Economic Development Depends On Human Capital

I recently attended the yearly Economic Outlook Conference conducted by the WVU College of Business and Economics. The Conference is presented in five regions around the state. This one focused on the Eastern Panhandle. The news was mixed, with positive jobs and income growth in the Panhandle and North Central West Virginia while the state’s coalfields continue to lag in all measures. But the presenters made one powerful point that was probably unexpected in a room full of business men and women. Our economic future depends on the development of our human capital.

First the good news. Since late 2016, West Virginia has added 7,000 jobs. Per capita personal income in the state reached $37,900 in 2017, an increase of 3.4% — the second highest growth rate in the nation during the period. West Virginia’s GDP grew strongly in 2017, better than 40 other states. This growth was driven by increased coal production for the export market and by gas pipeline construction.

But the good news has to be put into context. In the period 2011 to late 2016, nationwide employment increased by about 15 million jobs while in the same period West Virginia employment decreased 20,000 jobs, even factoring in the recent increases. While our per capita income has surged, it is still only around 75% of the national average.

West Virginia’s challenges are well-known. Our population is among the oldest in the nation and, accordingly, is among the least healthy. Obesity is a big problem among children and adults. We have been ravaged by the opioid crisis. Adjusting for the effects of our older population, our mortality rate is still the second highest in the nation.

Another worry is that West Virginia’s population declined in 2017, the fifth consecutive annual loss – a cumulative loss of more than 39,500 residents on a population of only 1.8 million. Jefferson, Berkeley and two counties in the North Central area are the only counties forecast to experience growth in the next five years. A declining population means a declining tax base with which to solve the state’s problems.

But the statistic most germane to the discussion in the room was the one on workforce participation. Only 53% of West Virginia’s adult population is either working or looking for work. This is the lowest rate of labor force participation in the nation. Jefferson and Berkeley are the only two counties with a higher labor force participation rate than the national average. Low labor force participation is a significant hurdle for long-run economic prosperity. New businesses will not locate here and existing businesses will be unable to expand without a reservoir of qualified employees.

Why is our workforce participation rate so low? Part of the answer is that an older population naturally works less. But 27% of West Virginia’s prime-age workers (ages 25-54) are non-participants — also the highest among the 50 states. The complete answer is that our workforce is under-educated and under-equipped with job skills, in poor health, and challenged by hurdles to work common to poor and low-wage workers. The solution is to pursue policies that invest in ourselves, particularly our young and prime-age workers.

There are a number of thoughtful proposals for policies that could improve West Virginia’s low level of workforce participation. The West Virginia Center on Budget and Policy has long been active in encouraging these policies. Isabell Sawhill, a distinguished economist, has just published The Forgotten Americans: An Economic Agenda for a Divided Nation. Sawhill proposes a number of measures to increase workforce participation that value working as a source personal fulfillment as well as income.

Among the policy proposals from these sources are:

  • an increase in the West Virginia minimum wage;
  • a state earned income tax credit or worker credit;
  • enhanced child-care assistance;
  • increased funding for education at all levels, from pre-K to post-secondary; and
  • the development of more training programs for jobs that employers want to fill.

In upcoming posts, I hope to explore these policy proposals in more depth.

One of the presenters at the Economic Outlook Conference who seemed in sympathy with the need to develop human capital was Todd Hooker, Deputy Director for Business and Industrial Development at the West Virginia Department of Commerce. Yet he distributed a handout that reveals how difficult it will be to change thinking among business people about economic development.

Hooker’s handout touted “major wins” in economic development that consisted of the Proctor & Gamble and Macy’s projects in Berkeley County, the Gestamp metal stamping plant in South Charleston and the Hino Trucks plant expansion in Wood County. He suggested that these “wins” were produced by the elimination of the business franchise tax in 2015, and the reduction of the corporate income tax rates in 2011. But, of course, these tax measures reduced the government revenue available to fund policies that improve our human capital. Tax cuts for business are just corporate welfare that does not directly improve worker quality or availability.

In addition to informing the attendees, the recent Economic Outlook Conference may have done one other really useful thing. It may have been a step toward revised thinking among the economic elite about the need for government spending that develops the quality of our workforce. Because, after all, the future of our economic development depends on it.