Why Does Education Matter?

Some recent research suggests that some cities are behind the curve on employment opportunities.  What is the issue? Is there a valid causation related to education to be found?  It appears that the percentage of residents who have college degrees can forecast the economic success of a locale pretty well.

According to Edward Glaeser, a Harvard economist, metropolitan areas where more than 1/3rd of the population had college degrees (as of 2010) recently had an average unemployment rate of 7.5%, compared with a rate of 10.5% for those areas where less than 1/6th of the population had a college degree1.  The argument is that the latter areas are being left behind in the current economy.

The favored locales include expected economic powerhouses like New YorkBoston, Chicago, and San Francisco, but also hot beds for technology and new startups like Raleigh, Austin, Madison, and the Washington, D.C. area.  Out of favor are older manufacturing centers including Dayton, Youngstown, and Tampa.  A table listing the data for the top 100 metropolitan statistical areas can be viewed here. As you can see from the data spread, the phenomenon is not a Red State/Blue State or North/South issue.

Lessons – if you have a small or young growing company in need of human capital, you have two choices.  If your management team is in place, or you need a long term supply of manual labor, look for those out of favor areas, they will have more of the type of labor that you need.  If you don’t have your brain power in place, or need a workforce heavy with technical skills (engineers, computer science, etc.) head to the in-favor locales, the environment for your high powered skill sets will be better there.  As a bonus, these high percentage areas self-reinforce with a higher quality of life  –  so the long term looks good.  The rich get richer, the not so try to improve slowly or they die off.

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Pensions – Not So Boring Anymore…

In my deep past I wrote a paper for a college economics class.  I recall it was on a solid but boring topic for the time (mid – 70’s), related to pensions and the effect on budgets of mis-forecasting rates of return.  Now this was in an era when interest rates were boring, but soon they would not be so.  In the Seventies the big issue became inflation, or stagflation, which after the ’73 oil shock, started heading towards double digits.  At a time when inflation revolved around 10%, the question was can a pension then earning 9% keep up?

The yield problem, particularly for public sector pensions, has come home to roost in the current era of minimal inflation.  With nominal interest rates near zero, it is hard to achieve a return above 7%.  This is causing political problems for many municipal entities, a problem foreseen several years ago.

Responses have varied, but have come from both the right and left.  With the Tea Party behind him, Wisconsin Governor Scott Walker attacked the unions on collective bargaining rights, going after pay and pensions.  The left has taken up the call, as noted by Democratic advisor David Crane of California in 2010, “I have a special word for my fellow Democrats,” Crane told a public hearing. “One cannot both be a progressive and be opposed to pension reform.”  All this rancor over a bucket of money which has been promised to our public servants (teachers, fire, police, etc.).  But as Crane implied, in the current environment, keeping up with these fixed return obligations is threatening basic services like public schools and social services for the needy, not to mention fire, police, and garbage collection.

All this is being revisited across the country now, as an example New York City faces the prospect of an additional $1.9 billion in annual pension contributions due to a reduction in the assumed rate of return from 8% to 7%.  Its pension contributions currently make up 10% of the total operating budget.

With the majority of American workers now facing retirement with a combination of maybe a 401K yielding 2% and Social Security looking dicey, the public sphere is living in the past.  It is time for them to share the risks of the markets that we all do.  A promise to pay is one thing, a promised return is another.  It is time to put to bed traditional pensions for municipal employees, and the arcane activity of forecasting reasonable returns.

Rob Cannon is a frequent guest contributor at SMBmatters and is a principal at Cannonomics.  He is a virtual CFO for hire.

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