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Finding The Keys

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University of Kentucky researchers identify opportunities for greater prosperity

 

In 1939, Kentucky ranked 44th out of 48 states in per capita personal income.  In 1970, Kentucky ranked 44th out of 50 states in per capita personal income, and in 2004, Kentucky was still the sixth-poorest state in the union with average earnings of $27,151 compared to the average for the entire country of $33,041. On top of this already low level of income, Kentucky has experienced fairly slow growth in output in recent years. Between 1997 and 2004, Kentucky had an average annual growth in real gross state product (GSP) of 1.6 percent, ranking 43rd in GSP growth.

Without increasing the speed at which income is growing in the commonwealth, it is unlikely Kentucky will move from the bottom of the income distribution in the near future.

In contrast to Kentucky’s relatively stagnant growth, many of Kentucky’s neighbors, especially to the South, have experienced relatively rapid growth in average earnings in recent years.

Figure 1 shows that in 1969, Georgia, Kentucky, North Carolina and Tennessee all had average earnings that were 77 to 82 percent of the average earnings in the U.S., while Alabama had average earnings that were approximately 70 percent of the national average. By 2004, Kentucky’s average earnings remained at approximately 80 percent of the national average while average earnings in Georgia, North Carolina and Tennessee had grown to 90 percent of the national average and average earnings in Alabama had grown to over 85 percent of the national average. In other words, relative average earnings in Kentucky have been flat for the past 40 years, while average earnings in a number of Southern states similar to Kentucky have experienced fairly rapid relative growth since 1969.

One obvious question is, “Are there identifiable factors that can explain why Kentucky remains mired at the bottom of the income distribution?” A number of factors have been offered to explain Kentucky’s low income.

One of the more prominent explanations is the historically low level of education in Kentucky. Clearly this was part of the motivation behind the Kentucky Education Reform Act of 1990 (KERA) and the Postsecondary Education Reform Act of 1997 (known as HB1). The education explanation appears credible since in 2004 Kentucky ranked 49th in the percent of the adult population with a high school degree and 47th in the percent of adults with a college degree.

Other explanations focus on Kentucky’s relatively low concentration of “high technology” employment as a contributor to its low ranking. Again, this argument is bolstered by a recent report from the Milken Institute in which Kentucky ranks 48th in the institute’s state technology and science index.

The overall focus of Kentucky’s economy has historically been concentrated in manufacturing, mining and agriculture, and this may explain the state’s poor performance. More recently, policy makers have been examining what is perceived as the poor business environment in Kentucky and initiated efforts to lower taxes on business and to make Kentucky a “right-to-work” state. Arguments can be made supporting each as a possible reason for the poor performance of the economy, and it seems likely that each factor plays some role. However, before policies to address the problem of low income in the state are developed, it is important to determine which factors are the most important in hindering Kentucky’s growth.

The UK research focuses on seven possible explanations for Kentucky’s low level of income and differences between Kentucky and other states in:

(1) the stock of knowledge (2) the business climate and taxes (3) state industrial structure (4) state infrastructure (5) the size of the government sector and the role of transfer payments (6) demographic changes and (7) other observed or unobserved factors related to income growth.

The analysis examines variables that may account for why some states have grown faster than Kentucky between 1969 and 2004. In the analysis, each state is treated as a separate economy or an independent country. The study focuses on the period 1969-2004 because Kentucky, prior to 1969 (along with other poor states), appeared to be catching up with wealthier states.  The study documents the ways in which the average Kentucky resident has lost ground relative to residents in other states in the Southeast region and relative to residents in other states in the U.S. over this period.

Figure 2shows that while all of the five Southern states have levels below the U.S. average, North Carolina, Georgia and, to a lesser extent, Tennessee all experienced substantial growth in the average number of patents per resident, particularly in the 1990s. Clearly for these states, the growth in innovative activity fueled a significant portion of their growth in income over this period. In contrast, Kentucky has remained a state with very little innovative activity, experiencing almost no growth in patents during the 1990s.

Figure 3presents the percentage of adult residents age 25 years and older with at least a four-year college degree in five states and an average across all states. This figure shows that at the start of the period evaluated, four of the five states had approximately the same share of adults with a college degree. Tennessee had a slightly lower percentage than the other states and all five had a smaller share of educated adults than the typical state.

Over this period, all states have seen a growth in the percentage of adults with a college degree; however, Kentucky has experienced much slower growth of college-educated residents than the other Southern states. By 2004, Kentucky has the lowest share of college graduates compared to Alabama, Georgia, North Carolina and Tennessee, which have all experienced much faster growth. The percentage of college-educated adults is a factor that plays a significant role in explaining the more rapid economic development in these states.

Figure 4shows the pattern in urbanization. Georgia and North Carolina have had sizable increases in urbanization since 1990 with Georgia surpassing the national average and North Carolina moving from the least urban to the second most urban and tied with Tennessee. Kentucky’s urbanization has increased slightly over the period, making it the fourth most urban of the five states. Alabama has actually declined substantially since 1990, becoming the least urban state of the group. Kentucky’s larger rural population is important because workers in rural areas are less productive and, therefore, have lower incomes than workers in urban areas.

Figure 5shows in-migration trends over a 10-year period.  Georgia had the highest in-migration throughout the late 20th century. North Carolina also experienced high levels of in-migration, well above the national average. Tennessee had a substantial increase in in-migration during that period. Kentucky had a slight increase in in-migration in the 1990s, surpassing Alabama but still remaining well below the national average. Clearly, Georgia, North Carolina and Tennessee have been more effective in attracting new residents to their states, and this helps explain why these states have grown faster than Kentucky over this period.

Kentucky has lower levels of college graduates (Figure 3) and in-migrants (Figure 5) than other states. Figure 9b shows education levels for individuals moving into a state (in-migrants) age 25 years old and older. In every state, people moving into the state are more educated than the people living in the state. This result is to be expected since more-educated workers are more mobile.

Figures 8a and 8bshow average earnings for college and high school graduates age 25 and older. Comparisons of Figures 8a and 8b show that college graduates earn more than high school graduates and that this difference has widened over this period.

Because Kentucky has a lower proportion of college graduates than the other states, this widening gap puts Kentucky at a greater disadvantage in 2004 than it did in 1970. Thus, compared to their Southern neighbors, Kentuckians have both a lower average education as well as lower earnings for each educational level.

Figures 10a and 10bshow Kentucky (with lower levels of education) has lower earnings among both its in-migrants and its long-term (non-mover) residents than the other four states.

As cities grow and expand, the definition of urban changes over time. To avoid having an area change its status, each county in a state is identified as either urban or rural based on a 1974 definition of urban areas. Using county-level data from the Bureau of Economic Analysis’ Regional Economic Information System (REIS), average earnings for urban and rural areas of Kentucky and its four comparison states were calculated.

Figures 11 and 12 show the percentage of new residents (in-migrants) locating in an urban area by state and the average earnings in the urban part of each state relative to average earnings in all urban areas in the U.S.  With the exception of Alabama, the growth of earnings in urban areas is very similar in each state. In 1969, incomes in Kentucky and Tennessee were approximately 85 percent of the earnings in all urban areas in the U.S., while incomes in North Carolina and Georgia were close to 95 percent of the earnings in all urban areas.

By 2004, the earnings in Georgia, North Carolina and Tennessee were equal to the earnings in urban areas in the rest of the U.S., while the earnings in urban areas in Kentucky were 98 percent of those in all urban areas in the U.S. Thus, the historically urban areas of Kentucky such as Lexington, Louisville and Northern Kentucky have earnings approximately equal to urban areas in our comparison states and have actually experienced faster growth than the typical urban area in the U.S.

Conclusions

Four factors were found to be important determinants of state growth. Changes in these factors in Kentucky were compared with the changes in the four comparison states: Alabama, Georgia, North Carolina and Tennessee. Relative to Kentucky, the comparison states experienced faster growth in the average number of patents per resident, the percent of adults in the state with a four-year college degree, the percent of the population living in an urban area, and the percent of residents who have recently moved into the state. Faster growth in these factors largely accounts for the faster income growth in the comparison states.

While workers with a college degree receive higher earnings in all states, college graduates in Kentucky receive lower earnings than college graduates in any of the four comparison states. In addition, new residents who in-migrate to a state tend to be more educated and receive higher earnings than people who have lived in the state for a longer period. In-migrants to Kentucky tend to be less educated, receive lower earnings and more likely to relocate in a rural area than people moving into comparison states.

Finally, the slow growth in income in Kentucky is almost exclusively due to the slow growth in income in the rural areas of Kentucky. When growth in income in urban areas in the five states is compared, the growth in the urban areas in Kentucky is quite similar to the income growth in the urban areas of Georgia, North Carolina and Tennessee and is much faster than the income growth in the urban areas of Alabama. The problem is that a much smaller portion of the Kentucky population lives in urban areas compared to these other states, so a much smaller portion of the population in Kentucky has participated in the growth in income in the urban areas.

A copy of the full report with footnotes may be viewed and downloaded at
http://gatton.uky.edu/cber/Downloads/CBER_Econ_Develop_Report_final_jan2008.pdf

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