What Drives the Regional Economy? Follow the Money... (Part 2)

As noted in a previous post, nearly 1 out of every 5 dollars in the Pittsburgh Region’s economy comes from Social Security, Medicare, Medicaid, and other “transfer payments,” a bigger share than in any of the top 40 regions in the country.

Another 15% comes from dividend, interests, and rent, which is about average among the largest regions in the country.

The remaining two-thirds of the region’s personal income comes from jobs. Which industries are the biggest contributors?

Many people will be surprised to learn that manufacturing is still #1. Although manufacturing provides only about 9% of the jobs in the region, it provides over 14% of the employment-generated income. That’s because the jobs in manufacturing have better pay and benefits than other industries. In fact, manufacturing jobs in our region are among the highest-paying in the country.

Although the Pittsburgh Region lost a lot of manufacturing jobs through the recent recession, almost every region in the country did, too. But total earnings from manufacturing jobs in Southwestern Pennsylvania actually increased by over 11% between 2001 and 2004, while manufacturing income went down in Austin, Boston, Portland, and Silicon Valley. That suggests that what we lost were primarily lower-paying, lower-skilled jobs, and that we gained some higher-paying, higher-skilled jobs.

The second-largest sector is health care and social services. It contributes over 12% of the region’s employment-generated income, the 3rd largest percentage among the top 40 regions. Health care is actually the region’s largest employer, with more jobs than manufacturing, but it generates less total income than manufacturing because of lower wages.

The third largest sector of the economy is government, which provides 11.4% of the Pittsburgh Region’s earnings. Although most people locally believe we have too much government, government actually represents a smaller share of the Pittsburgh Region’s economy than in most other regions. Southwestern Pennsylvania ranks 32nd out of the top 40 regions in the percentage of income derived from government jobs.

One other sector of the regional economy deserves special attention – higher education. Although the education sector contributes only 3% of the region’s employment-related income, that’s the 3rd highest share of any region in the country – only Boston and Philadelphia have a larger proportion of income from the education sector.

What does all this mean for the region’s economy?

1. We need to have a competitive business climate in order to retain and grow the high-wage manufacturing jobs that contribute so much to regional income. High-tech manufacturing is particularly important, because its jobs pay high wages and are less likely to be outsourced to other regions.

2. We need to support the continued growth of the health care and higher education sectors – not only do they jointly provide a share of regional income equivalent to manufacturing, and not only do they provide an important amenity for the region, but they represent key sources of ideas that will lead to new technology businesses and new jobs in the future.

3. We need simpler government, not necessarily smaller government. The complexity and inefficiency caused by having so many different governmental entities, each with its own rules and procedures, can deter growth in other sectors, particularly manufacturing.