by Stacey Pelika and Deborah Mitchell
The best way to strong wages and a strong workforce is through education, not by cutting taxes to capture private investment from other states in what amounts to a race-to-the-bottom economic development strategy. That’s the conclusion by the Economic Analysis and Research Network (EARN), a group of more than 61 research, policy and advocacy organizations that recently released a report.
According to the report, “many states have been retreating from their responsibility to ensure state economic growth that benefits all residents in favor of a short-sighted approach to economic development. In these states, the focus is on luring employers from other states with strategies that do not lead to rising incomes because they do not make the workforce more productive.”
While there are many examples of how states can increase their overall economic standing in the bullet points below, the report focuses on one basic idea: investing in the workforce itself is the easiest way to increase economic prosperity.
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The recent economic downturn has caused many states to focus on short-term solutions to economic development, namely, focusing on attracting businesses through tax breaks and incentives. According to the report’s authors, however, this approach simply leads to a short-term bump in overall employment numbers and does nothing to increase wages or opportunities beyond the immediate. In many of these states, the authors found that because lowering tax rates for businesses slashed the funds available for education, the overall effect was a lowering of the average income within the state.
In states that focus on investments in the workforce instead of businesses, however, the report shows a strong correlation between a well-educated workforce and a high-wage state economy. In states where less than 30 percent of adults have attained a bachelor’s degree, median wages were about $15. In contrast, median wages in states where more than 40 percent of the workforce holds bachelor’s degrees are $19 to $20 per hour, almost a third higher than in the less educated states.
Other key findings from the report:
High-wage economies are not more common in low-tax states
- The data show no correlation between lower tax rates and higher median wages. In other words, strategies to attract business by cutting taxes do not appear to translate into improved economic well-being for a state’s residents as a whole.
- In addition, there are no states with relatively well-educated workforces and relatively low wages and virtually no states with relatively low levels of education and relatively high wages. The only two states that are an exception to this trend – Alaska and Wyoming – have economies built largely on natural resource extraction and as a result pay relatively high wages in comparison to their average levels of education.
A factor that shows a strong correlation with a high-wage economy is a well-educated workforce
- In states with a less-educated workforce – those in which 30 percent or less of adults have at least a bachelor’s degree – median wages are about $15. In contrast, median wages are $19 to $20 an hour—nearly a third higher – in states in which more than 40 percent of the workforce has at least a bachelor’s degree.
- This difference in wages has significant effects on the economic well-being of working Americans. For a full-time, full-year worker, it is the difference between making $30,000 a year and making $40,000 a year, and for a household with one person working full time and one person working half time, it is the difference between $45,000 a year and $60,000 a year.
The relationship between education and wages has strengthened since the last 1970s
- In the late 1970s, the correlation between education and wages was much weaker due to a very different economy that provided a lower premium for a college education. Some states, such as Michigan, Ohio and West Virginia, had reasonably high wages but less-educated workforces due to the availability of high-paying manufacturing and mining jobs.
- In addition, the authors point to the decline in union representation, and the resulting decline in the percent of profits distributed as wages rather than as profits, as an additional factor in changing the relationship between education and wages.
Citing research by other authors, the report concludes that states can strengthen their economies in the long run by adopting policies that increase the number of well-educated workers
- State and local businesses are far more likely to base their location decisions on the skills of the local labor force than they are on state and local taxes. In addition, “additional higher-skilled labor attracts employers with more skilled jobs” – in other words, “If you educate them, they will come.”
- Both high school and college attainment rates were linked to state economic growth between 1939 and 2004.
- Every additional student who receives an associate’s or bachelor’s degree returns to his/her state, through higher taxes, more than the state spent on supporting that education. This holds true even if one-third of degree recipients leave a state after graduation.
Despite there being a larger role for the federal government, there are measures states can take to improve productivity and adequately distribute revenue
- Despite a clear link between education and state economic health, state investments in higher education have declined. Funding per public higher education student declined 26 percent in real funding between 1990-1991 to 2009-2010, while at the same time tuition doubled at four-year institutions and rose by 71 percent at community colleges. Reversing these trends would greatly improve access to higher education.
- States should also explore policies that have demonstrated links to improving student academic achievement, such as improving early childhood education and improving school facilities.
- States can enact and change policies that focus on the distribution of revenue, such as increasing state minimum wages and adopting higher wage standards in economic development programs.