Sunday, July 31, 2011

California versus Texas: Part 6: The model

The first thing to say is that my model isn't wildly precise. However, where it predicts lots of job growth there is job growth, and where it predicts lots of job losses there are job losses. It works well enough to reassure me that I am looking at the right things.

The real national economy is very complex and very diverse, so a simple formula is never going to give precise answers. However, to have any success at all, that simple formula has to get some big things right.

There are a few states where it fails badly, but even so it fails in an interesting way. Kansas and Nebraska are neighbors, and the model greatly over predicts job growth in both states.  There seems to be some regional factor at work. West Virginia and Kentucky do much, much better than predicted. Both are coal mining states with a lot of labor intensive underground mining, and coal prices have risen dramatically in the last ten years. And then there is Washington state, which does much better than expected. Washington state is an anomaly in many ways, and I don't know why. It might be due to the presence of Boeing and Microsoft. The state  has very good pay after taxes and housing costs are taken out. While the congressional delegation looks like California, the state tax system looks more like Texas. Washington state is either lucky or they are doing something right which my model doesn't capture.

How it works

The idea behind my model is that job growth will happen if employees are profitable. If an employee produces $50,000 per year of output, but only costs $40,000 per year to the company, then a company will tend to expand and add jobs. The rate of job growth is proportional to profitability. So a state that has a well educated workforce working for moderate wages will see job growth.

I calculate a labor force value which increases with the percentage of the the work force which is college educated. If the state is a right-to-work state that increases the labor force value by another 17%.

Labor force value = 22845 + (775 * Percentage college educated)

I then subtract the mean wage to get profit, and multiply that by a factor to get employment growth.

Job growth = (Labor force value - mean wage) * 6/1000

I then subtract the job losses due to rural populations, and add the regional adjustment, if any. The final formula is:

Projected job growth = ((Labor force vale - mean wage) * 6/1000) - Percentage of population which is rural - Regional correction


California  has an average wage of $50730, 6% of the population is rural, and 30% of the workforce has a bachelor's degree. It is not a right to work state. The regional correction is +30.

Labor force value $ = 22845 + (775 * 30) = 46095
Projected job growth = (46095 - 50730) *6/1000 - 6 + 30 = 3.8

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