Posted January 11, 2018
Economic growth, prosperity and human development tend to go hand-in-hand, and productivity – doing more with less over time – critically drives growth and higher living standards. Metropolitan areas that are near natural gas, oil and mining activity have been exceptionally productive and able to sustain high productivity over time, according to a recent Brookings Institution study. While overall U.S. productivity has continued to slow, metro area participation in the energy and technology booms has become a precursor of high productivity and growth.
At a time when the macroeconomic policy debate focuses on boosting growth via tax reform and monetary policy, the study links tangible benefits to communities from energy growth and technology.
To maximize energy and technology-driven growth, the study recommends that policymakers encourage more affordable housing development and actively address disparities in education and technical skills. Specifically, the study identifies zoning and land use reforms as well as technical education and training programs as means to improve people’s access to economic opportunities in these dynamic areas.
The study also highlights that policymakers should work to create local energy hubs and manufacturing innovation institutes that leverage the nation’s energy laboratories for local economic development. For example, public-private partnership models, together with local colleges and universities, could help advance these goals. Importantly, the study’s findings imply that policymakers should foster energy development in areas where natural gas and oil reserves are present, ensure development of pipelines and export infrastructure and advance free trade policies that support competitive markets.
Productivity has many forms but is most easily understood when it is measured as output per worker or hour worked. In the chart below, based on analysis of Bureau of Labor Statistics data, you can see that the decade average of U.S. labor productivity fell to 1.2 percent in 2016 from a cyclical peak of 3.1 percent in 2005.
When coupled with slowing demographic growth, falling productivity sets the stage for slower U.S. GDP growth over the next decade. In fact, the current decade average is backloaded, as annual labor productivity was below 1 percent per year in five of the past six years.
A threshold of 1 percent productivity is prominent in the Brookings study, which compares U.S. labor productivity by metropolitan area, as measured by output per worker. More detail from the study:
- Productivity relates directly to rising living standards. U.S. metropolitan areas with higher labor productivity tend also to have higher incomes and lower poverty rates, and this relationship was statistically significant across nearly every period going back to 1980, even when controlling for regional differences in education levels.
- Metropolitan areas that have mining, oil, natural gas or their downstream refining and petrochemical manufacturing applications nearby have been exceptionally productive and able to sustain high productivity over time. Contrary to a theoretical catch-up effect among neighboring areas, metro areas that participated in the energy and technology revolutions have tended to sustain high productivity and outpace other areas.
- The natural gas and oil and technology sectors are key enablers of prosperity. “Unless a metro economy participated in the energy boom (see metros in North Dakota, Oklahoma, and Texas) or the tech boom (see Austin, TX; Pittsburgh, PA; Portland, OR; San Jose; CA; and Seattle, WA), it was very hard for it to grow at more than one percent per year.”
The following chart from the study tells the story:
Both the left and right panels distinguish between metro areas where productivity was above (blue) or below (red) the threshold of 1 percent annual productivity gains. The left panel provides a snapshot from 1978 to 2004, when about 70 percent of the 382 metropolitan areas studied had annual productivity above the 1 percent threshold, and high growth was geographically diverse across the country. By contrast, the right panel shows more recent results, from 2004 to 2016, when productivity exceeded the 1 percent threshold in only about 20 percent of metro areas.
High productivity was predominantly concentrated near areas that benefited from the energy or technology industries. For example, six of the top seven areas with the strongest productivity growth (2004-2015) were in Texas and Oklahoma. Additionally, energy-driven metro areas in Alabama, Arkansas, Pennsylvania, Ohio, Louisiana, Mississippi, North Dakota and South Dakota rounded out the top 25. Large metro areas with high sustained productivity gains included energy-driven Dallas-Fort Worth, Houston, Oklahoma City, Pittsburgh and San Antonio and technology-driven San Jose–Sunnyvale–Santa Clara (Silicon Valley), Portland and Seattle.
The association of high productivity with energy and technology centers – and lack of a catch-up effect by non-energy producing areas – is rooted in part by a metro area’s endowment of resources. It also speaks to barriers that may exist in regional education and technical skill disparities.
For example, areas like Durham-Chapel Hill, North Carolina, and San Jose, California, have long strived to attract intellectual resources and high-tech industries. With leading research universities in the areas, their policies resulted in strong sustained productivity and growth, but it took more than a generation to achieve critical mass. By contrast, energy in general and especially the shale boom was transformative within a relatively short period, as parts of Texas, Oklahoma, North Dakota, Pennsylvania and Louisiana and others have experienced.
Cementing the link between productivity and growth, Chart 3 shows the U.S. Bureau of Economic Analysis’ most recent appraisal of state-level GDP growth. North Dakota led the nation in Q2 2017 with growth of 8.3 percent at a seasonally adjusted annualized rate. Other states that have had leading roles in the energy renaissance – Texas (6.2), Louisiana (3.2), Ohio (2.0), Oklahoma (5.5), Pennsylvania (2.5) and West Virginia (4.1)– also are all growing solidly.
Productivity generates economic growth and is a critical determinant of Americans’ future jobs, pay and standard of living. To increase productivity, growth and prosperity, it is crucial that the U.S. continue to harness its energy resources, promote manufacturing and connectivity that empower businesses to leverage these resources, and pursue housing, education and research & development policies that enable even more people to participate in the economic opportunities that these dynamic areas generate.
ABOUT THE AUTHOR
Dr. R. Dean Foreman is API’s chief economist, specializing in energy and global business. With a Ph.D. in economics from the University of Florida, he came to API from Saudi Aramco Strategy & Market Analysis in Dhahran, where he managed short-term market monitoring and the long-term oil demand outlook. Foreman has more than 20 years of industry experience in corporate strategic planning, forecasting, finance / risk management and regulatory policy at ExxonMobil, Talisman Energy and Sasol North America.