Human Capital, Local Economic Development, and the Importance of Colleges and Universities Jaison R. Abel Cornell ILR School High Road Program Buffalo, NY – July 15, 2016 The views expressed here are those of the presenter and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.

Questions What is human capital? Why is human capital important to regional economies? How can regions increase their human capital? FEDERAL RESERVE BANK OF NEW YORK 1

What is Human Capital?

Human Capital The knowledge and skills people use in their jobs to produce goods and services Closely tied to educational attainment FEDERAL RESERVE BANK OF NEW YORK 3

Why is Human Capital Important to Regional Economies?

Human Capital and Economic Activity Correlation Between Education and GDP Per Capita $100,000 $90,000 $80,000 $70,000 New York Boston $60,000 Philadelphia Pittsburgh GDP Per Capita, 2008 $50,000 $40,000 Erie $30,000 Buffalo Flint One percentage point increase in college attainment associated with 2 percent increase in economic activity $20,000 $10,000 $0 0% 10% 20% 30% 40% 50% 60% 70% Human Capital Stock (Share of Population 25+ With a College Degree), 2006 FEDERAL RESERVE BANK OF NEW YORK Source: U.S. Bureau of Economic Analysis, U.S. Bureau of the Census and Moody’s Economy.com 5

Why Does this Relationship Hold? than the sum of its parts! Highly skilled individuals earn higher wages: High human capital regions have a larger collection of such workers Spillover effect: Everyone receives a productivity benefit from being around workers with higher skills, leading to higher wages for all The whole is greater than the sum of its parts! FEDERAL RESERVE BANK OF NEW YORK 6

Other Benefits Regions with higher levels of human capital also tend to have: More innovation Faster population and employment growth More rapid “reinvention” FEDERAL RESERVE BANK OF NEW YORK 7

How Can Regions Increase Their Human Capital?

Two Ways Colleges and Universities Can Help to Raise Local Human Capital Levels Degree Production: increasing the supply of human capital Educate the local population and draw students into the region, some of whom stay after graduation  Limited ability to keep local graduates not tied to region Academic Research: raising the demand for human capital Local businesses can utilize the skills, knowledge, and technology developed at academic institutions, which attracts start ups and expands high human capital economic activities  Importance of physical proximity provides anchor to the region FEDERAL RESERVE BANK OF NEW YORK 9

Correlation Between Degree Production and Human Capital The Supply Side Correlation Between Degree Production and Human Capital 70% 60% 50% 40% 30% 20% 10% 0% Ithaca Boston New York Human Capital Stock Pittsburgh Philadelphia Buffalo Erie Doubling of degree production associated with 3 to 7 percent increase in human capital Flint 0 2 4 6 8 10 12 14 16 Degree Production Rate FEDERAL RESERVE BANK OF NEW YORK Source: IPEDS, U.S. Bureau of the Census 10

Correlation Between Research Intensity and Human Capital The Demand Side Correlation Between Research Intensity and Human Capital 70% 60% 50% 40% 30% 20% 10% 0% Ithaca Boston New York Human Capital Stock Philadelphia Pittsburgh Buffalo Erie Doubling of research intensity associated with 4 to 9 percent increase in human capital Flint 0 10 20 30 40 50 60 Research Intensity FEDERAL RESERVE BANK OF NEW YORK Source: IPEDS, NSF, U.S. Bureau of the Census 11

Type of Human Capital How Do Colleges and Universities Affect a Region’s Mix of Economic Activities? Occupational Structure of the Labor Force % with BA Life, Physical, and Social Science Legal Education, Training and Library Community and Social Services Computer and Mathematical Architecture and Engineering Business and Financial Operations Healthcare Practitioners and Technicians Arts, Design, Entertainment, Sports, & Media Management Sales and Related Protective Service Office and Administrative Support Personal Care and Service Healthcare Support Installation, Maintenance, and Repair Production Transportation and Material Moving Food Preparation and Serving Related Construction and Extraction Building & Grounds Cleaning, Maintenance TOTAL AMONG ALL OCCUPATIONS 76.3 76.1 73.5 66.9 63.2 60.2 58.8 54.4 51.3 48.8 23.6 19.4 15.5 12.3 8.8 6.8 6.2 6.1 5.9 5.4 5.1 26.4 High Human Capital Low Human Capital FEDERAL RESERVE BANK OF NEW YORK Source: U.S. Bureau of the Census 12

High vs. Low Human Capital Occupations Change in Composition of Local Labor Market High Human Capital 27.1 Low Human Capital 72.9 Average Metro Area FEDERAL RESERVE BANK OF NEW YORK 13

High vs. Low Human Capital Occupations Change in Composition of Local Labor Market High Human Capital 27.8 2.4% Increase In High Human Capital Occupations Low Human Capital 72.2 One Standard Deviation Increase in Degree Production FEDERAL RESERVE BANK OF NEW YORK 14

High vs. Low Human Capital Occupations Change in Composition of Local Labor Market High Human Capital 28.5 5.3% Increase In High Human Capital Occupations Low Human Capital 71.5 One Standard Deviation Increase in Research Intensity FEDERAL RESERVE BANK OF NEW YORK 15

High vs. Low Human Capital Occupations Change in Composition of Local Labor Market High Human Capital 29.2 7.7% Increase In High Human Capital Occupations Low Human Capital 70.8 One Standard Deviation Increase in Degree Production and Research Intensity FEDERAL RESERVE BANK OF NEW YORK 16

Summary The amount of human capital in a region is a key ingredient to its economic success Colleges and universities can help build local human capital stocks by increasing both the supply of and demand for skill The importance of human capital to regional economies is only likely to increase as the U.S. economy continues to shift away from manufacturing and the distribution of goods to the production of ideas FEDERAL RESERVE BANK OF NEW YORK 17

Human Capital, Local Economic Development, and the Importance of Colleges and Universities Jaison R. Abel Cornell ILR School High Road Program Buffalo, NY – July 15, 2016 The views expressed here are those of the presenter and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.