Preparing a Workforce for the Next Arizona Economy McKinsey & Company November 17, 2011 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

The US has lost 3 to 5 times as many jobs as those lost in any other post-war recession Millions of jobs lost from peak prior to recession 1990-91 1981-82 2001-2010 5X 3X SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

The US is a long way from recovering the lost jobs Millions of jobs 2007-2010 2010-2011 Net jobs lost -6.7 2.1 -8.8 SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

Unemployment rates vary by degree level Percent College graduates Young college graduates Young high school graduates Young people without a high school diploma 1 Total employment equals the number all employed workers in the economy, including full-time, part-time, and self-employed 2 Net employment change as a share of total employment in the base year (e.g., 1990 for 1990s) SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 3

In the long term, the cost of unemployment is in the trillions of dollars USD billions 4,500 Lost lifetime income for today’s unemployed 2,500 Lost output due to unemployment 400 UI pay- outs SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis

A quarter of Americans surveyed “feel the American dream is not really alive today” Percent of surveyed 1986 2003 2011

A new job market?

The period between GDP recovery and employment recovery has been increasing Gap between GDP returning to pre-recession peak and employment returning to pre-recession peak Months “Jobless recoveries” ? 8 Year in which the recession began 1948 1953 1957 1960 1969 1973 1981 1990 2001 20081 1 GDP returned to its pre-recession peak in December 2010 SOURCE: U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; McKinsey Global Institute analysis 7

In contrast to the past, firms today are more likely to lay off workers during a recession than suffer declines in productivity Contribution to change in real GDP during recessions Compounded quarterly growth rate,1 peak to trough (%) 100% = -0.65 -0.53 -0.45 -0.27 -0.70 Employment loss 32 51 75 98 98 Productivity loss 2 2 1973–75 1981–82 1990–91 2001 2007–09 1 Calculated from the onset of recession to trough of GDP. Calculations use real GDP estimate (2005 chained dollars) and total employment (full time and part time) for workers ages 16 and over. SOURCE: US Bureau of Labor Statistics; US Bureau of Economic Analysis; McKinsey Global Institute analysis 8 8

The number of new businesses has declined dramatically in this recession Change in number of private-sector establishments launched every year March 1993 to March 20101, thousands 667 -23% 656 634 631 633 627 612 609 603 548 505 The US would have 1.8 million more jobs had the 2007 rate of start-ups continued 2000 01 02 03 04 05 06 07 08 09 2010 1 Calculated using U.S. Bureau of Labor Statistics Business Employment Dynamics data set. The annual number indicates the number of businesses less than 1 year old that were in existence in March of that year. SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 9

Low-skill occupations had the highest job losses in all sectors <1,000 job change >100,000 job loss 1,000-10,000 job gain 10,000-100,000 job loss >10,000 job gain Annual net employment change from 2007–20091 Thousands of jobs 1,000-10,000 job loss Most significant source of occupational training On-the-job training Work experience Vocational award Associate degree Bachelor’s degree Bachelor’s plus work experience Graduate degree Manufacturing Administrative & support services Retail Construction Finance and insurance Transportation and warehousing Business services Wholesale Real estate Accommodation & food services Educational services Government Health care Industry 1 Calculated using U.S. Bureau of Labor Statistics Occupational Employment statistics data, which do not include farm, self-employed, or new entrants to the labor market SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 10

The unemployment rate varies widely across the country >10% 9–10% 8–9% 7–8% 6–7% 5–6% <5% Unemployment rate, December 2010 % unemployed SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 11

Mobility in the United States has been declining since 1990 and is at a 50-year low Annual domestic migration rate, 1948–2009 % of residents who have changed addresses during the past year Long-run average = 18% In the 1950s and 1960s, 1 in 5 Americans changed residences every year . . . . . . but that figure has now dropped to 1 in 10 1950 1960 19701 1980 1990 2000 2009 1 Data from 1970–1981 are interpolated due to data constraints. SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 12

Cyclical | Structural | Institutional Are we asking the right question? Cyclical | Structural | Institutional

How many jobs does the US economy need to produce? MCKINSEY CONFIDENTIAL AND PROPRIETARY How many jobs does the US economy need to produce? Employment needed to achieve 5% unemployment rate by 2020 Millions Employment In 20101 139.1 Replace lost jobs 7.1 21 million Net new entrants to workforce2 14.3 Full employment in 20201 160.4 1 Total employment, including self-employed and part-time workers 2 New entrants include student inflows, net immigration inflows, return of discouraged workers, and exits of retirees SOURCE: Bureau of Labor Statistics’ Current Population Survey; McKinsey Global Institute analysis

Is it possible to produce 21 million jobs? Real GDP compound annual growth rate Percent Net employment change Increase in total employment2 Percent Total employment1 Millions 1950s 6.9 12 3.5 1960s 12.9 20 4.2 1970s 20.6 26 3.2 1980s 19.5 20 3.2 1990s 18.1 15 3.4 2000-07 9.2 7 2.4 2 1.7 2000-10 2.2 1 Total employment equals the number all employed workers in the economy, including full-time, part-time, and self-employed 2 Net employment change as a share of total employment in the base year (e.g., 1990 for 1990s) SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 15

Has automation and information technology permanently reduced the need for workers? Has globalization permanently priced US workers out of the global labor market? Does growth in non-traded sectors come at the expense of traded sectors?

How must institutions change?

How must schools, colleges and universities change what and how they teach? How must businesses change the way they recruit and train? How should government change its priorities and the way it operates?

Skill Share Spark Speed

Ensure more Americans acquire the skills that match employers needs Demand vs. supply – 2020 projections Millions Difference 168.9 163.3 +5.9 No high school diploma 13.6 19.5 High school graduate 43.3 44.1 +0.8 Some college, no degree 30.7 29.1 -1.6 1.9 Associate degree 17.7 19.6 Bachelor’s degree or higher 58.0 -1.5 56.5 Demand1 Supply 1 Labor demand from MGI high job-growth scenario SOURCE: U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis 20

Help US workers to win market share Potential visitors lost Actual overseas visitors Number of overseas visitors in the US Millions 36 34 34 31 29 26 27 24 24 23 2 26 24 25 24 22 22 22 19 20 18 From 2000 to 2009, international long-haul travel increased by 31% Had the US simply kept pace with this growth (maintaining market share), an additional 68.3 million visitors would have entered the US over the past decade With average spending of over $3,000 per international visitor, these lost visitors represent $214 billion in lost direct revenue over decade and ~500,000 US jobs 2000 01 02 03 04 05 06 07 08 09 SOURCE: WTTC

Restore the new business growth engine Entire economy without startups Entire economy Net job creation in US establishments Thousands of employees 77 79 81 83 85 87 91 93 95 97 99 01 03 05 07 09 1 Startups refer to new businesses, i.e. firms less than 1 year old SOURCE: BDS, Kauffman

46 environ-mental reviews Speed up processes US has a lengthy and complicated set of regulatory/ permitting requirements This lack of speed can act as a major competitive disadvantage EPA “It is much easier to site and build a factory in China than it is in the US. For a manufacturer, two year advantage in building a plant may be everything” A power plant built in Wisconsin required 46 environment approvals US Army Corp of Engineers FAA 46 environ-mental reviews FERC Six state agencies “The real threat to our industry is the slow, cumbersome, and out-of-date system that we use to manage our” - Executive of Corporation State historical society City, country, and others Other SOURCE: RFF “Reforming Permitting”; expert interviews

Skill Share Spark Speed

Why can't students, workers, and employers have as useful information as marketers and investors?

Why shouldn't what you learn on the job be worth as much as what you learn in school?

How can we turn the unemployment system into a re-employment system?

Incentives and support to innovate Make it easier to invest in the US Prioritize a high skill, high share, high spark, and high speed economy Joint commitment to solving these issues

Thank you