Tuesday, July 26, 2011

California versus Texas: Why some states grow jobs and others don't

There's been a lot of talk recently about the success of Texas in creating jobs while the rest of the country stagnates. The Federal Reserve Bank of Dallas recently claimed that 37% of all net new jobs created in the last two years in the US were in Texas. Some credit this to the leadership of Texas governor, and potential Presidential candidate, Rick Perry.

Meanwhile, California, once America's most dynamic state, has become an example of stagnation. Conservatives point to us as an example of the damage that can be done by environmentalism and high taxes.

Is Texas really as good as they say?

All the discussion about Texas so far has missed a rather important point. Texas creates a lot of jobs because it is big! To properly compare states, I have calculated the job growth per thousand residents over the past economic cycle for each of the 50 states. I'm interested in sustainable and long term job growth, so I am using an entire economic cycle, comparing the employment low of the 2001 recession with the employment low of the recession that began in 2008.

It turns out that Texas is not the best job creator in the country. That honor goes to Arizona, which generated 69 jobs per 1000 people who lived there in 2002. Janet Napolitano , take a bow! Amid the wreckage left behind by the housing collapse, it is easy to overlook the vast number of jobs created in Arizona over the past cycle. Even after losing many jobs in the recession, Arizona created more jobs over the period than any other state. Then comes Utah, where Jon Huntsman was governor. Then come Washington and Virginia. Texas is next, at 46 jobs per 100. So Texas is a good job creator, but other places have done better.

There is another side to this story. Rather a lot of states actually lost jobs over the past decade. California, Illinois, Massachusetts and New Jersey are some of the largest and wealthiest states in the country, but all are in slow economic decline. California lost 5 jobs per 1000 residents over the past cycle, even as the population grew.

The worst story is in the Midwest. Missouri, Ohio and Michigan experienced an economic meltdown. Michigan was the worst, losing 50 jobs per 1000 residents. That is as many jobs lost as Texas gained!

Why is this happening?

In a recent Room for Debate at the New York Times, Pia Orrenius from the Federal Reserve Bank of Dallas credited Texas's oil deposits, ports and low cost of living. Columnist Paul Krugman proposed three possible models on his blog. They involve either a reduction in wages, cheap housing or a surge in productivity due to the policies of Rick Perry.

I think it is really important right now to understand why some places create jobs and others don't. America's 50 states offer a kind of natural economic laboratory for understanding which job creation strategies are likely to work. I've been digging into the data, and have arrived at a model which up to a point can explain the differences in job creation by states over the last economic cycle. I think that most of differences in job growth between states over the past economic cycle can be determined from five variables. Getting to that formula will take me quite a few blog posts, so be patient!

(Technical notes: Job data from Department of Labor . Population data from the Census Bureau. Calculations use state populations as of 7/1/2002. I am measuring jobs from trough to trough. In many places that is 2002 to late 2009. In others it is 2003 to 2010

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