13] Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.  https://www.bls.gov/data/

[14] Employment change from 2010-2017.

[15] Most recent available data from 2017 Finger Lakes Progress Report, op cit.

[16][16] “Top Optics, Photonics and Imaging Companies in the Greater Rochester, NY Region, 2018”  http://www.rochesterbiz.com/Portals/0/Top%20Optics%2C%20Photonics%2C%20and%20Imaging%20Companies%20in%20the%20Greater%20Rochester%2C%20NY%20Region%2C%202018.pdfyujg8hni6rthuj76i  Number adjusted to reflect more recent Xerox employment from Rochester Democrat and Chronicle, op. cit.

[17] https://en.wikipedia.org/wiki/Photonics

[18] http://www.aimphotonics.com/what-is-integrated-photonics/

[19] “Finger Lakes 2015 Upstate Revitalization Initiative Plan,” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2015-finger-lakes-uri-plan.pdf

[20] “A New State Government Approach to Economic Growth,” op. cit.

[21] See, for example, “2016 Annual Jobs Report on ESD’s Loan and Grant Programs,”  https://esd.ny.gov/sites/default/files/2016-Annual-Jobs-Report-Final.pdf

[22] 2017 Finger Lakes Progress Report, p. 25.

[23] 2017 Finger Lakes Progress Report, p. 31

[24] https://www.evidencecollaborative.org/principles-evidence-based-policymaking




Reconsidering “Lost Manufacturing Jobs – The Effects of Imports and Increased Productivity”

In a post examining the causes of the decline in manufacturing employment over the past fifty years, I concluded, like other analysts, that although increases in imported manufactured products had caused part of the decrease, most of the drop resulted from productivity increases from automation and process improvements.  See for example: https://www.nytimes.com/2016/12/21/upshot/the-long-term-jobs-killer-is-not-china-its-automation.html.

Because of the emphasis on the idea that manufacturing has seen sharp productivity gains, much of the discussion about the future of manufacturing employment has focused on the perceived threat of automation. For example, a recent OECD study, “Automation, Skills Use and Training,” by Ljubica Nedelkoska,  and Glenda Quintini estimates that “Across the 32 countries, close to one in two jobs are likely to be significantly affected by automation, based on the tasks they involve. But the degree of risk varies. About 14% of jobs in OECD countries participating in PIAAC are highly
automatable (i.e., probability of automation of over 70%).”  But, the impact of automation appears to be slowing.  Manufacturing productivity growth has stagnated since the recession of 2008-10.

More recent research has challenged the focus on productivity increases as the primary cause of manufacturing employment declines.  Daron Acemoglu, David Autor, David Dorn, and Gordon H. Hanson concluded in Import Competition and the Great U.S. Employment Sag of the 2000s,” that between two and two million, four hundred thousand jobs were lost to Chinese competition between 2000 and 2011. They point out that “the coefficient estimates imply that had import competition from China not increased after 1999, trade-exposed industries in local labor markets would have avoided the loss of 2.35 million jobs.”

A new study, “Understanding the Decline of U. S. Manufacturing Employment,” by Susan N Houseman of the Upjohn Institute for Employment Research shows that a statistical artifact drove much of the apparent productivity growth.  She found that “Since the 1980s, however, the apparently robust growth in manufacturing
real output and productivity have been driven by a relatively small industry—computer and electronic products, whose extraordinary performance reflects the way statistical agencies account for rapid product improvements in the industry. Without the computer industry, there is no prima facie evidence that productivity caused manufacturing’s relative and absolute employment decline.

Houseman notes that in accounting for the output of computer products, the government recognizes that “The semiconductors embedded in our electronics are much more powerful today than they were a decade or even a year ago. Likewise, the computers and related devices that consumers and businesses buy today have much greater functionality than in the past….The rapid output growth in this industry does not necessarily imply that American factories are producing many more computers, semiconductors, and related products—they may be producing less. Instead, it
reflects the fact that the quality of the products produced is better than in the past. The statistical agencies adjust price deflators for other products, such as autos, for changes in quality. However, the effects of quality adjustment in other industries on aggregate statistics, to date, have generally been small compared to those of the computer industry.” (p. 11)

On the surface, measuring worker productivity would seem to be simple since the definition of productivity is output per work hour, and the Department of Commerce’s Bureau of Economic Analysis provides information about employment and industry output.

Many of the analyses of the decline of manufacturing employment, including mine, looked at the inflation adjusted value of manufactured products over time and compared that with the number of workers employed in manufacturing them.  When they discovered that the value of output per worker had increased, they attributed the change to increases in productivity.

Instead, Houseman shows that the output of products per worker in manufacturing, except for the computer industry,  has grown at about the same rate as the overall economy.   The growth of the value of manufacturing output as measured by the Bureau of Economic Analysis is associated with product quality improvements, not increases in the volume of products manufactured.  The chart below, which illustrate’s Houseman’s point, is from “Trade vs. Productivity: What Caused U. S. Manufacturing’s Decline and How to Revive It,” by Adams Nagar, Information Technology and Innovation Foundation, February, 2017.

Growth of Real Value-Added Per Worker in Computer and Electronic Products, the Rest of the Manufacturing Sector, and the Rest of the Economy, 1998–2015

As a result, Houseman concludes, “once the anomalous effects of computer industry are excluded, even descriptive statistics provide no prima facie evidence that higher rates of automation were primarily responsible for the long-term decline in manufacturing’s share of employment. Rather, they suggest that understanding the reasons for the slow output growth in manufacturing output—whether from weak growth in domestic demand, strong growth in imports, or weak growth in exports—is critical.”(p. 19)

The last eight years have seen a cyclical recovery in manufacturing employment that has been weaker than the employment recovery in service providing industries, with the largest increase coming from the recovery of the auto industry after the Federal bailout.  Manufacturing employment has grown overall by 10.2%.  Motor vehicle manufacturing employment grew by 47%.  During the same period, private sector growth in the United States has been 17.5%.

To date, the Trump administration has focused on business tax reductions and tariff policy to encourage employment growth.  The stimulative effects of the tax policy changes are likely to support continuation of the post recession recovery, but will confront monetary policy restraint from the Federal Reserve as inflationary pressures build.

A discussion of the administration’s tariff approach is beyond the scope of this research, but it carries significant risks associated with the possible growth of trade wars, as well as trade-offs from higher prices for imported goods.

The loss of manufacturing employment has damaged to the economy, particularly for workers with low educational attainment and few job skills, since jobs with few educational and skill requirements in the service sector generally pay less.  Since it is clear that imports have played a major role in the decline of manufacturing in the United States, policies that help manufacturers are appropriate responses at the federal, state and local levels.

Among the more significant options available at the state and local level are support for skills training, manufacturing process improvement assistance from programs like the Manufacturing Extension Program, programs to encourage technology transfer and commercialization, and those to encourage entrepreneurship.  Additionally, streamlined regulatory and permit processes can help manufacturers seeking to locate or expand.

But, it should also be understood that manufacturing employment is a small percentage of total employment, and that government policy responses will not fully erase the significant wage differentials that have led manufacturers to produce their products outside the United States.  For that reason, rational economic development policies should also focus on encouraging the growth of service sector industries.

 




Traded Employment Losses Since 2001 in Upstate New York

Metropolitan areas in Central and Western New York, like others in the Rust Belt that had high concentrations of manufacturing employment, have been hit hard by the loss of manufacturing jobs.  Ninety-one thousand net manufacturing jobs were lost in the 2001-2010 decade in five upstate metropolitan areas – Utica-Rome, Syracuse, Rochester, Binghamton, and Buffalo-Niagara Falls. During that same period, only 62,000 net service sector jobs were created in these areas.  The period between 2001 and 2010 was an extraordinary decline in manufacturing, but it was not unique.  Manufacturing employment in these Central and Western New York metropolitan areas has declined in every decade, beginning in 1970.

The challenges facing upstate metropolitan areas that had high concentrations of manufacturing employment in the twentieth century are not unique.  In fact, most rust belt metropolitan areas have seen employment stagnate since 2001.  While manufacturing employment has significantly decreased, service sector employment in most rust belt metropolitan areas has grown more slowly than in the nation.  In fact, more than half of the region’s job creation deficit compared to the nation since 2001 is associated with slow service sector growth.

The weak performance of the region’s service sector is in part a reflection of the manufacturing employment losses, since much service sector employment has historically depended on manufacturing.  Almost all manufacturing firms are so-called “traded” businesses, since they sell products outside the regions where they are produced.  These businesses import income into regions through the sale of products and services that they export.  In contrast, local businesses sell products and services within regions.

Manufacturing industries typically produce products that are exported from the metropolitan areas where they are made.[1]  But, service providers operate in many cases within local markets.  For example, lawn care providers, hair dressers and barbers, restaurants and retail stores (other than those with an on-line presence) generally trade within a relatively small area.  Other service providers export their services.  Industries like financial services, information services, on-line retailers and institutions of higher education serve larger regional, national or international markets.

Because local services are bought in local, rather than regional or national markets, local service employment is proportional to local populations.  Because traded jobs export products and services and replace imports, they create more jobs within their regions.  Consequently, economic development strategies focus on strengthening existing traded industries, and attracting traded employment.

This post examines changes in traded industry employment in New York State, Michigan, Ohio and the United States.  The data shows that traded employment grew nationally from 2001 to 2016, but not in Central and Western New York metropolitan areas, or in Ohio and Michigan.  It also shows that while traded service sector employment has grown in most metropolitan areas in upstate New York and the rust belt, growth in some cases has been insufficient to offset losses in manufacturing employment. Even so, traded service employment continues to increase its share of total traded employment.  In 2016, more than 70% of traded employment in every New York metropolitan area except for Binghamton was in the service sector.  Nationally, 80% of traded employment was in service industries.

Employment Change – Traded and Local Industries

Except for the New York City and Albany-Schenectady-Troy metropolitan areas, traded industry employment in New York metropolitan areas and in Ohio and Michigan did not do as well between 2001 and 2016 as the United States, which grew by 13.3%.[2] The Rochester and Syracuse MSA’s saw decreases in traded employment of more than 6%, while in Utica-Rome it decreased by 12.4%.  The Binghamton MSA, which was hard hit by the closure of IBM’s first manufacturing plant, lost 24% of traded employment between 2001 and 2016.  New York City had an increase in traded employment of 19%, while Albany-Schenectady-Troy’s traded employment increased by 11%.

Metropolitan areas in Michigan and Ohio had greater employment losses between 2001 and 2010 than those in New York State, other than Binghamton.  Since 2010, Michigan and Ohio metros have recovered employment at nearly the rate of the nation growing 15% compared to 17%.

Local employment increased by 9% between 2001 and 2010 in the United States.  New York City metropolitan local employment growth during that period was greater than the nation – 13.4%.  Metropolitan areas upstate had much weaker growth. Albany-Schenectady-Troy local employment growth was strongest, at 5%.  Between 2010 and 2016, the New York City metropolitan area again had local industry employment growth that exceeded the nation – 18% to 16%.  Local industry employment growth in upstate metropolitan areas was much weaker – less than 10% in each case.

Traded Industry Employment – Manufacturing vs. Services

 Manufacturing

Between 2001 and 2010, 3,700,000 traded manufacturing jobs were lost in the United States – nearly three of every ten manufacturing jobs that existed in 2001.  Much of the lost manufacturing loss was the result of increased off-shore competition – 2.4 million jobs by one estimate.[3] But other factors were important as well.  Increases in productivity have played a significant role over the long-term in reducing manufacturing employment.  And, technological change has displaced major manufacturers, like Kodak, that depended on the sale of products like photographic film that became inferior to new competition.

Traded manufacturing employment losses hit New York State metropolitan areas harder between 2001 and 2010 than the United States.  Most metropolitan areas in New York State lost more than 30% of traded manufacturing jobs between 2001 and 2010, compared with 29% for the United States. Michigan/Ohio metropolitan areas were hit even harder than those in New York, losing 39% of manufacturing employment.  

Traded manufacturing employment began to rebound in 2010, gaining 727,000 jobs.  Nationally, traded manufacturing employment increased by 8%. Michigan and Ohio rebounded even more strongly, gaining 144,300 jobs – 18%.   Most metropolitan areas in New York State saw weaker recoveries, or continued manufacturing employment losses.  Three metropolitan areas saw increases – Albany-Schenectady-Troy gained 6,000 jobs (30%), Buffalo gained 2,700 (5.6%) and Utica-Rome gained 190 (1.7%).  The New York City metropolitan area, Syracuse, Rochester and Binghamton had continued losses.  Binghamton lost 19% of its traded manufacturing employment between 2010 and 2016 (2,600 jobs), after losing 6,600 traded manufacturing jobs between 2001 and 2010.

Services

Traded service sector employment in the United States increased in both the 2001-2010 and 2010-2016 periods, though the gain between 2010 and 2016 was larger than in the earlier period – 5,500,500 vs 3,000,000.  Between 2001 and 2010, only the Buffalo-Niagara metropolitan area equaled the national rate of increase – 9.6%.   The New York City metropolitan areas saw an employment increase that approached that for the United States – 8.1% vs. 9.6%.  Rochester and Syracuse had smaller increases, while service sector employment in Utica-Rome and Binghamton decreased.  Metropolitan areas in Michigan and Ohio also had slightly less service traded sector employment in 2010 than in 2001.

Between 2010 and 2016, national traded service sector employment increased by 16.4% compared with 9.6% in the earlier period.  New York City’s traded service employment increased by 18.4%, while metropolitan areas in Michigan and Ohio had an increase of 14.2%.  All the metropolitan areas in upstate New York had increases of less than 10%, with Albany-Schenectady-Troy showing the strongest growth – 9.1%, followed by Rochester with 8.9% and Buffalo-Niagara Falls with 8%.  Binghamton again lost traded service sector employment .

Traded Manufacturing and Service Employment 2010-2016

Following the great recession of 2008-2010, manufacturing employment rebounded nationally, as well as in several upstate New York metropolitan areas.  How much employment growth did traded manufacturing and service employment each contribute?

The performance of metropolitan areas showed substantial differences.  Nationally, manufacturing generated 11% of traded employment growth between 2010 and 2016.  But, in Albany-Schenectady-Troy. Utica-Rome and Michigan and Ohio metropolitan areas, manufacturing accounted for one-third or more of employment growth.  In Buffalo, manufacturing provided 20% of traded growth.  But in Binghamton, the New York City metropolitan area, Rochester and Syracuse, manufacturing employment continued to decline.

Because manufacturing employment dropped sharply between 2001 and 2016, and traded service employment generally increased, service employment now constitutes more than two-thirds of all traded employment nationally, and in most of the rust belt metropolitan areas studied.

Only the Binghamton metropolitan area has less than 70% of traded employment in service industries, and even that area has shifted towards services.

Conclusions

Over the 2001 – 2016 period, manufacturing dependent upstate metropolitan areas west of Albany-Schenectady-Troy and those in Michigan and Ohio did not do well. While traded employment in the United States increased by 13.3%, every upstate metropolitan area west of Albany and those in Ohio and Michigan had less traded employment in 2016 than in 2001.  But, between 2001 and 2010 and 2010 and 2016, the employment of upstate metropolitan areas differed from other rust-belt metropolitan areas in Ohio and Michigan.  Ohio and Michigan had steeper traded employment declines between 2001 and 2010 and greater growth between 2010 and 2016 than did those in Western and Central New York.  The v-shaped employment change in Ohio and Michigan may have been primarily the result of the collapse and federal bail-out of the domestic auto industry during the great recession.

Traded service sector employment growth was relatively weak during both periods in Central and Western New York metropolitan areas.  Two small metropolitan areas – Utica-Rome and Binghamton had less traded service employment in 2016 than in 2001.  But, despite the relatively weak growth of traded service sector employment in Central and Western New York metropolitan areas, most traded employment growth in the region came from service sector industries.

State and local governments in the rust-belt seeking to strengthen regional economies face a challenging environment.  Because they have higher percentages of employment in declining and slow-growing industries than other regions, if rust-belt regions are to succeed in encouraging economic growth, they must focus on helping build employment in faster growing industries, while helping preserve the existing industrial base.   Because there are relatively few large business expansions and relocations in a given year (one estimate is 1,500)[4], attracting businesses in growing industries can be difficult – competition can be intense and incentive costs are often very high.  Supporting the growth of existing small businesses in faster growing sectors may be more cost-effective, but relatively few small businesses grow to become large employers.

Too often, policy makers think primarily of tax incentives as the primary tool to induce businesses to locate and expand within their jurisdictions.  But, tax incentives have crippling weaknesses as economic development policy tools.  First, they are extraordinarily wasteful.  Timothy J. Bartik, in “Who Benefits from Economic Development Incentives? How Incentive Effects on Local Incomes and the Income Distribution Vary with Different Assumptions about Incentive Policy and the Local Economy”[5] found that 85 to 90% of typical incentive spending is wasted, because it does not affect the existence of about 85 to 90% of the jobs that receive tax incentives. Bartik writes, ““But for” the typical incentives, the probability of the incented jobs choosing the state would have been reduced from 100 percent to 90 or 85 percent.” Because of this, Bartik concludes, “As a result, the direct budget costs of incentives significantly exceed fiscal benefits.”[6] Bartik estimates that fiscal benefits are 22% of incentive costs, based on his model’s assumptions.

In practical terms, the heavy use of tax incentives carries a large opportunity cost.  Given that state and local budgets are constrained by tax revenues, large tax incentive expenditures are likely to result in cuts to major state programs – primarily education and social assistance.  Alternatively, they can lead to tax increases, which decrease private sector demand because they reduce the number of dollars available to taxpayers to spend.

Development of successful economic development strategies at the state level requires understanding the needs of existing businesses within a region and the development of effective assistance strategies.  They require the creation and maintenance of strong relationships between state, local and regional economic development organizations.  They build knowledge of and relationships with existing traded businesses and seek to meet their needs.  Effective organizations maintain strong business visitation programs, assemble up to date site data, and work with private developers to expand site availability, work with training providers to ensure the availability of workers with needed skills, assist expanding businesses in expediting permit processes, and where needed, provide financial assistance for capital costs and worker training.

Because of the difficulties faced by upstate metropolitan areas west of Albany-Schenectady-Troy, Governor Cuomo has focused resources on the region. The Governor proposed legislation in 2011 creating Regional Economic Development Councils. The Councils are responsible for the creation and implementation of regional economic development plans.  The state provided funding to support their implementation.

The intent of the initiative is to give regions greater voice in decision making about state supported economic development efforts.  As of 2018, the state has spent $5.4 billion on projects selected through the Regional Councils.[7]  This year’s funding is $750,000,000.  $225 million is to be provided through grants and tax credits from Empire State Development, and $525 million through other state agency programs.  To be sure, much of the spending is through already existing programs, but there has been significant additional funding provided for regional initiatives.

Much of the emphasis of the regional strategies that were developed in response to the Governor’s call has been on growing advanced manufacturing and high technology within upstate New York regions.  And, the State has encouraged that focus with a series of large investments in high technology manufacturing facilities. It is clearly rational for regional economic developers to focus on retaining manufacturing employment, and it is possible for manufacturing employment to grow, as it has in some metropolitan areas.   But, over the past forty years, manufacturing employment’s share of national employment has declined.  High technology manufacturing has declined along with more traditional industries. Regional economic development strategies should recognize that most employment growth in upstate New York and elsewhere, even that in traded industries that export products and services, is in services.

Future posts will examine additional employment challenges faced by upstate metropolitan areas and the Governor’s Regional Economic Development initiative.

[1] One of the relatively rare exceptions might be found in the food processing industry, such as a few dairies that only sell their products within the metropolitan areas where they are located.

[2]Source:  Bureau of Labor Statistics – Current Employment Survey.  Traded employment estimated as proposed by Mercedes Delgado, Richard Bryden and Samantha Zyontz, in “Categorization of Traded and Local Industries in the US Economy,”   http://clustermapping.us/sites/default/files/files/page/Categorization%20of%20Traded%20and%20Local%20Industries%20in%20the%20US%20Economy.pdf.  In this paper the authors estimate the percentage of employment in two-digit NAICS codes that is traded.  Because two digit codes are broad categories, differences in industry mix within clusters between areas are possible sources of estimation error.

[3] “Import Competition and The Great U.S. Employment Sag of The 2000s” Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, NBER Working Paper 20395, http://www.nber.org/papers/w20395.pdf

[4] Timothy J. Bartik, “Local Economic Development Policies,” Upjohn Institute Working Paper No. 03-91, W. E. Upjohn Institute, 2003.  http://research.upjohn.org/cgi/viewcontent.cgi?article=1108&context=up_workingpapers

[5] http://research.upjohn.org/cgi/viewcontent.cgi?article=1037&context=up_technicalreports

[6] Ibid, pp. viii-ix.

[7] https://regionalcouncils.ny.gov/about




Nexgen in Syracuse – Throwing Good Money after Bad?

Update:  Note that the Syracuse Post Standard carried the following article on January 4th:  http://www.syracuse.com/business-news/index.ssf/2018/01/ny_taxpayers_built_90m_factory_in_dewitt_for_firm_that_walked_away_didnt_create.html The article quotes ESD spokesman Jason Conwell.  “Conwall said the grant will be contingent on the company meeting its job commitments. Details of the grant’s terms will not be available until the grant disbursement agreement is executed later this month, but they will follow ESD’s standard practice of requiring companies to return a grant, or portions of it, if they fail to meet hiring milestones, he said.”  

Note that ESD General Project Plans, adopted by its Board, generally contain specific job and recapture requirements, and that the plan adopted by the Board in its December meeting does not.  However, as Conwell states, such a requirement could be included in the Grant Development Agreement, which both ESD and the company would sign.  If so, the action would address one of the issues in my commentary, below.

Recently, a news article in the Syracuse Post Standard, “Soraa walks away from $90M factory that NY built; $15M more brings new tenant,” described New York’s attempt to save its investment in a $90 million facility in Dewitt, near Syracuse, originally intended for Soraa, a manufacturer of LED lighting.  In addition to the facility, Empire State Development has awarded a $15 million grant to Nexgen, a power converter manufacturer.  Both the original agreement with Soraa and the construction of the facility, as well as the new grant to Nexgen contain highly questionable features that expose taxpayers to real, unnecessary risks, features that are common to a number of projects undertaken by the SUNY Polytechnic, SUNY Research Foundation and Fort Schuyler Management Corporation, a group of related state sponsored entities.

Soraa

In October, 2015, Governor Cuomo announced that Soraa, an industry leader in ultra-high performance lighting and LED technologies, will relocate its global manufacturing and research and development operations from California and overseas to SUNY Polytechnic’s Central New York Hub for Emerging Nano Industries. This move will create 420 new high-tech jobs in Central New York and is being made possible thanks to a $90 million state investment for the facility’s construction.”

The project, like the Solar City project in Buffalo that I examined in an earlier post, made the SUNY Research Foundation the owner of the facility being constructed. Like Solar City, Soraa was to be responsible for a $1 per year lease payment for the facility, and for shouldering operating expenses related to production.  In my earlier post, I pointed to a major problem with the model used in these projects:

  • “State taxpayers will be exposed to an unusually high degree of risk by the unprecedented structure of the SolarCity deal, under which Fort Schuyler Management Corp., a non-profit subsidiary of the State University’s College of Nanoscale Science and Engineering, is building the factory for the company, and will retain ownership. SolarCity’s up-front capital investment in the project is thus limited, weakening its incentive to remain in Buffalo after its dollar-a-year lease of the building expires in 10 years.”

This issue was present in the deal with Soraa, along with an additional problem – one which left the state’s investment exposed when Soraa pulled out of its deal with the SUNY Research Foundation.  SUNY’s deal with Solar City calls for graduated penalties if the company ceases production at the facility within the first 10 years after completion of the project.  The penalties would allow the state to recapture part of its investment of more than $750 million in the project if the company broke the lease during that time.  But, incredibly, SUNY’s deal with Soraa contained no recapture provision, leaving the state with no return on its $90 million investment in the building and equipment when Soraa decided not to go ahead with production in New York state.

Construction of the Soraa facility was delayed for a time because of the indictment by then U. S. Attorney for the Southern District of New York, Preet Bharara of Dr. Alain Kaloyeros, the head of SUNY Polytech, and of principals of Cor Development of Syracuse, on bribery, wire fraud, and other charges.

According to the Post Standard article, [Howard] Zemsky [Chairman of Empire State Development] said the delay may have been a factor in Soraa’s decision to abandon the local plant. But he said Soraa also is facing competitive pressures from Asian manufacturers. The company ultimately decided not to invest in the DeWitt plant.”

Nexgen Power Systems

The public was made aware of Soraa’s decision when Empire State Development’s Board of Directors approved a $15 million grant to a new occupant for the facility – Nexgen Power Systems.  On December 20th, the Syracuse Post Standard reported that

NexGen Power Systems, a startup company from California, plans to manufacture semiconductors for the electronics industry in the 82,000-square-foot plant in DeWitt, said Howard Zemsky, CEO of Empire State Development.

NexGen has promised to invest $40 million of its own in the facility and to create at least 290 jobs within seven years, state officials said. The company plans to move in sometime around the middle of 2018….

Despite the assurances of state officials, the NexGen deal has the same primary problem as  Soraa and Solar City deals, and some others as well.  Like the earlier deals, in the NexGen deal, New York State, through the SUNY Research Foundation retains ownership of the $90 million facility, leasing it to NexGen for $1 per year.  As a result, New York continues to bear the risk of ownership of the facility if NexGen does not continue to produce products at the Dewitt facility.

Although the Fort Schuyler Management Corporation website does not show an agreement with NexGen that describes its relationship with the company, Empire State Development’s website shows the General Project Plan for the $15 million grant that NexGen is receiving. While “Nexgen promises to employ 290 new full-time permanent employees within seven years of project completion,” the General Project Plan does not include a requirement setting the length of time the company must maintain the jobs or a provision for recapture of a portion of the value of the facility if the company leaves.  As a result, the employment commitment in the ESD grant appears to be unenforceable.  Also, though the Syracuse Post Standard quoted state officials as saying that “NexGen has promised to invest $40 million of its own in the facility,,,” The ESD Board materials contain no reference to any financial commitment by the company.

This raises another concern that is common to the projects undertaken by the SUNY Research Foundation.  Solar City, Soraa and Nexgen have relatively little company capital investment in their New York projects.  Because the state is providing essentially all of the capital costs of these projects, New York is getting very little leverage from the investment of State dollars.  This is in sharp contrast to prior state assistance to businesses – even for large projects like the semiconductor facility operated by Global Foundries in Malta – where ESD provided grants covering $650 million of the $3.2 billion capital investment (The company was also eligible for up to $600 mllion of Empire Zone benefits over 10 years).

Nexgen Power Systems – Company Risks

Nexgen is a startup company, and, there is little publicly available information concerning the production or distribution of established products.  In fact, the company’s website provides no specific information about the company’s financial resources or production capabilities.  Nor does publicly available information show that the company has received venture capital funding to support the $40 million that state officials say that it has promised to invest in operating costs related to production at the facility.

Press reports indicate that the company is a successor to Avogy, a failed startup, that produced laptop chargers that claimed to use the same gallium nitride technology that Nexgen promises to use in its Dewitt facility. One analysis (“Is Avogy Inc. Dead?” on PntPower.com) of Avogy’s failure pointed out, “Avogy developed a GaN/GaN power semiconductor device.  They own several patents in the field…But, according to all the people we discussed with, the distribution of these devices has never been large.”

According to Crunchbase.com, Avogy had received $40 million in a second round of venture capital funding in 2014 from Intel and Khosla Ventures, before disappearing in early 2017.  Court documents indicate that total venture funding for the company was $60,000,000.

Nexgen acquired Avogy’s intellectual property for $200,000. A report on Axios.com states that Khosla Ventures, the venture capital firm that had invested in Avogy, had sued Dinesh Ramanathan, the founder of Avogy and Nexgen.  The report states, “Vinod Khosla’s venture capital firm has sued the former CEO of a failed portfolio company, accusing him of fraud and extortion. But it’s not really about recovering the $60 million that Khosla Ventures invested, since that money is long gone. Instead, it’s about getting back at what Khosla believes is a duplicitous executive by exposing his alleged misdeeds.” The suit argues that Ramanathan engaged in self dealing by rejecting a slightly better offer for the intellectual property than his own bid, and attempted to illegally gain a cash payment from Soraa for the technology.

Nexgen’s website indicates that its core product is a laptop charger that is smaller and lighter than current devices.  The company claims to have switching technology that operates at higher frequencies than current silicon-based technology, reducing the size of inductors and capacitors in the circuit. The website describes the technology this way: “Avogy’s TrueGaN /XX platform…uses high frequency GaN switches in combination with a high efficiency circuit architecture, to enable at a fundamental level, the change required to build small power supplies, safely.”  In the past, gallium nitride based devices have been relatively expensive.

The charger is shown on a page on the Nexgen website that is not linked to the company’s home page.  Originally advertised at $99.95, the device is now available at $29.95 on Rakuten.com.  The charger is also sold on Amazon.com, where it has only three reviews, two of them negative, with comments about sparks and fire hazards.  Amazon.com indicates that the charger’s sales rank is 1,070 in the charger category.  It faces competition from FIXSix, which produces a similar small, laptop charger (FIXSix Dart).

While it was in business, Avogy produced a laptop charger through a subsidiary, Zolt, that claimed to use gallium nitride technology .  However, a teardown published on chipworks.com claimed that the charger used silicon technology, not Gallium Nitride.

The future prospects of Nexgen are unknown.  The company may continue to compete in the marketplace with a laptop charger that faces stiff competition from existing products.  It might also manufacture and sell power conversion semiconductors using its technology to product producers.  Whether it can succeed will depend on  a number of factors, including the advantages its technology offers, the price of its products, and its success in developing relationships with product producers and sellers.

Startup Companies and Venture Capital

When New York offered funding for the Global Foundries semiconductor chip fab it was dealing with an established company in an industry, because of the very large capital requirements and production expertise required, that has high barriers to entry.  But, barriers to entry are relatively low in other technology industries, like power conversion.  Additionally, investing in startup companies carries considerable risk, because the companies fail at relatively high rates. As a result, when New York acts as a venture capitalist, its investments carry high risks.

Startup companies often receive funding from venture capitalists, as Nexgen’s predecessor, Avogy, did.  Other sources include angel investors, and business incubators.  In these cases, investors get ownership stakes in the companies.  These investors generally participate in operational decisions of the companies that receive funding.  Financial, industry knowledge, marketing and networking expertise are generally provided.

New York, through the SUNY Research Foundation, does not provide the same kinds of assistance to the companies that it assists.  For example, the Memorandum of Agreement with Soraa made the Foundation responsible for constructing and equipping the facility for up to $90 million.  It also promised to help the company locate additional high technology jobs at the company’s contractors and suppliers in New York State, and to provide training for company staff.

Since New York State does not have an ownership interest in companies like Nexgen and Soraa, it has no real leverage to ensure that assisted companies will employ good financial practices, and is not offering to provide assistance in operational matters, such as developing relationships with product buyers and in product marketing.

As a venture capitalist, New York is in a relatively weak position, because it does not take ownership positions that would provide it some control over assisted companies, and has chosen to make large investments without finding partners to share risk.  By making large investments in a relatively small number of firms, the State’s approach increases the risk to its investments associated with company failures.

Conclusions

Soraa’s decision not to locate at the facility that New York had built for it in Dewitt left the state in a difficult position.  Because the state owns the building and equipment within it, it needed to find a tenant, to ensure that some return would be received on its investment.  Since the building had specialized design features and equipment intended for a company using gallium nitride technology, Nexgen appeared to offer a reasonably good solution to New York’s problem.  But, based on evidence now available, the state appears to be repeating mistakes that put it in the position of needing to find a tenant for a nearly $1o0 million facility.  Most importantly, while the Nexgen promised to employ at least 290 people at the facility, the General Project Plan adopted by Empire State Development does not specify the time period for which employees must be retained  and provides no penalties if the company does not meet its employment target.

At the same time, the State’s $105 million investment provides a very poor return on investment, based on the most optimistic assumptions.  The economic benefit of the project (tax revenues to state and local government plus net resident disposable income) according to Empire State Development’s Benefit-Cost evaluation is only 1.47 to 1, far below ESD’s benchmark for projects of 75 to 1.  The project’s fiscal (tax revenues to state and local governments) benefit cost ratio is negative: .12 to 1.

But, ESD’s benefit-cost analysis is not credible, because it assumes the project will maintain 290 new jobs over seven years.  Since the project plan does not contain any requirement for the period of time that jobs must be maintained, and since there is no recapture agreement in the event that jobs aren’t created, the analysis is based on an assumed set of circumstances that the agreement does not require the company to meet.

Finally, note that the decision to chase 290 high technology jobs in this case carries a high price tag – $105 million, an amount that is substantially larger than the amount ($86 million) that the region will receive in the coming year from the state’s primary regional economic development initiative – the 2017 Regional Council Competition.

New York, like other states has emphasized the pursuit of high technology companies as a key to the state’s future economic well-being.  In New York’s case, most of the state’s spending has been on high technology manufacturing, including the Global Foundries Chip Fab in Saratoga County, Solar City’s solar panel facility in Buffalo, Nexgen’s power converter plant in the Syracuse area, Norsk Titanium in Plattsburgh, and Danfoss Silicon Power near Utica.

But the price tag has been very high; several billion dollars in total, and other than Global Foundries, none of the facilities is expected to employ more than 500 people.  The long term prognosis for these facilities is also doubtful.  Over the past twenty years, employment in the electronics industry in the United States has cratered.  Employment at computer manufacturers in 2015 was less than 20% of what it was in 1998. Electronic component manufacturers employ 42% of the workers that they did in that year.  Semiconductor manufacturers employment is 45% of what it was in 1998.  In New York State, despite the opening of the Global Foundries facility in Malta, semiconductor manufacturing statewide is 17% lower (Source: U.S. Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School).

Perhaps it is time for policy makers to gain a better understanding which industries are growing nationally and in New York State, and to focus their attention on making sure that New York gets its share of national growth.  The state should also help existing businesses in New York compete by working with them to meet labor, facility and infrastructure needs.




Data, Key Punches, Blogging and the Upstate Economy

Fifty years ago, as a research assistant in graduate school at Syracuse University, I did some quantitative research for a professor on the effect of various factors on state policy outputs.

Technische Hochschule Aachen
Rechenzentrum

Doing the work required me find data in books in the university library and to go to a room in the university computer center, like the one in the illustration on the right, to put the data on cards using a key punch. Once the cards were punched, I gave the deck of cards to a member of the university’s computer staff. who then put them in a card reader connected to a computer.  On the computer, a statistical analysis program – SPSS (Statistical Package for the Social Sciences), provided the tools I needed to analyze my data.  Later, I would return to collect sheets of paper on which the results were printed.

The process was slow and cumbersome, involving hours of work to collect, input and analyze data.  Today, that data can be collected and analyzed in minutes on a laptop computer.  With the internet, I no longer have to comb through books from a specialized library, and with a personal computer, I no longer have to go to a central place to analyze data.

Information sharing is much easier, too.  In the past, if I wanted to share research data, I would have to find an institution that was willing to publish it – a process that sometimes required researchers to share in the cost of publication.  Today, the internet offers the possibility to reach readers directly.  Over the past two years, I’ve been able to publish more than two dozen research notes on my blog, reaching thousands of readers.

On this blog, I’ve written about data related to significant policy issues that face New York, particularly upstate New York.  As a long-time upstate resident, I am aware that much of the region, particularly those areas that were historically dependent on manufacturing, faces significant challenges in making it possible for residents to find good jobs that pay well.

While upstate New York faces the same challenges as the rest of the rust belt, its metropolitan areas differ from those in other rust belt places, such as Michigan and Ohio, because the impact of the loss of manufacturing has been less severe here.  Metropolitan areas like Buffalo, Rochester and Syracuse continue to have relatively affluent suburban populations, and overall have median household incomes that are near the national average.  Paradoxically, upstate central cities have among the highest poverty rates in the region, and several of the cities face fiscal distress.  The map, below, shows employment growth rates from 1998 to 2015 for economic regions in the Northeast and Midwest.  The weakest rates in the region are on a belt along the southern shores of the Great Lakes running from Wisconsin to Ohio.  Although Western and Central New York have done less well than much of the country, they have performed better than much of the Midwest.

Through my analyses, I’ve tried to strengthen policy discussions that focus on the decline of upstate cities and rust belt metropolitan areas, in order to avoid errors such as attributing most of the region’s decline to relatively high taxation levels, and misguided attempts to revive regional economies that create too much taxpayer risk by spending hundreds of billions of dollars to attract high technology businesses.  I’ve looked at the paradox of thriving suburbs and declining cities in New York’s metropolitan areas, and the growth of racial segregation upstate.  I’ve also provided data to help readers understand the real reasons why city schools are “failing.”

I’ve been happy to see that some of my pieces have been seen by a relatively large number of people.  Among the most popular have been:

The Decline of Manufacturing in New York and the Rust Belt, which has had more than 3,000 views.

As Private Sector Employee Incomes Stagnate, Local Government Workers Prosper, with more than 2,300 views.

New York’s Ineffective Business Tax Incentiveswith 1,600 views.

New York’s “Failing Schools” – The Wrong Diagnosis and a Misguided Solutionwith 1,300 views, and

The Crisis of Poverty in Upstate New York Cities, with more than 1,000 views.

In the coming year, I’ll be a Richard P. Nation research fellow the Rockefeller Institute at the University of Albany.  The fellowship will afford me the ability to work with other researchers on critical issues.  I also hope to work with the Institute’s staff to develop forums to discuss some of these issues and policies.  As a result, in the coming year, some of my research will be published on the Institute’s blog, or as research publications.  In those cases, I’ll be sure to provide links to that work on this blog.

In the past two years, much of the impetus for my work has come from accounts that I have read in various places on the internet, such as a story that appeared in the New York Times, “Spike Nation: Cheap, unpredictable and hard to regulate, synthetic marijuana has emergency responders scrambling to save lives.”, which contained the statement, “Syracuse is one of the poorest cities in America — more than a third of the people here live below the poverty line.”  Having lived in Syracuse in the 1960’s and 1970’s, I was aware that whenI lived there, that Syracuse was not one of the poorest cities in America.  The city had a mix of relatively poor and well-off areas.  That sparked my interest into researching what had happened to upstate metropolitan areas after I left Syracuse in 1971,  and led to several pieces on this blog.

Other pieces on this blog came from readers who asked questions about the proposed increase in the minimum wage, and about labor participation rates in upstate areas.  I hope that readers of this blog will continue to ask questions and offer their perspectives.  I may be contacted at  john.bacheller@policybynumbers.com.  

In the coming year, I plan to continue to look at labor participation and employment in New York State with a focus on disparities between cities and suburbs.  I’m also collecting data on city and town tax and revenue burdens and spending patterns to understand how they differ, and researching New York’s Regional Economic Development Council initiative to better assess strengths and weaknesses.  I also hope to take a look at some more data about student performance in New York schools.   I expect to publish findings via the Rockefeller Institute and on this blog in the coming months.

Illustrations are from Wikipedia.  Map is from: U.S. Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School.    http://www.clustermapping.us/region




Left Behind: Characteristics of Low Labor Participation Counties

In my last post, I examined labor market participation in New York State counties.  I found that most New Yorkers, both upstate and downstate, live in counties where labor market participation differs only slightly from national levels, but upstate counties with small populations in many cases have labor participation rates that are significantly below the average.  In this post, I look more closely at the ways that low participation counties differ from those with higher labor market participation.  In particular, I examine how income compositions, and industry compositions differ.

The data shows that employment has decreased between 1970 and 2015 in upstate counties with low levels of labor participation, largely because weak service sector employment growth was insufficient to offset losses in non-service industries.  Earnings per employee were weak in low participation counties as well.  In 2015, per employee earnings overall were 16% lower in  upstate low labor participation counties than in high participation counties, and 47% lower than those in the New York city metropolitan area.  Differentials between per employee earnings were particularly large in relatively high paying service industries, such as information, financial services, and professional and business services.  Government transfer payments make up a larger part of personal income in counties with low labor participation because of low employment levels in these counties.  Government employment made up a larger part of total employment in low participation counties because of the low level of private sector employment in these counties.

Data from this post is from the U. S. Bureau of Economic Analysis – Local Area Personal Income and Employment tables.  Much of the BEA data referenced was taken from the data presentations found at the Headwaters Economics Economic Profile System.

County Population Size

On average, the fifteen upstate counties with the lowest levels of labor participation had populations that were much smaller than those with high levels of participation, or those in the New York State metropolitan area.  On average, low participation upstate counties populations were only 22% of high participation counties, and 6% of counties in the New York metro area.

Populations of both the top and bottom 15 participation counties upstate have been essentially stagnant since 1970.  While high participation counties showed a small amount of growth between 1990 and 2015, and low participation counties have declined since that year, populations in both have only increased by about 2% since 1970.  The populations of New York metropolitan area counties have increased by 12% since 1970, and by 18% since 1980.

Employment

Not surprisingly, full and part-time employment as the percentage of the population of low labor participation counties was lower than counties where labor participation was higher.

Low participation counties had lower levels of employment throughout the period than either high participation counties, or counties in the New York metropolitan area.  Significantly, the gap in employment levels between low participation counties and other counties has increased over time – from six to eight percent less in 1970 to 14% to 16% less in 2015.

Income

Average wages and salaries have consistently been highest in counties in the New York Metropolitan area, followed by high participation upstate counties, with low participation upstate counties having the lowest average wages and salaries.  While the difference between low and high participation counties upstate has been relatively constant since 1970 – about 15% – the gap between average wages and salaries in the New York City Metropolitan area and in high participation areas upstate has grown from 7% in 1970 to 24% in 2015.

The Bureau of Economic Analysis income data is average, not median, income.  In contrast, inflation adjusted median incomes have not risen significantly for the past 15 years, and have risen much less than average incomes over the period since 1970.  Median incomes have increased less than average incomes because most real income growth over the past several decades nationally has been received by high income workers, while typical workers have had much smaller income growth.  See, for example, the chart below, from “Distributional National Accounts: Methods and Estimates for the United States,” by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman

Components of Personal Income

Labor income (work related compensation) is a smaller part of personal income in low labor participation counties than in high participation counties upstate and in the New York City metropolitan area, while transfer payments (such as Social Security benefits, medical benefits, veterans’ benefits, unemployment insurance benefits, liability payments for personal injury and corporate gifts to nonprofit institutions)  make up a larger part of personal income in these counties than elsewhere.  Transfer payments are 26.6% of total personal income in low participation counties upstate, compared with only 15.9% in the New York metropolitan area and 19.9% in high participation counties upstate.  Dividends, interest and rent are 14.6% of total personal income in low participation counties, compared with 21.8% in the New York City metropolitan area.

The fact that transfer payments make up more than 26% of per capital personal income in low participation counties compared to 16% in the New York metropolitan area might lead readers to conclude that the amount of government transfer payments per capita is greater in low participation counties  upstate than in high participation counties or in the New York City metropolitan area.  In fact, that is not the case – per capita transfer payment levels per capita differ little.  Instead, they are more important in low participation counties because wage, salary and benefit levels are lower than elsewhere.

Employment

Employment patterns in high and low labor participation counties upstate and in the New York City metropolitan areas differ. Low labor participation counties had much larger percentages of total employment in non-service sector industries and in government.

Employment in service industries was 79% of the total in the New York City metropolitan area in 2015, while in low labor participation counties upstate, service sector employment was only 56% of the total.  Service sector employment in high labor participation counties upstate was 70% of total employment.

Several relatively high paying service industries – information services, financial activities, professional and business services and education and health services were  concentrated in counties in the New York City metropolitan area, with 48% of total employment in the region in 2015. In high participation counties upstate, these industries were also relatively important, having 38% of total employment.  In low participation counties upstate, however, these industries only accounted for 24% of total employment. In contrast, relatively low paying service industries, like trade, transportation and utilities and leisure and hospitality accounted for between 27% and 28% of all employment in each region.

Non-Services related employment (primarily manufacturing and construction) was 19% of the total in low labor participation counties upstate, while it was only 7% of the total in the New York City metropolitan area.  Again, high participation counties upstate were between low participation counties and the New York City metropolitan area on this measure, with 13.2% of total employment in non-service related industries.  Manufacturing was 8.7% of total employment in high labor participation upstate counties, 13.3% in low participation upstate counties, and 2.9% in counties in the New York City metropolitan area in 2015.

In low participation counties in upstate New York, more than one-quarter (25.4%) of all employment is in government, while in the New York metropolitan area, government employment is only 13.5% of the total.  In high participation counties, upstate, government employment was 17% of total employment. Local government employment is a larger part of total employment in low participation counties upstate than elsewhere – 16% of the total.  State government employment is also a larger part of total employment in low participation areas than elsewhere – 8%.

Why is government employment a much larger percentage of total employment in low labor participation counties?  The table above shows that government employment is about the same percentage of the total population in high and low participation counties upstate – between 8% and 9%, while in New York City, government employment is about 6% of the population.  But, the percentage of the population that is employed in the private sector is much lower – 26% in low participation counties upstate, compared with 40% in upstate high participation counties and in counties in the New York metropolitan area.

Overall, total employment in low labor participation counties is only slightly more than one-third of the total population – 35%, compared with nearly half – between 46.4% and 48.5% in counties in the New York City metropolitan area and in high participation counties upstate.

Change in Employment by Industry Sector Since 1970

Low labor participation counties upstate differed from high labor participation counties upstate and those in the New York City metropolitan area in the fact that these counties lost employment between 1970 and 2015.  Employment decreased in these counties by 6.3% during the period.  Employment in the New York metropolitan area increased by 6.7%, while in upstate high participation counties, it increased by 12.2%.

While non-services employment declined slightly less in low labor participation counties in upstate New York than other counties studied — 52% vs. 56% and 66%,  service sector employment grew much more slowly than elsewhere – 26% vs. 35% and 58%.

Employment and Population Change

Employment in low labor participation counties upstate decreased as a percentage of the counties’ populations by 2.9 percent between 1970 and 2015.  In the New York metropolitan area, employment as a percentage of counties’ populations decreased by 2.1%. Only in upstate counties with high levels of labor participation did employment as a percentage of population increase – by 4.1%.

In low participation counties, non-services employment  as a percent of county populations in industries like manufacturing has decreased slightly less than elsewhere – by 7.2% compared with 7.5% and 8.5% between 1970 and 2015, but service sector employment as a percentage of population  in upstate counties with low labor participation grew slower than elsewhere in those years.  In low participation upstate counties, service sector employment as a percentage of population grew by 3.8% compared to 11.9% percent in high labor participation counties, and 6.4% in counties in the New York City metropolitan area.

Per Employee Earnings by Industry

Per employee earnings are the sum of wages and salaries, supplements to wages and salaries, and proprietors’ income divided by employment.  Per employee earnings overall, in the private sector, and in government were lower in low participation counties upstate than they were in counties in the New York City metropolitan area and in high participation counties upstate.  Overall, earnings per employee were 16% lower in low participation counties upstate than in high participation counties upstate.  Compared to counties in the New York City metropolitan area, earnings per employee were 47% lower in low participation counties upstate.

Per employee earnings in the service sector in low participation counties show the greatest weakness compared to high participation counties upstate  (25% lower) and counties in the New York city metropolitan area (58% lower).   Per employee earnings in non-service sector industries, such as manufacturing, in low participation counties upstate were 16% lower than in high participation counties upstate, and 26% lower than in counties in the metropolitan area.  Differences in government earnings per employee between low and high participation counties upstate and counties in the New York City metropolitan area. Per employee earnings in low income counties upstate were 14% lower than in high income counties upstate, and 25% lower than in counties in the New York City metropolitan area.

A closer look at per employee earnings by industry sector in 2015 shows that low labor participation rate counties upstate were at a greater disadvantage to others in some industries than others.  For information services, per employee earnings were 31,536 in low participation counties, compared with 69,604 in high participation counties upstate, and $131,767 in counties in the New York City metropolitan area.  For professional and business services, per capita employee earnings were $39,004 in low labor participation counties upstate, compared with $60,015 in high labor participation counties, and $99,132.  For financial activities, per capita earnings for low participation counties were $48,746, compared with $66,689 in high labor participation counties upstate, and $200,727 in the New York City metropolitan area.  The industries with the greatest differentials between low participation areas and other locations were industries with relatively high per employee earnings.   Industries with lower per employee earnings, like leisure and hospitality and education and health services had smaller differences in earnings per employee between upstate low and high participation counties and counties in the New York metropolitan area.

Conclusions

The data supports the notion that counties with low levels of labor participation have weak labor markets characterized by weak employment growth in service industries that have seen growth nationally, and relatively low earnings per employee in service industries that have comparatively high earnings per employee.  Both of these factors support the conclusion offered in my earlier post on the subject that, “Differences in participation within groups between counties that have low and high labor participation levels at least partially reflect the hypothesis that people have been unable to find jobs and have left the labor force.”  

But, in my earlier post, based on low levels of participation by low skilled workers, I argued that, “The low levels of participation of these groups in low participation counties probably reflect reinforcing factors, like lower average levels of education among minority group members, the decline of manufacturing industries that employed low skilled men, and low levels of demand for workers without college educations in places where there are relatively few jobs available.”  Instead, this data shows that labor market growth in low labor participation counties has been particularly weak in those industries in the service sector, like information, financial services and professional and technical services that have relatively high earnings per employee.

In my earlier post, I concluded that, “The ability of low participation counties in small metropolitan areas and rural locations to create the resources needed to diversify their economies to include occupations that match the qualifications of residents are likely to be limited, because of the significant advantages offered by locations that have larger labor pools.”  The data presented in this post does nothing to contradict that conclusion.  And, because these labor markets are typically small and lack concentrations of workers with skills that are in high demand in growing industries, reversing their decay would present substantial challenges to remedial policy efforts.

Government actions can give residents the opportunity to increase their social mobility, though, even if the way mobility can be achieved is to move to locations with greater opportunities.  In “Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States,” by Raj Chetty, Nathaniel Hedren, Patrick Kline, and Emmanuel Saenz, the authors found that higher mobility is associated with higher quality primary and secondary education, greater family stability, and less income inequality.  But, more economic mobility also is related to geographic mobility from low income locations – those places that had higher levels of economic mobility also had higher levels of out-migration.

In a recent study by Eleanor Krause and Richard V. Reeves, “Rural Dreams, Upward Mobility in America’s Countryside” the authors conclude that several actions could be taken to increase mobility.  These include “increase the number of Advanced Placement courses and improve career and college counseling.” and providing better funding for rural schools.  Another option might be to encourage charter schools to open in low labor participation areas.  Extending the availability of high speed fiber networks could benefit schools that lack access to online curricula, internet-based research and online testing.

Krause and Reeves also point to the need to encourage family stability.  Discouraging teen pregnancy is one approach to helping teens to make decisions that are more likely to lead to stable families with two parents.  Increasing access to long-acting reversible contraceptives is particularly important. They argue,  that residents of rural areas face obstacles to receiving health care that urban residents do not.  “Efforts to reduce these disparities are likely to include the protection or expansion of health coverage (particularly publicly-funded health insurance for low-income families), supporting publicly funded clinics, and promoting the availability of the full range of contraceptive options, including LARCS. School-based health centers and online programs could also help to reduce transportation barriers in more isolated areas. (Of course, online platforms will only prove effective if complemented by expanded access to broadband in some regions.)”




Left Behind: Missing from the Labor Market in New York State

A reader of this blog recently wrote, “We know that labor force participation rates across the country have declined noticeably for a number of years, and many economists have warned of the troubling implications of this.  Such rates across Upstate NY have declined as well, and in most cases are significantly below the national average – not an encouraging sign.  In the North Country and the Mohawk Valley, they are not much above 50%, and in some other Upstate regions just a couple of percentage points higher. Clearly some of this indeed is because people have not been able to find jobs, and thus have left the labor force.  I don’t think a low unemployment rate necessarily indicates that “Upstate’s problem is not that its residents cannot find jobs.”

Low rates of labor market participation might indeed show that people are dropping out of the job market because of limited opportunities.  But, other factors are at work as well, including the aging of the population.  This post reviews labor market participation data in New York’s counties to understand changes over time and how low participation counties differ from those with higher participation rates.

A recent Brookings Institution study, “What we Know and Don’t Know about Declining Labor Force Participation: A Review” points out that: “This steady decline in prime-age male participation rates and recent stagnation of prime-age female rates has adverse implications for national economic growth and individual well-being. Workers between the ages of 25 and 54 tend to be at their most productive, so these trends affect economic growth as well as individual income. Further, as discussed below, lower work rates might be contributing to the decline in marriage and to poorer health and psychological well-being, possibly leading to an increase in premature deaths among certain populations.”

A significant part of the decline is explained by the aging of the population, as older workers move into retirement. John Robertson and Ellyn Terry of the Atlanta Federal Reserve Bank report that “In 2007, about one in five Americans were over 60 years old. In 2015, almost one in four were over 60. Moreover, this demographic force will continue to suppress the overall LFPR as the share of older Americans increases further in coming years.

But, labor force participation has declined overall.  The Bureau of Labor Statistics reported in 2016 that, “From 2000 to 2015, most of the major demographic groups saw a decrease in labor force participation. Teenagers experienced the largest drop in participation, which coincided with a rise in their school enrollment rate. Young adults 20 to 24 years also showed a decline in labor force participation, but the decrease was not as steep as that for teenagers. The labor force participation rate of women 25 to 54 years also fell, with the decrease more pronounced for women who did not attend college. The labor force participation rate of men 25 to 54 years continued its long-term decline. As in the past, the decrease in participation among men with less education was greater than that of men with more education. However, labor force participation rates of men and women 55 years and older rose from 2000 to 2009 and subsequently leveled off.”

The causes of the decrease in labor force participation for prime age people include both the demand for workers and the supply of labor.  On the demand side, technology and trade have reduced the demand for low skilled manufacturing workers.  The disparity in demand for workers at low and high skill levels has increased, because technology has led to greater demand for workers with technical and managerial skills.  On the supply side, the Brookings Institution study points out that “the problems include not only a lack of skills but high reservation wages [the wage levels at which people are willing to accept jobs], poor health, and the availability of disability insurance or other forms of unearned income.


Labor Force Participation in New York State

In this post, I look at differences in the labor force participation level between counties in New York State.  Because the economic performance of the New York City Metropolitan area has been stronger than upstate New York since 2000, participation in the two regions is examined separately, where relevant.

This analysis is at the county level, and does not show differences in participation based on levels of economic disadvantage below the county level, particularly in urban centers where participation may also be low.

The data shows that while changes in labor market participation from 2005 to 2015 in the New York Metropolitan area, and in larger upstate metropolitan areas did not differ much from the nation as a whole, smaller metropolitan areas and rural upstate had greater declines than the nation.  Comparing county performance in 2015, large differences were found in the educational attainment of residents of better and worse performing counties.  The percentage of college graduates in the populations of the 15 counties in New York State was more than double that found in the 15 counties with the lowest level of participation.  The behavior of residents within particular socio-economic groups in counties with high and low labor market participation varied as well.  Disproportionately lower percentages of people who did not complete high school, residents who were black or Hispanic or male, and residents who were 25 and 34 years old and 55 and 64 participated in the labor market in counties where labor market participation was low.

Data is from the Census Bureau’s American Community Survey.  The Census Bureau data differs from the Bureau of Labor Statistics data referenced at the beginning of this post in its methodology and sample selection.   The differences in methodology are  discussed here.

In this post, I use two different data samples.   Beginning in 2005, county level labor force participation data is available from the Census Bureau’s American Community Survey.  The sample used for the section titled “Change over Time” is from single year samples of one percent of the United States population.  The single year samples are too small to permit an analysis of data for small population units.  Consequently, only 37 of 62 counties in New York State are included.  Because the sample is relatively small, estimates of smaller county characteristics can have relatively large errors – as much as 2.5% for labor force participation for the entire population, and as much as 5% for some groups within the overall population.

In the section “Comparison of Labor Force Participation at the County Level in 2015” I use a five-year sample of the population that includes 5% of the United States population.  Because the sample is larger, it includes all New York counties, and has less sampling error.  Smaller county estimates are likely to be within 1.3% of the true value.  Estimates of groups within the overall population should be within 3% of the true value.  But, because the data is an average of five-year data, it lags trends, since the midpoint for the time period covered for the 2015 five-year data, which includes surveys from 2011 to 2015, is 2013.

Because differences in labor force participation between counties are relatively small, it is important to recognize that their relative performance can vary from year to year because of sampling error.  For example, Schenectady County’s labor participation rate was reported as 63.7% in 2014, 61.7% in 2015, and 64.7% in 2016.  That kind of variation could reflect sample variation around the true participation level.


Change over Time

The tables showing change over time between 2005 and 1026 are based on the American Community Survey data for a single year.  Counties in the New York Metropolitan areas saw relatively wide variations in the change in the level of labor force participation between 2005 and 2016.  For example, Kings County (Bronx) saw an increase from 59.7% to 63.9% over the period, while Dutchess County saw a decrease of 6.2% from 68.4% to 62.2%.  Two thirds of the counties in the metropolitan area did better than the national average, based on the American Community Survey sample data.
Three quarters – nine of twelve counties in the New York metropolitan area had participation rates that were higher than the national average in 2016, compared with seven of twelve in 2005.

Census Bureau’s American Community Survey 2016 one year data includes 26 of 50 counties outside the New York Metropolitan area.

In upstate New York, larger metropolitan counties, like Monroe, Schenectady, Saratoga, Albany, Niagara and Erie County had smaller percentage labor force participation losses between 2005 and 2016 than did the nation .  Others, like Rensselaer County, Onondaga County and Cayuga County were near enough to the national average to be within the margin of error of the national estimate.

Many small upstate counties had larger declines than the nation as a whole.  Decreases in Broome County (5.8%), Ulster County (5.9%), St. Lawrence County (6.1%), Oswego County (6.2%), Chautauqua County (6.5%), Clinton County (6.7%), Ontario County (8.3%) and Sullivan County (9.9%) were all more than twice as great as the national average. It is also important to note that all of these counties had participation rates in 2015 that were significantly lower than the national average.  Chautauqua County was lowest at 55%. Seven upstate metropolitan areas had participation rates that were greater than the national average, compared with 18 that were below it.  In 2005, eight upstate counties had participation rates that were higher than the nation as a whole, and 17 were below.


Comparison of Labor Force Participation at the County Level

The American Community Survey five-year sample from 2011 to 2o15 used in the following section has a margin of error of approximately plus or minus 1.3% for counties, so differences of that size between counties should not be viewed as significant.  Because this data has a different time period (2011 to 2015) and sample size, the numbers differ from the discussion of change above.

Nationally, 63.7% of people 16 years old or older were in the labor force in 2015.  In New York State, participation in 2015 ranged from 67.6% in Putnam County, where 67.6% were in the labor force, to 50.8% in Hamilton County. Overall, participation levels were higher in the New York metropolitan area (65.3%) than in upstate counties (60.0%).

Two of five counties in New York City (New York, and Queens) had participation rates in 2015 that were above the national average, while three had rates that were below (Kings, Bronx and Richmond). Suburban counties in the New York City Metropolitan Area were above the national average.

Upstate, larger metropolitan counties, including counties around Albany-Schenectady-Troy, Rochester, Syracuse, and Buffalo-Niagara Falls, had labor participation rates that were higher than or within their margin of error compared with the national average.  Smaller urban areas upstate, like Utica-Rome (59.4%), Binghamton (58.7%), Jamestown (58.1%) and Elmira-Corning (56.9%) and rural counties generally had participation rates that were below the national average


Factors Related to Labor Force Participation Rates

Census data includes a number of factors that show significant relationships with levels of labor force participation.  Among the more important are:

Educational Level

At the individual level, education is a significant predictor of labor force participation.  People with a bachelor’s degree or higher are  27% more likely to be employed or seeking employment than those with have not graduated from high school.

  • Education: Population Characteristics

In 2015, there were large differences in educational attainment in the 15 counties with the highest labor market participation and the 15 with the lowest participation.  Counties with high levels of participation had 15% fewer people whose highest level of educational attainment was high school graduation than did counties with low levels of participation. Counties with high levels of participation in 2015 had 24% more people who had attained a Bachelor’s degree or higher than did the 15 counties with the lowest participation levels.

  • Labor Market Participation at Each Level of Educational Attainment

Comparing the top quarter of counties ranked by labor market participation with the bottom quarter, the largest divide in participation is for people with less than a high school degree.  On average, only 41% of those with less than a high school diploma were labor market participants in 2015 in the lowest quarter of counties ranked by participation.  In  the quarter of counties with the highest participation levels, 62% of those with less than a high school diploma participate.  At the opposite end of the educational spectrum, the difference in labor market participation levels for those with a Bachelor’s degree or more was only 3.3% – 87.1% vs. 83.3%.

 

Age

Like education, age is related to labor market participation at the individual level.  Young (16-19 years old)and old (60+) people participate at lower rates than workers of other ages.  As a result, it is not surprising that counties whose populations have higher percentages of older people have lower labor participation rates than counties with younger populations.

  • Age: Population Characteristics

This section compares labor market participation levels for two age groups:  younger workers aged 25-44 are in age groups that show the highest levels of labor market participation overall, and older people, aged 55+ who are beginning to leave the labor market.  The differences in the size of the older compared to the younger age group in the top 15 and bottom 15 counties are relatively small – in the top 15 counties, people between 25 and 44 make up 5% more of the total population than in the bottom 15 counties.  Older people, aged 55 or more, are 4% more of the total population in the lowest 15 counties than in the highest 15 counties.

  • Labor Market Participation at Each Age Range

Comparing labor force participation with age for the highest quarter of counties vs. the lowest quarter shows that participation levels differ most for those between 25 and 34 and for those who are 55 to 64 – in those cases the difference between participation levels is more than 10%.

Gender

  • Labor Market Participation:  Men vs. Women

Statewide, 81.4% of men and 72.8% of women were in the labor force in 2015.  Although difference between the labor participation rate of women living in the top quarter of counties ranked by labor participation compared with the lowest quarter of counties was 4.9%, the difference in participation rates for men in high versus low participation rates was much larger – 13.9%.

Race

For this analysis, the state has been separated into the New York City Metropolitan area and the rest of the state, because of significant differences in the levels of black/Afro-American and hispanic labor participation.  Because the number of black and Hispanic residents of low participation counties New York City Metropolitan Area is quite small, the comparisons presented here are between the top half of counties by labor market participation and the bottom half.

  • Race and Ethnicity: Population Characteristics

In the New York City Metropolitan area, the top half of counties ranked by labor market participation had populations in 2015 aged 16 or over that were 52% white, compared with 34% white for the lower participation counties.  High participation counties had 8% less black/Afro-American residents and 4.5% less Hispanic/Latino residents.

Upstate, the top half of counties ranked by labor market participation in 2015 had populations in 2015 that were 82% white, compared with 87% white in lower participation counties.  Blacks/African-Americans comprised 4.4% more of the population aged 16 or more in higher participation counties than in lower participation counties.

  • Labor Market Participation: Race and Ethnicity

In the New York City metropolitan area, participation rates for blacks/Afro-Americans, Hispanics and whites were similar in the low and high participation counties in 2015.  The difference in labor force participation in high and low participation counties was only 3.1%.  For black/Afro-American, participation is 63% in both high and low participation counties.  Hispanic and white residents participated more in the labor market in high participation counties by 3% and 4% respectively.

In upstate counties, the picture differs.  White labor market participation in high participation counties was 5.3% higher in 2015 than in low participation counties.  Hispanic labor market participation was 14% higher in high participation counties than in low participation counties.  For black/African-American residents, the difference was 25% in 2015, with participation averaging only 34% in low participation counties, compared with 59% in high participation counties.


Conclusions:

In the New York Metropolitan area, county populations aged 16 or over are large – averaging 650,000 for high participation counties, and 1.1 million for lower participation counties.  Additionally, the range of labor participation levels in the New York Metropolitan area was relatively small in 2015, and participation levels were higher overall than upstate.  In fact, the participation rate for the lowest county in the New York Metropolitan area – Staten Island – was within 1/10th of one percent of the average for upstate counties.

The range for upstate counties was much larger.  Saratoga County’s participation rate of 67.6% was the second highest in the state, while Hamilton County’s was 50.8%, almost 9% lower than the lowest county in the New York Metropolitan area.  In Upstate New York, labor force participation is higher in large metropolitan areas than in small ones.  This finding suggests that areas with smaller populations do not provide the opportunities for employment that are offered by larger ones.

Participation Differences Resulting from Differences in County Population Characteristics

Two characteristics showed consistent differences between counties with low and high participation levels – education and age.  Of the two, educational attainment showed much larger variations between counties with high participation levels and those with low levels of labor market participation.  The difference in the percentage of residents with college degrees or more is particularly striking:  45.4% in the 15 counties with the highest levels of labor market participation, and 21% in the 15 counties with the lowest levels.  In contrast, 35.5% of residents in counties with low participation levels had ended their education at high school graduation, while 21% of those in counties with high levels of participation had only graduated high school, a difference of 14%.

A portion of the variation in the educational attainment of residents between counties is likely to be a result of the differing levels of educational levels of educational attainment of young adults who were raised in those counties.  Another part stems from migration patterns of young people seeking and finding first jobs inside and outside their home counties.  Determining the relative contribution of each factor is beyond the scope of this research.

It was expected from previous research that counties having a higher proportion of older residents would have lower participation levels than those with younger residents.  But, the differences found in counties in New York State were less significant than those for educational attainment.  The percentage of residents aged 25-44 was about 5% higher in high participation counties than in low counties, while the percentage of those 55 years old or older was 4% less.

Differences in Participation within Groups in High and Low Participation Counties

There were also significant variations in labor market participation within groups in high and low participation counties.  Among the more notable were:

  • Much lower labor market participation by people who did not complete high school in the 15 lowest participation counties, compared with the highest participation counties – 41% vs. 62%.
  • Significantly lower participation by workers aged 25 to 34 and 60-74 in low participation counties: differences exceeded 10% between the bottom and top quarter of counties sorted by labor participation.
  • Much lower participation by males in the 15 lowest participation counties, compared to the 15 highest (14%) than by females (5%).
  • Very large differences in participation levels for black/Afro-American residents and Hispanic/Latino residents between upstate counties with low and high labor participation levels – 25% for black/Afro-American residents and 14% for hispanic residents.

Differences in participation within groups between counties that have low and high labor participation levels at least partially reflect the hypothesis that people have been unable to find jobs and have left the labor force.  But beyond that, the data shows that some groups are much more likely than others to be absent from the labor force in low participation counties.  These include people with little education, men, young and old workers, and blacks and Hispanics.   The low levels of participation of these groups in low participation counties probably reflect reinforcing factors, like lower average levels of education among minority group members, the decline of manufacturing industries that employed low skilled men, and low levels of demand for workers without college educations in places where there are relatively few jobs available.

These differences are not present in the New York City metropolitan area, where most counties have relatively high labor market participation levels, or in larger upstate metropolitan areas, like Buffalo, Rochester, Syracuse and Albany, but they are significant is smaller urban areas like Utica, Binghamton and Elmira, and in rural areas of New York State.

To the extent that New York’s development policies can be based on need, one focus should be on upstate’s small urban areas and rural communities.  If smaller counties are to see more labor market participation by their residents, the state must help them address the barriers that have discouraged participation by less educated people, men, blacks/Afro-Americans and Latinos, and find ways to generate jobs that retain college graduates.  At the same time, policy makers concerned about the well-being of New York residents must recognize that some policies that would help residents of low participation counties access jobs could increase out-migration to locations with more employment opportunities.  The ability of low participation counties in small metropolitan areas and rural locations to create the resources needed to diversify their economies to include occupations that match the qualifications of residents are likely to be limited, because of the significant advantages offered by locations that have larger labor pools.




President Trump to Upstate Residents: Move to Wisconsin

Recently, in an interview with the Wall Street Journal, President Trump suggested that upstate New York residents should leave the state for Wisconsin, where a new Foxconn LCD display panel manufacturing plant will be located, creating at least 3,000 jobs.  President Trump said, “I said, you know, Gary, you go to certain sections and you’re going to need people to work in these massive plants that we’re getting, that are moving in. Where do we have the people? You know where we have the people? In New York state that can’t get jobs, in many other places that can’t get jobs. And people are going to have to start moving. They’re going to move to Colorado and they’re going to move to Iowa and Wisconsin and places where – like if Foxconn goes to Wisconsin, which is one of the places they’re very strongly considering – but if Foxconn goes to Wisconsin and they have a very low rate and the governor’s done an excellent job, you’re going to have a situation where you got to get the people. But they’re going to start moving. And I’m going to start explaining to people when you have an area that just isn’t working – like upper New York state, where people are getting very badly hurt – and then you’ll have another area 500 miles away where you can’t – you can’t get people, I’m going to explain you can leave, it’s OK, don’t worry about your house.” Source, “Full transcript: Trump’s Wall Street Journal interview” Politico, August 1, 2017.

It is true that upstate employment performance has been weak, with most upstate metropolitan areas seeing decreases, while a few, like Buffalo, Glens Falls and Albany-Schenectady-Troy had small increases (Source – Bureau of Labor Statistics – Local Area Statistics). Many of the region’s smaller metropolitan areas had relatively large losses:  Binghamton, Elmira and Utica-Rome each lost more than 10% of its population.

On the other hand,   Median household incomes upstate were near the average for rust belt states, and the unemployment rate for upstate counties was the same as the national average in 2016: 4.9% in 2016 (Source: U. S. Department of Labor, Bureau of Labor Statistics, Local Area Unemployment Statistics).

The fact that the average unemployment rate in upstate counties is near the national average shows that the President’s statement, “You know where we have the people? In New York state that can’t get jobs…when you have an area that just isn’t working – like upper New York state, where people are getting very badly hurt,” is unfounded, given that unemployment upstate is no higher than the national average and that median household incomes are near it.  The labor force in upstate New York is stagnant or shrinking in most cases, but few labor force members are unemployed.  Upstate’s problem is not that its residents cannot find jobs, it is that the region’s population and workforce are stagnant or shrinking.

E. J. McMahon, in a recent New York Post op. ed., “Trump’s right, Cuomo wrong about the woes of Upstate” pointed out that many upstate New York counties are losing population.  McMahon argues, “From mid-2010 to mid-2016, nearly 194,000 people moved out of the 50 counties north of the New York City metro region — a net out-migration rate exceeded only by four states. Births and foreign immigrants made up some of the difference, but the total upstate population still dropped by nearly 60,000 people.”  McMahon’s statement is correct – many areas upstate have lost population since 2010 – in fact, 40 of 62 counties in New York State lost population between 2010 and 2016.

New York State is not unique in seeing population declines in some areas.  In Wisconsin, one of the places that the President said “they’re going to move to,” 36 of 70 counties saw population declines between 2010 and 2015.  In Ohio, included for comparison as another rust belt state which claims to have more business friendly policies than New York State, county populations decreased in 62 of 90 counties.

Since counties differ substantially in size within states, a better measure of the economic weakness of an area is the percentage of residents living in counties that are losing population.   In that respect, New York and Wisconsin performed similarly – in 2016, 13.2% of New Yorkers lived in areas with declining populations, while 9.2% of Wisconsin residents lived in declining areas.  In Ohio, 55.5% lived in declining population areas. Reflecting New  York’s regional divide, 61.3% of upstate residents lived in counties with declining populations, while none of the counties in the New York City Metropolitan area had declines.

(Table with full listing of counties is here:)

 

 

 

The data shows that population changes between 2000 and 2015 at the county level within New York, Wisconsin and Ohio varied significantly.  Like New York, Wisconsin and Ohio had counties that had significant population increases, and others that had large losses. Saratoga, Orange and Rockland Counties all had population increases between 2000 and 2016 that were greater than 10%.  New York’s least populous county, Hamilton, lost 15% of its population – a decrease of 834 residents. Wisconsin and Ohio saw similar variations. One county in Wisconsin had a 38% increase, while another lost 16% of its population.  In Ohio,  One county gained 75%, while another lost 10.5%.

“Business Friendly” Policies and Job Growth

E. J. McMahon argues in his New York Post piece that, “Trump, in effect, was simply prodding upstaters to act in their own best economic interests. …So, taxes aside, what advantages does Wisconsin offer over New York?….While Wisconsin Gov. Scott Walker has been an aggressive deregulator, New York’s regulatory climate in general is notoriously hostile to businesses. The 1970s-era State Environmental Quality Review Act, which has no equivalent in most states, hands a potent weapon to anti-development activists.”

Looking at New York, Wisconsin and Ohio from 2000 to 2015,  there is no evidence of consistent differences in performance that would reflect the effect of “business friendly” policies on job growth.  Instead, it shows that population and job growth vary substantially from local labor market to local labor market within New York State, and in Wisconsin and Ohio.  In each state, some areas are suffering, while others are doing relatively well.  New York had by far the strongest job growth overall between 2000 and 2015, but employment growth in New  York’s rural areas was the weakest of the three states.  Wisconsin’s performance was in the middle in both metropolitan areas and non-metropolitan areas, and Ohio’s was weakest in metropolitan areas, but stronger than New York’s in rural areas.

In a recent post, “Government Policies and Job Growth in the Rust Belt,” I showed that the relative performance of metropolitan areas over the rust belt differed substantially across time periods between 1990 and 2015.  If government policies, like “business friendliness” determined the economic performance of regions we would expect to see consistent advantages for states with states with business friendly attributes like low taxes or lax environmental regulation.  But, we do not.

Upstate’s relatively weak economic performance may be attributed to several factors  – most importantly, its past reliance on manufacturing employment.  In 1970, manufacturing employment was more than 40% of the private sector total in the Rochester and Binghamton metropolitan areas, and more than 35% of the total in Buffalo-Niagara Falls.  Today, in these areas, manufacturing employment is about 10% or less of the total.  In contrast, metropolitan areas that have had stronger growth recently, like New York City and the Albany-Schenectady-Troy metropolitan area, were less dependent on manufacturing.

Manufacturing Mega-Projects and Job Creation

Large manufacturing attraction projects, like the Foxconn plant in Wisconsin, the Solar City project in Buffalo,  and Global Foundries near Saratoga Springs cannot, in themselves be successful approaches to significantly improving the employment rate at the state level.

To encourage Foxconn to locate its facility in Wisconsin with a promise to create 3,000 jobs, the state agreed to provide three billion dollars in tax incentives and to waive environmental regulations  to allow Foxconn, without permits, to discharge dredged materials, fill wetlands, change the course of streams, build artificial bodies of water that connect with natural waterways and build on a riverbed or lakebed.Foxconn would also be exempt from having to create a state environmental impact statement, something required for much smaller projects.” Source: The Washington Post, “The Latest: Wisconsin Foxconn deal waives regulations,” July 28, 2017.

Projects that involve expenditures of as much as one million dollars per job are simply too expensive to replicate on a scale that would be large enough to meaningfully change  a regional economy.  New York’s employment was about 9,100,000 in 2016.  Increasing the state’s employment by even one percent – 91,000 – would cost ninety-one billion dollars at the cost of one million dollars per job for recent projects, assuming that enough large new job attractions were possible to enable that large an employment increase.  In fact, most job creation occurs at existing businesses, not at new facilities attracted because of government subsidies, while very few large manufacturing investments take place in a given year.

At the same time, the focus on attracting manufacturing is largely misguided.  Although manufacturing jobs are important, because they have higher average wages than jobs available to people without college educations in other sectors, manufacturing has been hemorrhaging jobs for forty years.  Mostly because of automation and productivity improvements, and less so because of import competition, manufacturing employment has sharply declined in the United States – from 20,000,000 in 1980 to 13,000,000 in 2016.   Between 2000 and 2015, New York lost 239,000 manufacturing jobs, while gaining 1,878,000 service sector jobs.  Ohio and Wisconsin also lost manufacturing employment, while gaining service sector employment. Because the growth of New York’s already strong service sector was particularly large – 25%, the state’s percentage job growth was much larger than the other states.

Because potential job growth continues to be likely to occur almost entirely in the service sector, focusing state resources on attracting manufacturing employment has a high opportunity cost.  Instead, policies and programs to support existing manufacturers in a region can be useful.

Upstate’s relative economic weakness is partly explained by the changing factors that drive location decisions in manufacturing and service industries. For manufacturers, upstate New York is a less attractive location than it once was because of factors including its location relatively far from the country’s population center, relatively high labor costs, difficult environmental permitting processes and relatively small and tight labor markets.  But, because manufacturing provides only about 10% of jobs upstate and nationally, manufacturing employment is a less significant economic driver than employment in other sectors is.

For high value added service industries, upstate New York suffers from relatively shallow labor markets, its relatively low percentages of college graduates compared to places like New York City and Boston, and the increasing concentration of industries in a few large companies headquartered in major cities.  Although the region has some significant strengths in higher education and health care, it has lost a number of corporate headquarters in financial services, because of the increasing concentration of the industry.

None of the problems faced by upstate New York, or for that matter, those parts of Ohio and Wisconsin that have stagnant economies, are easily resolvable.  But, leaders should recognize that the resurgence of these areas will not result from a policy of attracting manufacturing jobs to them – there are just too few opportunities to attract companies like Solar City, Foxconn or Global Foundries, and the cost is exorbitant.  Instead, leaders need to do what they can to anchor the companies in their area that have the potential to grow.  In most cases, those are service industries.  For these businesses, robust labor pools with appropriate skill sets are far more critical than the financial incentives or permitting issues that were critical to attracting large manufacturing facilities.