The High Wage Jobs Puzzle

When evaluating a region’s economy, the first question to ask is, “Do people want to live there?” If people want to live there, then something is working. If people do not want to live there, then something may be wrong.

By this metric, Montana is doing well because people want to live in Montana. In a recent Gallup poll, only 13 percent of Montanans indicated that they would move to another state if they could, the lowest percentage among all states. In contrast, almost half of the residents of New Jersey indicated that they would like to move to another state.

Migration data confirm Montana’s desirability. About 5,200 more people move to Montana each year than move away, ranking Montana’s net migration rate 13th among all states. By this simple measure, Montana’s economy is performing well. However, if one digs deeper, there are rumblings. While Montanans love Montana, they do have some concerns.

Every Place Has a Problem

All places want to offer high wage jobs, a modest cost of living and an amazing quality of life, but no place can offer all three. If a place did offer all three, it would attract lots of people – those people moving in would lower wages, increase the cost of living and possibly reduce the quality of life. As a result, every place has at least one problem.

In Montana, low earnings have been an issue. Median earnings for Montana workers over age 24 are $31,800. This is only 86 percent of the U.S. median ($36,900) and places Montana 45th among all states.

While the cost of living in Montana is lower than the U.S. level, it is still high relative to income. Montana’s cost of living is 94.5 percent of the U.S. level. For the median worker, less than half of Montana’s earnings gap is offset by the state’s lower cost of living.

These concerns are accentuated by the fact that Montana is becoming less affordable. Since the early 1990s, housing prices in Montana, adjusted for inflation, have doubled, growing at the third fastest rate in the country trailing only Colorado and Oregon. Income growth has not kept up with housing price growth. Median household income in Montana only increased by 19 percent over this same period. As such, Montana has become much less affordable over the past 25 years.

Yet, in spite of these affordability challenges, Montanans still want to live in the state, which speaks to Montana’s quality of life. There are a number of other places where Montanans could move that offer higher wages, a lower cost of living, or both. For instance, Michigan offers higher median earnings and a similar cost of living. Missouri offers similar wages and a lower cost of living, and Iowa offers both higher earnings and a lower cost of living. Yet, in spite of these opportunities, Montanans are not fleeing to these places.

For one group though, Montana’s mix of jobs, costs and quality of life is not as appealing – those are young, college-educated workers. Between 2008 and 2012, on average, 564 more of these young, college-educated residents moved out of the state than moved in.

The outmigration of college-educated Montanans is a long-standing feature of the state’s economy. Only 37 percent of Montana natives with a college degree still reside here. This is the ninth lowest percentage among all states and roughly half the level observed in states like Texas and California. In-migrants from other states replace many of the native Montanans who leave, but not all. Montana has 20,000 fewer college graduate residents than college graduate natives.

While some young Montanans may want to experience life outside the state or in an urban environment, limited job opportunities and low wages are likely driving this net outmigration. The median college-educated Montanan earns only 77 percent as much as the median college-educated American (82 percent adjusted for cost of living). In contrast, the median Montanan without a college degree earns 90 percent as much as the median American without a college degree (95 percent adjusted for cost of living).

Montana’s inability to attract and retain more college graduates imposes costs on the state’s economy. If Montana is not attractive to young, college-educated workers, it is not providing a full set of opportunities for its kids. Kids who grow up in Montana and go to college often feel they must leave the state to find opportunity and that is unfortunate.

Adding more college-educated workers would likely produce benefits for Montana’s economy. Creative workers are an increasingly important source of a region’s economic success. Economists find that regions with more skilled workers grow faster – they enjoy faster population, employment wage and housing price growth. More skilled workers increase the productivity of a region and increase its quality of life. Regions with more skilled workers also enjoy higher entrepreneurship rates and have proven more capable at recovering from inevitable downturns.

While no place is appealing to everyone, Montana’s mix of offerings is somewhat unattractive for young college-educated workers, which may be a long-term problem for the state.

The New Geography of Jobs

When the railroad came to Butte in the 1880s, a flood of people followed. Montana had abundant natural resources and those resources were valuable in larger markets. The railroad allowed those resources to reach the market and the state’s economy blossomed.

This is the typical regional economic story. Historically, economies sprouted where soil was fertile, timber and minerals were abundant, and where transportation by water was easy, such as at the confluence of rivers or at natural ports. Over time, man-made advantages like railroads or highways helped further shape local economic development. In recent years, the link between natural resources and local prosperity has weakened. Natural resources and access to markets still matter, but a region’s success is increasingly tied to human creativity. Recent changes have allowed the knowledge economy to become a reliable driver of economic growth.

Figure 1. Job Polarization: U.S. Employment by Occupation. Source: Federal Reserve Bank of St. Louis.
Figure 1. Job Polarization: U.S. Employment by Occupation. Source: Federal Reserve Bank of St. Louis.

Figures 1 and 2 help illustrate some of these changes. Figure 1 shows how the allocation of workers has changed. It shows employment growth for four different types of occupations: creative, knowledge workers (doctors and computer programmers), low-skill service workers (janitors and home health aides), medium-skill repetitive jobs (secretaries and bank tellers) and rules-based physical jobs (factory workers or truck drivers).

Over the past several decades, the non-routine occupations have grown, while the routine occupations have stagnated. Economists refer to the changes shown in Figure 1 as the polarization of the labor market. High- and low-skill occupations have grown, while middle-skill occupations have stagnated.

Figure 2 shows a similar pattern for earnings growth. The figure shows earnings growth between 1990 and 2014 across the earnings distribution. Adjusted for inflation, the earnings levels for approximately the bottom 75 percent of people declined or improved little, while earnings for the top 25 percent and particularly the top few percent, increased.

Figure 2. Cumulative Percent Change in Earnings (Adjusted for Inflation) by Income Percentile, 1990-2014, U.S. Source: BBER analysis of 1990 Census and 2009-2014, American Community Survey Public-Use Micro Data.
Figure 2. Cumulative Percent Change in Earnings (Adjusted for Inflation) by Income Percentile, 1990-2014, U.S. Source: BBER analysis of 1990 Census and 2009-2014, American Community Survey Public-Use Micro Data.

Natural resources still matter and will continue to matter in Montana. Indeed, in recent decades, Montana’s wage growth, employment growth and population growth have been strong, particularly for less-educated workers and much of this strong performance can likely be traced to natural resource booms, like the Bakken oil formation.

However, Montana could benefit from a more robust knowledge economy. A more robust knowledge economy would provide higher wages – particularly for Montana’s college-educated population. It would provide more robust opportunities for Montana’s kids and a more diverse economy to help insulate the state from the booms and busts of its natural resource industries. It might also ensure that Montana does not become a playground for the wealthy.

To build a knowledge economy, knowledge industry firms need to be able to create goods and services in the state and deliver them to markets. Specifically, Montana needs entrepreneurs who can develop a company, assemble the workers and technology required to execute their vision and deliver their product to customers.

For the past several years, Montana has topped the Kauffman Foundation’s rankings of start-up activity. Thus, Montana appears to have the necessary entrepreneurial spirit. However, the main impediment to more rapid growth in Montana’s knowledge sector is the struggle to access the workers and capital required to succeed.

For instance, knowledge-industry firms in Montana may need programmers or developers, however, the state has relatively few workers in these areas. Montana employs only 7,850 people across all computer and mathematical occupations – that’s 5,200 fewer workers to draw from than would be expected in a state Montana’s size. This makes it more difficult for these types of firms to succeed in the state.

Breaking the Cycle

Montana faces two problems that reinforce each other: Low wages limit the set of college-educated workers available to Montana firms – but to raise wages for these workers, Montana needs to develop a more robust knowledge economy and that requires a pool of skilled, creative workers. If Montana can break this cycle, it is likely to succeed in creating a more robust knowledge economy.

The good news is a knowledge economy is not tied to a particular place. It simply requires a collection of people and any place that proves desirable to knowledge workers and knowledge entrepreneurs can thrive in a knowledge economy. Thus, growing Montana’s nascent knowledge economy does not rely entirely on who is already in Montana, it also depends on who might be willing to come to Montana and the set of people willing to come to Montana is large.

Many former Montanans yearn to return to the state and others find it attractive overall as Montana’s quality of life is outstanding. Montana’s cost of living is lower than many other places and given a sufficient job, people can be better off here. Thus, Montana needs to do two things: it must attract or grow firms that can provide jobs and it must also develop the resources that allow these firms to attract potential residents. Montana’s entrepreneurs are essential to this process.

This requires overcoming Montana’s limitations. By empowering more entrepreneurs Montana is more likely to escape the unfortunate cycle described above. Montana’s small but growing technology sector offers hope that this process is underway and gaining momentum. Overall, Montana is a desirable place to live and this suggests that its economy is working. However, Montana does face an important economic challenge – its knowledge sector is underdeveloped and as a result, it is somewhat unattractive to knowledge workers.

Developing a more robust knowledge economy would provide benefits to Montana. The state would offer a wider range of opportunities and higher earning to Montana’s workers. It would also have a more diverse and resilient economy.

It should be noted, however, that developing a more robust knowledge economy may also impose costs. The cost of living may grow faster than income. As a result, Montana may become even less affordable. Also, the state’s population may grow faster and this could affect quality of life. Both of these changes may make Montana less appealing to different groups.

These are the current tensions that underlie Montana’s economy. Montanans must work to better understand these trade-offs and decide how we want to balance them. However, as we make these choices we must keep in mind that we have limited control. Economic forces outside of Montanans’ control will also play a big role in determining the extent to which Montana develops a knowledge economy, as will the associated costs and benefits.