Hit the books, Michigan, and get smart about economic growth

Lou Glazer is President and co-founder of Michigan Future, Inc.

Our work at Michigan Future, Inc. is focused on understanding the changes occurring in the American economy and how to be successful in that economy. Our interest is in the long-term structural changes in the economy, rather than year-to -year, largely cyclical changes.

Our new report, Michigan’s Transition to a Knowledge-Based Economy, assesses how well our state is faring; identifies the states and metropolitan areas that are faring best; and identifies the common characteristics of the most prosperous states and regions.

Globalization and technology are mega forces transforming the economy. The places that will do best are those that align with – rather than resist – these new realities. For Michigan that, first and foremost, means learning that what made us prosperous in the past isn’t working now and won’t in the future.

Michigan Future started with the question “where do we want to go from here?” Our answer: a high-prosperity Michigan – a place with per-capita personal income consis10tly above the national average in both national economic expansions and contractions.

High prosperity is different from the most-used measure for economic success, low unemployment. We believe the goal should be to create an economy with lots of well-paying jobs, with a broad middle class where there is a realistic chance for families to realize the American dream. Places with low unemployment rates, but also lower personal income, aren’t successful to us.

Our latest report covers the period from 2007 through 2014 – the peak of the previous national economic expansion through the current peak. This allows us to assess the Michigan economy structurally.

First, the good news

In very good news, Michigan from 2010-2014 has been one of the nation’s leaders with its 8.6 percent job growth, ranking seventh, compared to 6.9 percent for the nation. This reverses a decade of job losses.

In terms of personal income per capita, since 2010 Michigan has grown at a similar rate as the nation.

The state reached a low in personal income per capita of 38th in 2008 and 2009 and moved to 35th in 2014. Each year from 2007-2014 Michigan’s per capita ranged from 35th to 38th. If you take out government transfer payments, Michigan ranked 38th in 2014 and between 38th and 42nd in each of those years.

Michigan also ranks near the bottom in the proportion of adults who work, ranking 42nd in 25-64 olds with a job.

So despite a good stretch of job growth, Michigan is now structurally one of the nation’s low-prosperity states. Whether the nation’s economy has expanded or contracted since 2007, Michigan has been in the bottom third of states in per capita income and bottom quarter of states if you don’t include transfer payments.

What stands out in the economic and education data we analyzed is that in the fifth year (2014) of a national expansion, and an even stronger domestic auto industry recovery, Michigan is a national laggard on nearly all the metrics. Gone are the days when the auto industry – still the prime engine of the Michigan economy – could propel Michigan to being one of the most prosperous states as was true for most of the 20th century.

For most of the 20th century Michigan enjoyed the benefits of being the center of the auto industry. And that industry’s near collapse the past decade is something no other state suffered through. It was a major part of what mired Michigan – and no other state – in a decade-long recession.

The state could not avoid the downturn of the domestic auto industry, but we could have been better prepared if we had learned the lessons from high prosperity states.

The report – co-authored by me and University of Michigan researcher Donald Grimes – finds that prosperous non energy-driven states are those with both a high proportion of jobs and wages in knowledge-based services and a high proportion of adults with a four-year degree or more.

What are knowledge-based services? Finance and insurance; professional services; healthcare; education; information; and management of companies. They account for 42 percent of all of the jobs in America and 54 percent of total wages nationally. The data are clear: Knowledge-based services now are the center of mass middle class American jobs. Knowledge-based services contribute both strong job growth and high wages. The sector is now the high wage sector of the American economy.

Brains, not brawn

Human capital is the asset that matters most to knowledge-based enterprises. They have the highest proportion of employees with four year degrees or more in professional and managerial positions.

Our basic conclusion: What most distinguishes successful areas from Michigan are their concentrations of well-educated adults. Quite simply, in a world where work can increasingly be done anyplace by anybody, the places with the greatest concentrations of talent win.

No, the report does not claim that everyone needs a four-year degree. No more than any one claimed that everyone needed to be a manufacturing worker when manufacturing was the center of Michigan’s middle class.

And no, the report does not claim that those with four-year degrees are guaranteed stable, high-wage employment, any more than in the heyday of manufacturing, plant floor workers were guaranteed stable, high-wage employment.

What our research did find is that a core characteristic of prosperous states and metropolitan areas is a high proportion of adults with a four-year degree or more. It goes hand in hand with a concentration in knowledge-based services.

Of the top 10 states in 2013 per capita employment earnings (which includes both wages and employer paid benefits) eight are in the top 10 in four-year degree attainment. The other two are energy-driven North Dakota and Alaska. Of the bottom 10, eight rank 38th or lower in four-year degree attainment. The other two rank 21st and 30th.

In 2000, at the end of the boom years, Michigan still ranked 18th in per capita income. We were 34th in bachelor’s degree attainment. In many ways, 2000 marked the end of an era when you could have high prosperity with low education attainment. No more. In 2014, Michigan ranks 35th in per capita income and 34th in the proportion of adults with a four-year degree or more.

Cities matter

Our research found two other common characteristic of prosperous states: (1) an even more prosperous big metropolitan area where (2) those big metros are anchored by a central city with a high proportion of residents holding four-year degrees or more.

Michigan’s two big metropolitan areas also are lower-tier in per-capita income when compared to the nation’s 52 regions with a populations of one million or more. The Detroit region ranks 38th in per capita income; metro Grand Rapids ranks 49th.

Metro Detroit ranks 42nd in four-year degree attainment and 33rd in the proportion of wages from knowledge-based services. Metro Grand Rapids ranks 34th in four-year degree attainment and 52nd in the proportion of wages from knowledge-based services.

Minnesota – the Great Lakes’ most prosperous state – exemplifies the new path to prosperity. It is 13th in per capita income, 10th in employment earning per capita,10th in college attainment,12th in the proportion of wages from knowledge-based services and 3rd in the proportion of 25-64 year olds who work.

The three major differences between Michigan and Minnesota, in order of importance, are: the proportion of the population working, the proportion working in knowledge-based services, and a substantially higher wage in knowledge-based services.

Metro Minneapolis on all these metrics outperforms the rest of the state. It also has a central city – Minneapolis – that has a higher proportion of its residents with a four-year degree than its suburbs. The city is doing particularly well among 25-34 year olds, who across the county are concentrating in vibrant central cities. In Minneapolis, 49 percent of 25-34 year olds have a four-year degree or more.

We are confident that, primarily due to the ongoing force of globalization and technology, the American economy will become more and more service-, rather than goods-producing, based. And, in that economy, knowledge-based services will be where average wages are the highest and wage growth will be the strongest.

An era already ended

The lesson from the data analyzed is clear: Jobs in goods-producing industries – particularly manufacturing – are experiencing a long-term structural decline that almost certainly is irreversible.

Notwithstanding the current auto recovery-driven manufacturing rebound here in Michigan, long-term trends are clear: The defining characteristic of those places with the most prosperous economies today – and almost certainly even more so in the future – is their concentration in the knowledge-based sectors of the economy. The only exceptions have been and likely will be those states with commodity-based economies, particularly energy-related commodities.

To be clear, we are not advocating that Michigan abandon goods-producing industries. They are and will be important parts of the Michigan economy, especially in smaller regions and rural communities, and as such deserve support. But they are not a path to high prosperity or a broad middle class.

Nor is tourism. It is characterized by job growth, but low wages. The reality is if Michigan’s economic future is built on a base of factories, farms and tourism, we will be a low-prosperity state.

The world has changed fundamentally. We either adjust to the changes or we will continue to be poor compared to the nation.

Michigan’s fundamental economic challenge is that we rank 34th in the proportion of adults with a four-year degree. States without concentrations of talent will have great difficulty retaining or attracting knowledge-based enterprises, nor are they likely to be the place where new knowledge-based enterprises are created.

Michigan has lagged in its support of the assets necessary to develop the knowledge-based economy at the needed scale. Building that economy is going to take a long time, and it will require fundamental change. But we believe it is the only reliable path to regain high prosperity.

The choice we face is, do we do what is required to build the assets needed to compete in the knowledge-based economy or do we accept being a low-prosperity state?