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Human Capital Drives Regional Productivity Gains

Human Capital Drives Regional Productivity Gains

By James Clary


The term competitiveness is an imprecise descriptor for the concept of productivity. That said, productivity growth is extremely important for a region in order to experience growth in both employment and per capita income. Fortunately, many efforts to improve the quality of life of the region impact regional productivity, and efforts to increase regional productivity tend to improve the quality of life.

Human capital, which contains elements of education, experience, and other worker qualities, serves as the primary determinant of a region’s productivity growth. Dr. Edward Glaeser has done extensive analysis of the economics of cities, with particular attention to the impact of education on long term economic growth. In a paper titled “The Rise of the Skilled City”, Dr Glaeser, with his Harvard colleague Dr. Albert Saiz, used several highly sophisticated econometric techniques to control for various sources of growth.  Their research revealed that education consistently contributes to increased productivity.

Thus, a region that wishes to experience productivity growth should focus both on education and the retention of educated persons, as the primary method of driving economic growth.  A concerted effort devoted to education that results in an increase in the overall educational attainment will enable a regional economy to reach a tipping point, which will increase a region’s capacity for growth.

•    High School Education: The primary cost center of local government is primary and secondary schools, which is appropriate because the percentage of students who do not complete high school  in a city is significantly correlated with urban decline and falling home prices within that municipality (the correlation is less significant at the regional level). Unskilled labor pools with low levels of education tend to have reduced levels of mobility and require more government services.
•    College education has been shown to have a major effect on growth at the regional level. In Hampton Roads, 27.2% of the population has at least a bachelor’s degree, which is beyond the tipping point of 25% which exists in almost all fast growing regions. That said, increases in the percentage of the college educated population leads to higher wage growth and home price values, and allows a region to better transition when faced with economic shocks. The effect of the college educated population manifests itself across the regional economy, and does not seem to have a significant local impact.

This raises the point of how one achieves a population with a high level of college education. The growth and capacity of regional colleges and schools play an important role in this process, but also important is the preparation of the school aged population in Hampton Roads to achieve college education.  In addition to the “grow your own” approach, it is also important to ensure that amenities exist to help attract and retain talent. It is true that as a greater percentage of the population becomes college educated (many in colleges outside the region) that a significant number will move out of the region, but the overall gains will be greater in magnitude.

What about local business?

Attracting and relocating existing businesses to Hampton Roads is an exciting prospect and makes for great headlines in the news.  The reality, however, is that the dynamics of business expansion and formation within the region have a much greater effect on job growth within the region than does the attraction of businesses from other regions.  Emphasis should thus be placed on procedures and policies that encourage business growth and formation locally.
Aligning regional regulations and permitting requirements to remove barriers from business expansion continues to be an area for future growth. This allows for businesses that are prepared to move to a higher level of expansion to do so locally with few constraints, and it is the rapidly growing companies (often called gazelle companies by economic development professionals) that become basic sector industries, bringing in outside capital and talent to the region.

Another key role for local governments is to assist in productivity growth by providing an environment that enables successful small businesses to grow their enterprises and become larger businesses.  Policies that support the growth of economic clusters combined with incubators that support fast growing local businesses will help strengthen the regional economy.

Clusters are industries that develop in a region around a particular regional advantage(s). While the large clusters that have supported this region for quite some time are evident (the ports, the defense industry, and tourism), the region will need to see the development of new industry clusters to lead growth in the future. As outlined in the Hampton Roads Regional Competitiveness Report issued this month, clusters are extremely difficult to identify until they have grown to the point where they do not require support. This leads to offering a low level of support to a variety of potential clusters, encouraging the basic infrastructure of information sharing and labor force pooling to develop, without leveraging scarce public funds to support one particular company/industry. Biotech at the Beach is an excellent example of a simple and effective effort that requires very limited investment/support.

Another potential growth opportunity lies in the development of a regional business incubator with a specific focus of providing information, support, and business connections (as opposed to building space), that provides businesses with the specific tools to enable business expansion.  The success of such an incubator would be contingent on 1) its ability to identify companies well suited for growth within the regional economy, and 2) the incubator’s capacity to provide necessary support and develop constructive relationships to assist growing businesses.  It would be imperative that incubator staff possess professional business experience, particularly in regard to transitioning a small local business into a business that operates at the regional, state, or national level.

Productivity growth will solve all of your problems:

Economic analysis of development efforts are often challenging to measure because it is difficult to determine the nature of causal relationships.  Region’s that experience productivity growth tend to experience gains in education and amenities, which may then fuel additional productivity growth. Education is perhaps the one certainty that has been identified as a clear driver of productivity growth.  While many speculative theories abound as to how one might achieve economic growth, one can be assured that there is no substitute for an efficient system of governance that provides a stable and transparent framework for business growth and formation. With such a system in place, the majority of regional growth will come from the expansion of local businesses that take advantage of the region’s productivity growth and natural clusters.