1. 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. CONDITIONS AND PROSPECTS IN THE UPSTATE ECONOMY Richard Deitz, Federal Reserve Bank of New York richard.deitz@ny.frb.org June 25, 2009

2. Employment Trends 1 FEDERAL RESERVE BANK OF NEW YORK Source: U.S. Bureau of Labor Statistics and Moody’s Economy.com U.S. Buffalo Rochester Albany Syracuse Upstate NY 90 95 100 105 110 115 120 125 130 90919293949596979899000102030405060708 Index 1990 = 100 2008

3. Jobs Declining Less Rapidly Upstate Monthly Year-over-Year Percent Change in Employment 2 FEDERAL RESERVE BANK OF NEW YORK Source: U.S. Bureau of Labor Statistics and Moody’s Economy.com U.S. Upstate -5 -4 -3 -2 -1 0 1 2 3 Jan05Jul05Jan06Jul06Jan07Jul07Jan08Jul08Jan09Jul09 May Percent

4. Recession Employment Dynamics Past Three Cycles 3 Source: U.S. Bureau of Labor Statistics and Moody’s Economy.com FEDERAL RESERVE BANK OF NEW YORK U.S. Upstate 95 96 97 98 99 100 101 102 103 Jan90Jul90Jan91Jul91Jan92Jul92Jan93Jul93 U.S. Upstate 95 96 97 98 99 100 101 102 103 Aug99Feb00Aug00Feb01Aug01Feb02Aug02Feb03 U.S. Upstate 95 96 97 98 99 100 101 102 103 Jun05Dec05Jun06Dec06Jun07Dec07Jun08Dec08 Jan94 Aug03 Jun09 May Index (Onset of Recession = 100) Note: Shading indicates NBER recession

5. Job Growth by Sector Year-to-Date 2009 (May), Percent Change Education & Health Services Government Professional & Business Services Financial Activities Retail Trade Wholesale Trade Information Leisure & Hospitality Manufacturing 1.5 2.7 0.6 1.0 0.4 -3.5 -0.2 -1.2 -3.0 -1.1 -2.7 -2.5 -2.8 -3.4 -2.6 -3.9 -6.4 Upstate U.S. 4 Source: U.S. Bureau of Labor Statistics and Moody’s Economy.com FEDERAL RESERVE BANK OF NEW YORK

6. Unemployment Rising Rapidly 5 FEDERAL RESERVE BANK OF NEW YORK Source: U.S. Bureau of Labor Statistics and Moody’s Economy.com U.S. Buffalo Albany 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Jan00Jul00Jan01Jul01Jan02Jul02Jan03Jul03Jan04Jul04Jan05Jul05Jan06Jul06Jan07Jul07Jan08Jul08Jan09Jul09 Percent Apr May 9.4% Unemployment April 2009 U.S. 8.9% (9.4% May) Buffalo8.5% Syracuse7.9% Rochester7.5% Albany6.8%

7. What Makes This Recession Different?

8. No Housing Boom. No Housing Bust. Index of Existing Single-Family Home Sales 7 Source: National Association of Realtors; Moody’s Economy.com Estimates FEDERAL RESERVE BANK OF NEW YORK U.S. Buffalo Rochester Albany Syracuse Upstate NY 80 100 120 140 160 180 200 9394959697989900010203040506070809 Index 1993 = 100 2008

9. Housing Prices Average Annual Percent Change U.S. Buffalo Rochester Cleveland Albany 1995 to 2000 2000 to 2005 4.7% 8.3% 2.3% -3.3%.6% 5.1% 3.3% 1.3% 4.1% 2.2% 1.6% 1.0% 10.4% 4.8% -0.3% 3.9% 3.8% -1.3% -1.5% 2005 to 2008 2009Q1 8 Source: Federal Housing Finance Agency and Moody’s Economy.com FEDERAL RESERVE BANK OF NEW YORK 3.2% #4 4 th Highest Growth in the Country

10. Summary Upstate New York, like many mid-sized economies, has fared reasonably well during the recession Risks going forward:  Renewed manufacturing weakness  Public sector job loss, particularly in Albany  State and local budget cuts Growth likely to remain slow in upstate New York; human capital is very important to the region’s long-term prospects 9 FEDERAL RESERVE BANK OF NEW YORK

11. The Importance of Regional Human Capital and the Higher Education Industry

12. Why is Human Capital Important to a Region? Higher levels of human capital increase the productivity of individuals Individuals with the same levels of human capital are more productive in regions where their peers have more human capital Higher levels of human capital are associated with faster regional growth  Between 1980 & 2000, metro areas where: -less than 10% had college degrees, population growth averaged 13% -more than 25% had college degrees, population growth averaged 45% 11 FEDERAL RESERVE BANK OF NEW YORK

13. 12 Source: 2006 American Community Survey Boston (45%) Rochester (32%) Buffalo (28%) Flint (15%) Percent (25+) with Bachelor’s Degree or Higher 60% 50% 40% 30% 20% 10% 0% MSA Rank Albany (35%) Syracuse (29%) FEDERAL RESERVE BANK OF NEW YORK Variation in Human Capital Stock Distribution of Human Capital Stock in U.S. Metro Areas, 2006 Percent

14. Source: U.S. Bureau of Economic Analysis, U.S. Bureau of the Census and Moody’s Economy.com Note: The BEA and Census data are both for the 2007 year. 13 FEDERAL RESERVE BANK OF NEW YORK Higher Levels of Education Associated with Greater Wealth Correlation Between Human Capital and Income Per Capita Per Capita Personal Income College Degree (% of 25+) Buffalo Syracuse New York City Boston Albany Rochester El Centro CA Boulder CO

15. The Higher Education Industry

16. 15 Source: IPEDS Boston Dallas San Francisco Minneapolis Los Angeles Chicago Washington D.C. Philadelphia San Diego 59,032 30,603 31,604 31,315 89,311 68,321 48,525 45,986 25,905 New York 143,971 Rank Metro Area Degrees 4. 9. 7. 8. 2. 3. 5. 6. 10. 1. Syracuse Glens Falls Albany Rochester Binghamton Utica 9,736 0 12,771 11,836 3,507 1,658 Buffalo 13,927 51. 267. 32. 36. 123. 176. 26. Rank Metro Area Degrees Jamestown1,240193. 54,675Upstate Metro Areas FEDERAL RESERVE BANK OF NEW YORK Top Producers of Human Capital Degrees Produced (BA or higher), Top 10 and Upstate NY, 2006

17. 16 Human Capital Production Rate State College PA Bloomington IL Bryan-College Station TX Iowa City IA Gainesville FL Athens GA Austin TX Wilmington Sante Fe NM Syracuse New York Albany Rochester Buffalo Net Importers Albany New York Rochester -15 -10 -5 0 5 10 15 Change in Human Capital Stock Rate 80 70 60 50 40 30 20 10 Glens Falls Net Exporters 90 0 FEDERAL RESERVE BANK OF NEW YORK Human Capital is Highly Mobile Regional Flow of Human Capital, 2000 - 2006 Percent Source: Unpublished Paper, “The Higher Education Industry and the Stock of Local Human Capital,” Jaison Abel and Richard Deitz, Federal Reserve Bank of New York

18. 17 Local Human Capital Production National Human Capital Production National Labor Market Local Labor Market Local Human Capital Stock Local Grads Non Local Grads Labor Supply Labor Demand Stayers In-Migrants Out-Migrants External Knowledge Spillovers Local human capital stock reflects local labor market structure FEDERAL RESERVE BANK OF NEW YORK How Does the Higher Education Industry Raise Human Capital Levels in a Region?

19. 18 % with BA 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 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 High Human Capital Low Human Capital FEDERAL RESERVE BANK OF NEW YORK What are the High Human Capital Occupations?

20. 19 -10.0%-5.0%0.0%5.0%10.0%15.0%20.0% Production Business & Financial Operations Legal Management Office and Administrative Support Building & Grounds Maintenance Community & Social Services Personal Care & Services Food Preparation & Serving Arts & Entertainment Computer & Math Education (Teaching) & Library Life, Physical, & Social Science Healthcare Practitioner & Technical Architecture & Engineering Transportation & Material Moving Protective Services Installation, Maintenance, & Repair Construction & Extraction Sales Healthcare Support FEDERAL RESERVE BANK OF NEW YORK Change in the Share of Jobs in Each Occupation Group (Percent) Greater Higher Education Activity Associated With More High Human Capital Jobs Source: Unpublished Paper, “The Higher Education Industry and the Stock of Local Human Capital,” Jaison Abel and Richard Deitz, Federal Reserve Bank of New York An Increase in Higher Education Activity Leads to...

21. 20 -15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0% Production Construction & Extraction Food Preparation & Serving Transportation & Material Moving Education (Teaching) & Library Sales Office and Administrative Support Protective Services Installation, Maintenance, & Repair Healthcare Practitioner & Technical Building & Grounds Maintenance Healthcare Support Personal Care & Services Community & Social Services Business & Financial Operations Arts & Entertainment Life, Physical, & Social Science Management Legal Architecture & Engineering Computer & Math FEDERAL RESERVE BANK OF NEW YORK Change in the Share of Jobs in Each Occupation Group (Percent) Source: Unpublished Paper, “The Higher Education Industry and the Stock of Local Human Capital,” Jaison Abel and Richard Deitz, Federal Reserve Bank of New York Producing More Majors Has Largest Impact in Technical Fields Producing More Majors in Each of These Fields Leads to...

22. 21 - 20.0% - 10.0%0.0%10.0%20.0%30.0%40.0% Production Healthcare Support Food Preparation & Serving Community & Social Services Transportation & Material Moving Healthcare Practitioner & Technical Installation, Maintenance, & Repair Sales Education (Teaching) & Library Construction & Extraction Building & Grounds Maintenance Personal Care & Services Office and Administrative Support Protective Services Management Arts & Entertainment Architecture & Engineering Legal Business & Financial Operations Life, Physical, & Social Science Computer & Math FEDERAL RESERVE BANK OF NEW YORK Higher Research Expenditures Associated With Increase In Technical Fields Change in the Share of Jobs in Each Occupation Group (Percent) Source: Unpublished Paper, “The Higher Education Industry and the Stock of Local Human Capital,” Jaison Abel and Richard Deitz, Federal Reserve Bank of New York Higher Research and Development Spending Leads to...

23. Our Research Findings Suggest: In contrast to conventional wisdom, locally produced graduates are not a likely source of differences in human capital levels across regions The positive relationship between higher education activity and a region’s human capital stock is driven more by demand (via knowledge spillovers) than supply (via local graduates) The presence of colleges and universities tends to tilt a metro area’s occupational structure toward higher human capital activities Knowledge created at universities and spread into the local economy fosters development in technical sectors 22 FEDERAL RESERVE BANK OF NEW YORK

24. What These Results Imply for Policy Generic supply-side retention strategies unlikely to be effective at increasing local human capital levels Targeting the demand side of labor market can increase human capital stock through both attraction and retention Higher education research activity, particularly in technical fields, provides a promising pathway to increase local human capital and foster long-term economic development 23 FEDERAL RESERVE BANK OF NEW YORK