Posted by: Josh Lehner | October 30, 2019

Big Question #2: Capital and Long-Run Growth

One forecasting challenge is we do not know what the 11th or 12th year of an economic expansion looks like. We’ve never been here before. Our baseline forecast calls for ongoing, but slowing growth as we run into supply side constraints. However, that is more theory than data. I’ve been wrestling with two big questions in recent months that I’m putting to our advisors in the coming weeks. Last week we covered a short-run growth question, while this week I will lay out the long-run growth question.

Over the long-run, after we get away from near-term cyclical dynamics, there are two primary sources of growth: labor and capital. This means long-run economic growth is really about how many workers there are and how productive each worker is. Our office has written extensively on population growth and demographics over the years because it is Oregon’s comparative advantage and is a key driver of growth.

Our office has certainly discussed capital and productivity, however we have spent less time doing so because we lack good local data. This summer the Bureau of Labor Statistics published some experimental state productivity statistics (H/T OED’s Nick Beleiciks). No surprise, but Oregon ranks well. From 2007 to 2017, Oregon’s labor productivity increased the 2nd fastest among all states. Our unit labor cost growth ranked 3rd lowest, meaning the regional economy was able to produce a lot more stuff without price pressures forming. Now, the flipside of that is our real hourly compensation increase was right in the middle of all states, ranking 25th best. Now, we know our wages have increased significantly faster in recent years, so this is something to keep an eye on.

In the big picture, there are different types of capital that can raise worker productivity and drive long-run economic growth. These types of capital are not mutually exclusive and one type is not necessarily better than another.Financial capital is essential for firms to grow and expand and overall Oregon does OK here. Oregon is not a financial center nor do we have a deep bench of venture capital or the like. The state largely relies upon investments and loans made by out-of-state financial institutions. Encouragingly, the latest Oregon Capital Scan report shows we are seeing some improvements.

Physical capital is probably what most of us think of when it comes to worker productivity. It’s about plants and equipment and being able to make more widgets per worker. However it is also about office space and software and worker productivity in the knowledge economy.

Natural capital is largely about putting natural resources to use. Obviously here in Oregon we have an abundance of natural capital. The questions are how best should we use them and to what degree should we use them?

Finally, I tend to think of human and social capital together, although there are important differences. Social capital is more about community networks and involvement and is something we’ve touched on briefly when it comes to economic mobility. Human capital is largely about the skills of the workforce.

Now, it is important to point out that education, at least in the form of a 4 year degree or higher, is not the be-all and end-all of a good paying job. Nor is it the only measure of skill. See our report on job polarization and our dive into occupations, wages, and education for a more thorough discussion. That said, we know that in the coming decade a college degree is required to be a competitive job candidate for around 80% of high-wage jobs. It is increasingly the ruler many are measured against.

So how’s Oregon doing? Statewide we’re doing alright. This is in part because migrants have higher levels of educational attainment, but also in part because attainment is rising among those born in Oregon as well. But if we look beneath the statewide figures we see a lot more variation.

The share of the working-age population in Corvallis with a college degree is among the absolute highest in the nation. Portland’s is getting up there and the increases in the past decade are part of the transformative growth experienced this cycle. Bend is now better than three-fourths of all U.S. metros. And both the North Coast and Gorge have some of the highest levels of educational attainment in rural areas across the entire country.

However, one of the clear trends that has emerged in recent years is that educational attainment is not rising everywhere. The share of the working-age population with a college degree has remained pretty steady over the past two decades throughout much of the Willamette Valley. This is true in the Rogue Valley as well. Click here for more on college graduates in Oregon metros and their ranking.

Now, I am not here to try and pick on anyone. While most of the Willamette and Rogue Valleys do not have an above average, nor increasing share of college graduates, they do have larger shares of the workforce with Associate’s degrees or with some college coursework. We know that every year of schooling helps when it comes to employment opportunities and wages. As such some of these potential concerns may be overblown.

That said, I have been trying to think through the implications of these trends on future economic growth. At this point I do not believe these trends are a barrier to growth, but I do believe they warrant being an issue to watch. This is for a few reasons.

First, all regions of the state are seeing good economic growth this cycle when it comes to jobs, wages, household incomes and the like. It does not appear to be holding back growth so far. Second, there are many other types of capital. Not all local economies will hit it out of the park along all dimensions. So to the extent a local economy lacks in one type of capital, it can make up for it with higher productivity and stronger economic growth by using the other types.

However the reason it is an issue to watch is precisely because it is one type of capital that is not showing gains in some parts of the state. As such, it is like removing one avenue of future economic growth. By no means is it a deathblow but it does mean some local economies are more reliant upon the other avenues of growth. To the extent those falter, then there are fewer overall opportunities. The real concern is if it at some point in the future it does put a lid on potential growth. It could make further progress even more challenging once we get beyond the short-term cyclical dynamics.

Of course this is not an Oregon specific issue. These trends and patterns are seen throughout the nation. In a research note just the other day titled “The rich get richer,” Moody’s Analytics wrote the following:

As more educated workers congregate in places that already boast significant advantages, divergence across regional economies will likely intensify. Variation in median household income across economies has grown more pronounced over the past few decades, as high-wage jobs cluster in selected metro areas with large, skilled workforces. With prime tech jobs bypassing much of the nation, more creative approaches may be needed to try to ensure that left-behind regions can attract young, educated workers.

And brand new research out of the Federal Reserve Bank of Richmond documents the growth of college graduates in a handful of larger metropolitan areas.

Update: In conversations a question I keep getting is “why?” Well, I don’t have a perfect answer here. However some of it is a form of economic sorting based on the types of jobs and also on housing costs. We discussed this at greater length when looking at the Urban Wage Premium research previously and the Richmond Fed work linked above does as well.

But at a basic level, the clustering of knowledge-based, high-wage jobs in select urban areas attracts certain types of residents and workers (i.e. young-ish college grads) . This also occurs within regions, where growth and patterns within the urban core differ from the suburbs. It also means, given there no longer is an urban wage premium for those without a college degree, they increasingly do not live in the urban core or even in the handful of large metro areas.

Now, to date there does not appear to be net out-migration from a place like Portland. However I view it more as a choice on the front end. College graduates are disproportionately choosing to move to Bend, Corvallis and Portland. While those without college degrees are moving more to, say, Eugene, Medford, and Salem.

Lastly, it is important to note that all regions of Oregon are growing, and most have favorable demographics. It’s this one type of capital – human capital – that we are seeing some diverging patterns in recent years.

Bottom Line: Over the long-run, economic growth is driven by the number of workers and how productive they are. Oregon’s comparative advantage remains our ability to attract and retain working-age households. To date, productivity in Oregon has been relatively good as well. Looking ahead there are a number of ways a regional economy can grow and raise its productivity. This includes the uses of financial, physical, natural and human capital. Not all regional economies will excel along all dimensions. However if a region lacks one or more types of capital, then it becomes more reliant upon the other avenues of growth. This is not a problem in and of itself, but these issues warrant monitoring moving forward.


  1. […] Source: Big Question #2: Capital and Long-Run Growth | Oregon Office of Economic Analysis […]

  2. […] One forecasting challenge is we do not know what the 11th or 12th year of an economic expansion looks like. We’ve never been here before. Our baseline forecast calls for ongoing, but slowing growth as we run into supply side constraints. However, that is more theory than data. I’ve been wrestling with two big questions in recent months that I’m putting to our advisors in the coming weeks. The first is more of a short-run growth question, while next week I will lay out the long-run growth question. […]

  3. […] office spent much of 2019 digging into these sources of long-run economic growth: labor force and productivity. We know that population growth is slowing today, and retirements seem to have accelerated. This […]

  4. […] to hire and expand. Remember, long-run economic growth is all about the number of workers and how productive each worker […]

  5. […] to hire and expand. Remember, long-run economic growth is all about the number of workers and how productive each worker […]

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