Sunday, May 06, 2012

Is Our Regional Economy Adequately Diversified?

Financial advisors say that the best way to both preserve and grow your savings is to diversify your investments, i.e., create a balanced portfolio. Putting all of your eggs in one basket is dangerous. The same advice could be applied to a region’s economy. Invest in a range of different industries, and don’t rely on any one sector to create future growth, no matter how good it might look today.

The Pittsburgh Region learned the perils of non-diversification the hard way thirty years ago. In 1981, over 65,000 southwestern Pennsylvanians worked in the primary metals industry (mostly the steel industry), representing 7% of all the jobs and 14% of all worker earnings in the region. By 1983, the region had lost 25,000 of those jobs and over $1 billion in wages and benefits. Because steel was such a big part of the economy here, the ripple effects caused us to lose a total of 70,000 jobs over that two-year period, and because we were more dependent on the steel industry than other regions, Pittsburgh’s economy suffered far more than any other region in the 1980s.

Is our regional economy more diversified today than in 1980?

Although it’s often said that after the 1982 recession, Pittsburgh became a “service economy,” most jobs in every region have always been in the service sector. Today, Pittsburgh is about average compared to other regions in the balance between goods-producing and service sector jobs. In 2011, the Pittsburgh Region had 147,000 jobs in goods-producing sectors, 12.8% of the region’s total jobs. That’s less than places like Cleveland, Milwaukee, and Seattle, where over 15% of jobs are in goods-producing sectors, but more than places like Atlanta, Columbus, or Denver, where fewer than 11% of jobs are outside of the service sector.

Most (88,000) of our goods-producing jobs are in manufacturing, followed by construction (50,000 jobs) and natural resources/mining (8,500 jobs). Although the number of natural resources/mining jobs in the region (which includes natural gas drilling) has nearly doubled over the past five years thanks to the Marcellus Shale, jobs directly related to natural gas are still a very small part (less than 1%) of the region’s economy. However, from a diversification perspective, we now have a higher proportion of jobs in mining and drilling than any other major region of the country except for Houston, which means that our economy is more susceptible to swings in demand for coal and gas than other communities.

It’s also worth noting that although many people say the steel industry is “gone,” Pittsburgh still has more jobs in steel manufacturing today than any major region in the country, and far more than we have in either coal mining or natural gas production. In 2011, the Pittsburgh Region had over 12,000 jobs in primary metals manufacturing, including 7,000 jobs in steel mills, compared to fewer than 4,000 jobs in coal mining and gas drilling combined. Steel jobs are also among the highest-paid jobs in the region, so keeping them here needs to remain an economic development priority.

As for the service sector, more of those jobs in the Pittsburgh Region are coming from private firms than other regions of the country. Only 10.9% of the Pittsburgh Region’s jobs are in federal, state, or local government, the second-lowest percentage among the top 40 regions. That’s partly because many other major cities are state capitals and we’re not, but we also have the third-lowest percentage of jobs in local government (8%) of any major region in the country. (Although we have more units of local government than any other region, collectively they don’t employ more workers.) Given the fiscal challenges facing government today, being less dependent on public sector jobs is a good thing.

At the other end of the spectrum, nearly one-fifth of our private sector jobs are in just three parts of the service sector, and we are far more dependent on them than other regions:

Health Care. Over 120,000 (10%) of our region’s jobs are in hospitals and doctor’s offices, a higher proportion than the steel industry represented thirty years ago. Most major metropolitan regions are much less dependent on healthcare jobs than we are, including regions with nationally-renowned medical centers. Since there is strong evidence that we’re spending far more on healthcare in Pittsburgh than we should, our high dependency on healthcare has become a weakness, not a strength, for our economy. (See "Reducing Hospital Costs Can Benefit the Region's Economy.")

Higher Education. We have over 40,000 jobs in colleges, universities, and professional schools, a higher proportion (3.6%) than any major region except for Boston. Although it’s not likely that any of our colleges will pick up and move away, federal and state funding cuts for higher education could make it difficult for those schools to retain all of the jobs they currently have.

Company Headquarters. Although we are no longer the leading Fortune 500 headquarters city we once were, we still have 37,000 jobs in “management of companies and enterprises,” the third highest percentage (3.2%) among the major regions. Although our high quality of life has helped us attract and retain company headquarters, poor air service, high taxes, or inadequate mass transit could force some companies to consider moving their headquarters elsewhere in the future.

So our economic eggs are still in too few baskets, just different ones than thirty years ago. And just like then, we could suffer if we don’t proactively try to diversify. That doesn’t mean trying to pick any particular industry to grow; for many years, regional leaders here have tried to pick “the” industry that will drive the region’s economy. First it was computer chip design, then biotechnology, then robotics, and now energy. Although all of those efforts created new jobs, none of them had the dramatic results that promoters promised. And that’s a good thing, because our region is stronger precisely because we now have strengths in all of those areas, not just in any one of them.

Instead of trying to pick winners, the best regional economic development strategy is to help all types of businesses create and retain jobs. We need to encourage innovative startup companies no matter what kinds of technology they develop, and we need to have a good business climate, with competitive taxes, sound infrastructure, and an educated workforce, in order to retain and grow the many different types of businesses and jobs that are already located here.

(A version of this post appeared as the "Regional Insights" column in the Sunday, May 6 Pittsburgh Post-Gazette.)


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