Quarter 2, 2000
by Robert K. Triest

Concern has arisen recently that New England is running out of workers. Slow growth in our labor force is resulting in a shortage of available workers. And without a ready supply of workers, the argument goes, firms will be unable to expand their employment locally and will look to other regions when they locate new facilities. Although revised data from the Bureau of Labor Statistics show that earlier figures had overstated the magnitude of the slowdown, many economic analysts expect that the rate of employment growth will continue to fall.

Because employment growth has traditionally been a key barometer of the region’s economic health, this development seems ominous. The sharp drop in employment that began in 1989 as New England’s economy headed into recession is still a vivid memory. And many remember the region’s long economic stagnation that resulted from the gradual exodus of textile jobs, starting in the 1920s. Over the course of our economic history, slow employment growth became synonymous with lack of economic opportunity.

Today’s situation is fundamentally different, however. New England’s unemployment rate is hovering near 3 percent. The labor market is tight, and deficiencies in education or training are the main impediment to workers finding good jobs. The slowing of employment growth is not associated with lack of opportunity, but simply reflects the fact that workers are in short supply, thus constraining the rate at which employment can grow. The last time New England’s unemployment rate was this low was during the boom days of the 1980s. During that era, workers from regions with less vibrant economies flowed into New England in search of opportunity. Today, labor markets are tight all over the country, and there is less incentive for outsiders to migrate to New England in search of work.

If you are a worker, tight labor markets are advantageous. Jobs are relatively easy to find, and the prospects are good for one’s talents to be fully utilized. For employers, tight labor markets are challenging and create incentives for increasing labor productivity.

From the standpoint of policy makers, tight labor markets and the slowing of labor force growth bring into question the emphasis on job creation in economic development policy. And if the point of economic development policy is not to create jobs, then what should it be aiming to achieve?

IS THERE A PROBLEM?
New England is far from alone in facing a “shortage” of workers. Because of low fertility rates, the working-age population will be growing relatively slowly, and in some cases shrinking, across the developed world in coming decades. For example, over the next 30 years, the working-age population is forecast to decline in France, Germany, Japan, and the United Kingdom. By contrast, the U.S. working-age population is projected to grow 13.6 percent during this period. Although more rapid than in many other developed countries, this growth is dwarfed by the 38 percent increase expected worldwide.

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New England will be somewhere in the middle. Its working-age population is forecast to increase 6.6 percent over the next 25 years — faster than in Europe, but slower than in less developed countries and in the United States as a whole. This is not particularly surprising; New England is an older, densely populated area, and receives less foreign immigration than states such as California and Texas.

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Slow population and labor force growth need not be cause for alarm. Our current prosperity is based on the clustering of a critical mass of skilled workers, educational institutions, and innovative firms. Although lower-cost regions may grow more quickly and eventually develop similar clusters, their cost advantages will tend to be attenuated as they grow. And it seems very unlikely that New England’s cost disadvantage will be so great that we will lose the critical mass of skilled workers that makes the region attractive to employers. Indeed, it is important to remember that the attractiveness of New England is a key factor driving our relatively high costs.

HIGH HOUSING COSTS
High housing costs, especially in the Boston area, are often cited as a factor discouraging labor force growth. Workers find that they can buy a comparable suburban house at a lower price in other parts of the country. Some have argued that young professional workers with families are especially likely to be discouraged from locating in New England, and that this could impede economic development.

Underlying our high housing costs is a combination of high demand for housing and limited supply of developable land. The high demand reflects the economic health of the region and its attractiveness as a place to live. The limited supply reflects both natural geographic constraints and policies which limit development. Policies which restrict development need to be evaluated, but there may be a tradeoff between lifting restrictions on development and the quality of life. There is a cost to increased congestion and strains on the capacity of public infrastructure to accommodate new residential development.

This is not to deny that real problems face the low-income population due to recent increases in housing costs. There are legitimate reasons to encourage an increase in the supply of affordable housing for low- and moderate-income families. And ways may be found to do so without generating increased congestion and sprawl, through policies that encourage in-fill development and urban revitalization. But even if such policies are aggressively implemented, we will likely remain a high-housing-cost region. Those who wish to live here pay a premium, but the quality of life and clustering of job opportunities make it worthwhile to do so. Some workers will be driven away from New England by high housing costs, but others will find that the advantages of the region more than compensate for the high costs.

WHAT SHOULD BE THE POINT OF ECONOMIC DEVELOPMENT POLICY?
With the region’s working-age population expected to grow slowly in coming decades, job creation will be less pressing than in the past. Although the replacement of lost jobs will always be a problem following cyclical downturns, in normal times the key issue will not be whether there are enough jobs for workers, but whether workers are well matched to the jobs being generated by the New England economy.

This suggests the need to rethink the goals of economic development policy. An emphasis on job creation has always been part of the broader goal of providing economic opportunity, and this goal remains very relevant today. Education and training programs, which provide economic opportunity by increasing the earning potential of participants, are important policies for realizing this goal. Rather than directly creating jobs, these programs provide workers with the skills they need to qualify for the relatively high-paying jobs already being created.

Sound economic development policy — the provision of good-quality schools, transportation facilities, and other public amenities — will create an environment that generates economic opportunities and a high quality of life for New England workers. Given the slowing growth in the working-age population, our focus should be on economic opportunity and our quality of life, rather than on job creation as a goal in itself.