Productivity offers states competitive hiring edge

A job is a two-sided quality contract.

From the employee’s side, the requirements are about salary, benefits, work environment and commute. From the employer’s side, it’s about a contribution to output. If employees don’t contribute enough to the value of output, they’re not worth hiring. When the company’s output or product is not being purchased, the employer must reduce the number of employees.

During any recession, the employer has time to make the workplace more efficient  to produce the same amount or more output without adding employees. The laid-off employee should also retool, learn the skills needed to obtain a position in the new, leaner, more efficient workplace.

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How productive are we in Northern Colorado? The Bureau of Economic Analysis has just released GDP per capita numbers for 2009, compared to five years ago. Colorado is ranked 15th among states, down from ninth in 2004.

From 2004 to 2009, output per worker increased from $36,113 to $41,344, an increase of $1,046 per year, an uncompounded annual increase of about 2.9 percent. That’s about 1 percent greater than inflation, but not quite good enough.

In 2004, Colorado productivity was 79.7 percent of the leading state, Connecticut; in 2009 Colorado productivity was 76.0 percent of the leading state, still Connecticut. Obviously, we slipped relative to at least six other states: Wyoming, Alaska, California, Hawaii, Washington and Illinois.

Education, investment key

Northern Colorado has historically had a more highly educated workforce than the state and the nation; therefore, we should be more productive. However, the state is cutting support for both higher and secondary education, and Northern Colorado has been losing high-tech jobs for at least the last decade, also lowering the average productivity of workers.

The Metro Denver Economic Development Corp. recently released its annual report on the state’s competitive position using key indicators related to economic vitality and growth. It concludes that the state is becoming a weaker competitor for new jobs and investment.

Colorado has moved from a mid-level to a low-level tax state. Taxes support the education and infrastructure investments necessary to keep our state competitive. Rather than being invested in building blocks of the economy such as an educated workforce, a quality multimodal transportation system and affordable health care, tax funds have been diverted to make the communities where we live better through amenities such as bike trails, parks, open space, and the like.

However, the Metro Denver report concludes that Colorado continues to be a center of innovation that attracts some of the world’s brightest minds, especially in aerospace, alternative energy and bioscience. Much of this activity has developed as a result of Colorado State University.

These positive developments have occurred despite Colorado being 48th in both public support per full-time student and public educational support per capita. Colorado’s high school graduates are entering in-state colleges and universities at lower rates than students in more than half of U.S. states, dropping from 29th in 2006 to 32nd in 2008.

Recovery depends on adjusting

A recent Kansas City Federal Reserve System report suggests that the strength of any recovery will depend on how well communities adapt to new labor markets. Until the mid-1980s, productivity growth rose and fell with output growth. Since then, the relationship between these two variables has weakened and, occasionally, they move in different directions.

This divergence is the result of a decline in the importance of supply shocks. Increases in the cost of production lead firms to reduce output until they can develop technology that lowers costs of production. Substituting capital for the newly expensive input increases output and productivity.

But the current recession is a demand recession. Consumers have reduced purchases because their balance sheet has weakened, not because input costs have increased dramatically. These changes are structural – consumers feel less rich, quit spending as much, demand shrinks, retail and industrial sectors lay off employees, consumers spend even less, demand shrinks even more, and so it goes.

Transaction costs in the labor market have also come down because of Internet job matching, declining trade union membership, temporary worker agencies, part-time workers, overtime, increasing substitutability of labor and computers, and other factors. This has allowed employers to lay off workers more quickly when demand for their products decreases. The Kansas City Fed’s research shows that business cycles with jobless recoveries were cycles in which firms adjusted employment aggressively rather than smoothly.

Productivity growth averaged 7.1 percent in the U.S. in the last three quarters of 2009 but slowed to 1.5 percent in the first half of 2010. The Kansas City Fed concludes that as the productivity-enhancing benefits of investment in information and communication technologies made in the late 1990s diminish, efficiency gains will be even more difficult in the future. The report suggests that better technology and training – supply-side investments – will be necessary to increase productivity.

As we continue recovering from the recession, Northern Colorado needs to attract high-tech, export-based industries and quickly train workers to fill the resulting jobs.

John W. Green can be reached at jwgreen@frii.com.