Opinion and Economic Analysis and Banking & Finance

HICKS: State both good, bad in human-capital game

June 5, 2010

Like most economists, when I think about the economy, my mind is absorbed by equations or graphs. Fortunately (for me), I was married before becoming an economist, because this skill is not widely viewed as charming. But, it is useful. For example, a simple model can tell us a lot about the importance of education in a region’s economic well-being.

Suppose we lived in a perfectly flat world that is a vast, featureless plain of identical square counties. Each county is inhabited by a group of people whose human capital (education, skills, health, etc.) is distributed across the spectrum, from low to high, and the share of each group is the same in each county. So each place is essentially identical, and though people within each place are different, each county’s population is the same as in every other county. For some reason, this makes me think of Nebraska or Finland.

Now, randomly assign each county a different industry—mining, fishing, manufacturing, finance or retail—and see what happens.

In counties that got high-skilled industries like manufacturing or finance, there will not be enough workers. Those industries would like to go to places where there are enough skilled workers, but everywhere is exactly the same. So, the high-skilled workers in other counties, who are dissatisfied with low-skilled jobs at home, leave for high-skilled industries elsewhere. Thus, cities are born. Places with the bad luck to have low-skill industries end up with lower level of human capital, the first indication of brain drain.

Imagine another scenario. Instead of randomly plopping industries into each county, we’ll give each place an identical mix of industries with enough jobs for each worker. Then, we will randomly shock each county with different levels of unemployment at different times. Small and temporary differences in unemployment have no effect, but when one place has high or persistent unemployment, people move elsewhere to find jobs. But here’s the trick. We know from a long history, that the people who move for economic reasons have, on average, higher levels of human capital than those who stay. (Don’t believe me? Look at Ireland in the 20th century.)

In both cases, migration causes brain drain and exacerbates the human capital differences between regions. The effects are long-lasting due to intergenerational persistence of human capital. So, what to do?

One tool is to attract high-productivity businesses to your region. In my judgment, Indiana does this well and is poised for a generation of successful business attraction. Sadly, firm relocation accounts for a small fraction of new jobs. A necessary complement is something we do less well: ruthlessly target human-capital improvement. We need all-day kindergarten and hugely expanded early-childhood education. K-12 schooling has to get kids ready for post-secondary education and training. We are not doing this well enough. We must. If we don’t, that pesky economic model provides grim warning for the long-term prospects here in Indiana.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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