Better School Performance Needed to Grow the Economy

The recession has taken a huge toll on the national and regional economy over the past year. Many of the tens of thousands of jobs that have been lost won’t be coming back, and when job openings do appear, the competition for them will be more intense than ever.

Unfortunately, the Pittsburgh Region isn’t doing well enough in preparing its children to succeed in an increasingly competitive, knowledge-based economy. More than 30% of the 11th graders in the 10-county region can’t read adequately, and over 40% can’t do math properly. In other words, 1 out of every 3 high school graduates in southwestern Pennsylvania isn’t proficient in the most basic skills.

We wouldn’t expect a business to survive if one-third of its products were defective. How can we accept the fact that a third of our public schools’ graduates don’t have the skills the schools are supposed to teach them?

If the percentages don’t frighten you, the numbers should: our region’s schools are graduating over 11,000 students every year who don’t have the minimum skills needed to compete in the economy. Over the past four years, more than 40,000 southwestern Pennsylvania teenagers have entered the workforce without an adequate ability to read, do math, or both.

What’s worse, school performance in the region isn’t improving. There was essentially no change in 11th grade math and reading proficiency rates between 2006 and 2009.

It’s not just a problem with our high schools. The problem starts much earlier. Nearly 1/3 of the fifth graders in our elementary schools can’t read properly either, and nearly 1/4 of them aren’t proficient in math.

You might think that the biggest problems are in the City of Pittsburgh, since media coverage of schools tends to focus almost exclusively on the Pittsburgh Public Schools. But the fact is that 90% of the 11th graders in the region who aren’t meeting proficiency standards are in school districts outside of Pittsburgh, and more than half of them are in schools in the 9 counties outside of Allegheny County. In other words, we can only blame Pittsburgh for 1,000 of the region’s non-proficient graduates each year; the other 10,000 are coming from the other 124 school districts in the region.

If you think poor performance isn’t a problem in your own school district, you’re probably wrong. Only 4 of the 148 high schools in the entire region had 90% or more of their 11th graders proficient in reading, and only 1 had 90% of its 11th graders proficient in mathematics. Proficiency levels in over half of the region’s high schools were worse this year than last year.

If we graded our high schools the way they grade students, only one high school in the entire region would receive an "A," only 7 would receive a "B" (the best of which is CAPA in the Pittsburgh Public Schools), 19 would receive a "C," 33 would receive a "D," 40 would receive an "E," and the remaining 48 would receive an "F." (Click here for a complete list of the high schools in the region and their "grades.")

The problem isn’t lack of money. For example, the Shenango Junior Senior High School in Lawrence County was one of only eight high schools in the region where more than 80% of the 11th graders were proficient in both math and science, yet the school district’s instructional expenses per child in 2007-08 were only $6,200, 13% below the regional average.

The problem also isn’t the difficulties of educating low-income children. Although 79% of the 5th graders in the Propel Charter School in McKeesport were economically disadvantaged last year (one of the highest percentages of any school in the region), 100% of them became proficient in math and 92% achieved proficiency in reading, the second best performance of any elementary school in the region.

The problem is that parent, taxpayers, and businesses aren’t demanding better performance. What can you do?

1. Ask your local school board to publicize both the proficiency ratings for the district’s students and the board’s plans for improving proficiency. (Try going to your school district’s website to find out how it’s performing; you probably won’t find the information, or at least not easily.)

2. Hold the school board accountable for the district’s performance. Your first chance comes this Tuesday, when over 500 school board seats across the region are up for election.

If our region is going to grow in the future, it needs a high quality workforce that can attract and retain businesses. Creating that workforce starts with high-performance schools in every district in the region.

(A shorter version of this post appeared as the Regional Insights column in the Sunday, November 1 Pittsburgh Post-Gazette.)

What's Next, Pittsburgh?

The G-20 Summit is over, and the world finally knows Pittsburgh is no longer the dirty, smoky steel town pictured in the history books. Now it’s time to stop talking about how we recovered from job losses 30 years ago and start talking about how we can accelerate job growth over the next 30 years.


The fact that we’ve lost fewer jobs than most regions during the recession doesn’t mean we’ll grow more jobs than other regions when the recovery begins. In the years following the end of the last recession, the Pittsburgh Region’s economy had the 4th worst job growth among the top 40 regions. In fact, the region never recovered all of the jobs it lost in 2002-2003 before the current recession hit.


As a result, the Pittsburgh Region has fewer jobs now than in 1999, whereas most major regions still have more, even after losing thousands of jobs this year.

The real lesson for our future doesn’t come from the past several decades, but from what happened here a century ago. Pittsburgh was once a place where entrepreneurs came to start companies, find investors, and produce products sold worldwide. Companies like Alcoa, Heinz, PPG, U.S. Steel, and Westinghouse didn’t move here because of economic development recruitment efforts. They were started here by entrepreneurs and they grew to become not only major employers themselves, but to spawn thousands of jobs in supply firms, too. The companies’ decisions about expansion and hiring were made in headquarters located in Pittsburgh, not in other cities.

There’s an important difference between attracting facilities of companies headequartered elsewhere and starting companies that will be headquartered here. The former tend to look better on the economic development scorecard in the short run, because they bring lots of jobs all at once and make bigger newspaper headlines. But the companies founded and headquartered here may be more loyal to their home region when the going gets tough.

For example, in 1996, one of the region’s biggest manufacturing firms, Mine Safety Appliances, experienced a cutback in orders for protective helmets (hard hats), and needed to close one of its plants because of overcapacity. The logical choice was the plant with the highest costs and lowest productivity. At the time, that was the Murrysville plant (just east of Pittsburgh). But thanks to CEO John Ryan's commitment to his and the company's hometown, he gave the Murrysville plant a chance to improve itself before the final decision was made. The workers themselves took on the challenge to improve productivity. Within six months, productivity had jumped from 75% to 86%. As a result of the improvement, Mine Safety closed a plant in Rhode Island rather than the Murrysville plant. The Murrysville plant continued to improve, and by 2000, it was named one of the Best Plants in North America by Industry Week magazine. It might never have had the chance if Mine Safety Appliances had been headquartered somewhere else.

A century ago, our economic assets were natural resources like rivers and minerals. Today, Pittsburgh’s biggest assets are technology and innovation. The transformation of Carnegie Mellon, Pitt, and UPMC over the past three decades into some of the leading centers for research in the world has given our region one of the key ingredients for successful economic development in the future.


But innovations don’t turn into jobs without a second ingredient: the entrepreneurs. Although we have some great entrepreneurs in the region today, we don’t have nearly enough modern-day Andrew Carnegies and George Westinghouses who take big risks and devote themselves to bringing an idea to life. Over time, Pittsburghers came to define success as working for someone else, rather than starting and growing a business. As a result, our region now has some of the lowest rates of entrepreneurship and new business formation in the country.

A third key ingredient is investment capital. No matter how good the idea or talented the entrepreneur, if a startup business can’t get the money it needs to grow, it will be forced to close or move elsewhere. Alcoa, for example, is here today because 120 years ago, inventor Charles Martin Hall couldn’t find capital in his home state of Ohio, but received the $20,000 in seed capital he needed from Alfred E. Hunt and a small group of investors in Pittsburgh. Similarly, many of our rapidly growing technology firms are here today because of the early stage investment they’ve received through individuals and organizations such as Blue Tree Allied Angels and Innovation Works.

Unfortunately, we don’t have nearly enough angel investors in our region to support the levels of entrepreneurship we need for the future. Here again, Pittsburgh is a victim of its own success. Most angel investors in other regions are successful entrepreneurs who have profited from the growth or sale of their companies and are looking to get involved in new entrepreneurial ventures. In contrast, many of the people in Pittsburgh today with the kinds of assets needed to make such investments have experience running large established companies, not entrepreneurial ventures. So organizations like Blue Tree, Innovation Works, and the new Pittsburgh Equity Partners provide mechanisms for individuals, corporations, and foundations in Pittsburgh to support angel investment even if they don’t have the skills or interest to become angel investors themselves. The challenge will be even harder in the year ahead if the state budget (whenever it finally is enacted) includes the 50% cuts in funding for entrepreneurship and technology development programs that have been proposed by the Governor and state legislators.

Although Pittsburghers can be justifiably proud of our high rankings on quality of life, we should be embarrassed that we rank near the bottom on lists of places to start a business. Attracting entrepreneurs and helping them find investors should be a central and visible piece of our region’s economic development strategy. It’s not enough to have our technology-based organizations working on it; it has to be a priority for all of our elected officials and civic leaders, as well as the average citizen.

There is no better time to focus on entrepreneurship than now – there are likely hundreds of potential entrepreneurs among those who’ve lost their jobs here over the past year, and thousands more across the country, as well as dozens of budding entrepreneurs each year at our colleges and universities. Let’s encourage them to start a business here as enthusiastically as we welcomed our G-20 visitors.

(A shorter version of this post was published as the Regional Insights column in the Sunday, October 4, 2009 Pittsburgh Post-Gazette.)

Holding Steady

Jobs held steady in the region in August for the third straight month, giving even greater evidence that the recession has finally bottomed out here. The Pittsburgh Region has lost just over 32,000 jobs in the past year, or about 2.8% of our job base, and there has been essentially no change in those figures from June through August. (Although the total number of jobs in the region decreased by almost 3,000 between July and August, the number of jobs always decreases in August by a similar amount due to seasonal factors. On a seasonally adjusted basis, the number of jobs has been constant throughout the summer.)


The Pittsburgh Region continues to perform better than the U.S. as a whole; while job losses nationwide have slowed dramatically over the past several months, U.S. job losses continued to creep upward by a tenth of a percent per month over the past two months, in contrast to the stability here.


Similarly, the Pittsburgh Region continues to do better than most regions in the country; the rate of job loss here was the 12th lowest among the top 40 regions.

However, this is not true in all sectors. Workers in mining, construction, wholesale and retail trade, information, finance, and professional and business services have been less likely to lose their jobs here than their counterparts in most regions. But workers in manufacturing, higher education, hospitals, leisure and hospitality, and government have been more likely to lose their jobs here than elsewhere.


Wait a minute – we’re losing jobs in higher education and hospitals? Aren’t health care and higher education growth sectors? Not exactly – they’re recession-resistant sectors, which is different. Although jobs in higher education had been growing slightly until earlier this year, that has changed in the last two months, and we had 600 fewer jobs in colleges, universities, and professional schools in August than a year ago; in fact, we were one of the only regions with a significant higher education sector to report job losses. Whether this is a temporary phenomenon remains to be seen.

Similarly, after adding jobs for 17 straight months, hospital employment has declined slightly since June, and we were one of only a few regions to see job losses in hospitals. Ambulatory health care (e.g., doctor’s offices) continued to add jobs in August, as did nursing homes, so on the whole, health care has continued to add jobs, but that doesn’t mean that no one in healthcare has been affected.

Our biggest job losses continue to be in manufacturing, and we continue to lose additional manufacturing jobs every month. As of August, we’ve lost 11,000 manufacturing jobs in the past year, over 11% of the manufacturing jobs that were here a year ago. That’s the 10th biggest loss of manufacturing jobs among the top 40 regions. While that’s only half as bad as Detroit, which has lost 22% of its manufacturing jobs in the past year, it’s twice as bad as Boston, which has lost fewer than 5% of its manufacturing jobs in the past year.

Another group that’s been disproportionately affected here are temporary workers. Employment services businesses have cut 3,400 jobs over the past year, or 17.1% of employment a year ago. That’s the biggest percentage reduction of any sector in the region. Many businesses cut temporary jobs first when a recession hits, so it’s not surprising that we’ve lost jobs in that sector; almost every region in the country has. But it’s not clear why we’ve lost more temporary employment jobs than so many other regions.

Overall, while it’s very good news that total job losses here seem to have come to a halt, there are still problems in many important sectors, particularly manufacturing, that could create ripple effects in the months to come and slow our region’s recovery.

Pittsburgh: The Steel City Transformed

The eyes of the world will be on Pittsburgh this month, and those expecting to see a dirty, smoky steel town will be amazed to see clear skies and people fishing in the rivers while the world’s leaders meet in one of the largest green buildings on the planet. They’ll also likely hear that the region has weathered the recession better than most places in America.

The obvious question will be: How did Pittsburgh do that?

Unfortunately, even many Pittsburghers won’t get the story quite right. They’ll say that Pittsburgh is no longer the Steel City; that manufacturing is gone; that most of our Fortune 500 companies have left; and that the region now has a “service economy.” But the truth is very different.

First of all, we’re still a Steel City. The 10th largest steel company in the world – United States Steel – is not only headquartered in Pittsburgh, it still makes steel here. Allegheny Technologies, one of the top specialty steel makers in the world, has eight manufacturing plants in the region, and several other specialty steel companies have facilities here. As a result, we still have 7,000 steel jobs in the region, and over 12,000 in the primary metals sector.

Manufacturing? Although we lost 100,000 manufacturing jobs in the 1980s, 90,000 are still here, and manufacturing is still the biggest contributor to the region’s income, providing nearly $10 billion of the $75 billion in earnings workers in the region received in 2008. What’s changed in 30 years is how diversified our manufacturing sector is, with cutting-edge companies in life sciences, robotics, information technology, and energy joining leading firms in traditional industries like steel and chemicals.

Fortune 500 companies? After years of hand-wringing about the companies that left, few people have noticed that today, 8 of the Fortune 500 are located in our region, almost as many as in 1980. The City of Pittsburgh has more Fortune 500 headquarters today than all but eight cities in America.

A service economy? Sure, but we’re not talking about barber shops and laundromats. Our economy is being powered by global service businesses like K&L Gates, Reed Smith, and Burt Hill, and by leading financial services firms like PNC and Federated Investors.

But the most dramatic change in the region’s economy in the past 30 years can be summed up in three words – CMU, Pitt, and UPMC. Few remember that in 1980, UPMC didn’t even exist, and Carnegie Mellon and Pitt were merely good regional universities.

Today, UPMC is the one of the largest academic medical centers in the world, and the largest employer in the region with 50,000 employees. A $7 billion corporation, it would be on the Fortune 500 list if it were publicly traded. It’s not just big, it’s global – people from all over the world come to Pittsburgh for cutting-edge treatment, and UPMC now has facilities in several overseas locations.

Today, the University of Pittsburgh has 40% more students, but what’s really different is their higher caliber – half of the freshmen are in the top 10% of their class, more than twice as many as in the mid-90s.

Pitt conducts over $650 million in research each year, a ten-fold increase over 1980, and it ranks 5th in the country in attracting federal health research funding.

Today, Carnegie Mellon University not only has 60% more students, it’s become a global university, with 1/3 of its students coming from other countries, campuses in Australia and Qatar, and programs in Europe and Asia.

More than $300 million in sponsored research is conducted at Carnegie Mellon, a 10-fold increase since 1980.

The nearly one billion dollars in research at CMU, Pitt, and UPMC each year not only attracts some of the best students and faculty in the world to the region, it makes Pittsburgh a hotbed for technology growth. Over 200 companies have been spun out of Carnegie Mellon over the past 30 years, and Pitt research has spawned 42 start-up companies just in the past 5 years.

Thanks to the outstanding leadership of all of these companies and organizations, Pittsburgh has been able to retain many of its historic strengths as well as create the engines of growth for the future. That’s the story world leaders need to hear.

(A variant of this post appeared as the Regional Insights column in the Sunday, September 6, 2009 Pittsburgh Post-Gazette.)

Have We Finally Hit Bottom?

There are growing signs that the recession in the Pittsburgh Region is finally hitting bottom. After four straight months of accelerating job losses between January and May, the rate of job losses in the Pittsburgh Region increased by only one-tenth of a percent in the two months between May and July and total job losses in the region now stand at 32,800, compared to 32,000 in May. (Although the preliminary figures for June that were reported last month showed a slight improvement in jobs between May and June, the revised figures showed that there was actually no net change in the net number of jobs lost in June; the preliminary figures for July show a slight increase in job losses when comparing the July 2008 – July 2009 change to the June 2008 – June 2009 change.)



It’s important to note that while the total number of jobs in the region decreased by almost 15,000 between June and July, the number of jobs always decreases in July by a similar amount due to seasonal factors. In percentage terms, the decrease this year was similar and even slightly less than it has been in each of the past 8 years, which is why the numbers indicate that the rate of job losses has flattened out.


This stabilization is not unique to Pittsburgh. Job losses nationwide also flattened out in July, and 14 of the top 40 regions saw slight reductions in job losses between May and June. On the other hand, 13 regions saw increases in job losses that were 2-8 times as big in percentage terms as what we saw in the Pittsburgh Region. As a result, the overall rate of job loss in the Pittsburgh Region over the past year remains the 12th smallest (i.e., 12th best) among the top 40 regions.


What has not hit bottom in Pittsburgh is our manufacturing job losses. We lost an additional 1,200 manufacturing jobs between May and June – more than 1% of the total manufacturing jobs in the region – and 800 of those jobs were lost in June. That was the fifth biggest increase in loss of manufacturing jobs among the top 40 regions during that period of time. A few regions actually saw small increases in manufacturing jobs over the past two months. The Pittsburgh Region’s manufacturing sector has now lost almost twice as many jobs as any other sector of our economy.

As in previous months, the only sector of our economy that has seen any significant net job growth is health care and social services, which is now 2,900 jobs ahead of last year at this time. The mining sector has also seen a small amount of job growth – 200 jobs – much of which is likely a result of the boom in drilling for gas from the Marcellus Shale.

In addition, however, several sectors of the economy have improved significantly over the past couple of months; although they have many fewer jobs than they did a year ago, the leisure and hospitality sector, construction, and information sector account for fewer job losses now than earlier this year. Job losses in other sectors have continued to worsen slightly, however, including the financial services sector and the professional and business services sector. The biggest losses over the past few months have been in government jobs, particularly public education jobs, but this may be a temporary problem due to the state budget crisis.

So is the worst over? Although there are many positive signs, it’s still too early to say that there won’t be more bad news coming. The continuing losses in manufacturing jobs are particularly troubling, because they may be harbingers of additional job losses in supplier firms in the months ahead and they may slow the recovery in other sectors such as retail. However, the stabilization of the U.S. economy, and positive reports on many other economic indicators here and abroad, give us reason to hope that we may soon be on our way to recovery.

A Hundred Billion Dollar Region

Total personal income in the Pittsburgh Region crossed the $100 Billion mark last year for the first time in the region’s history, according to data released last week by the U.S. Department of Commerce. Personal income here grew by 3.8% between 2007 and 2008, more than the 3.4% growth in the U.S. as a whole, and the 10th biggest rate of growth among the top 40 regions in the country.


These data provide further evidence of the relative strength of the Pittsburgh economy in the midst of the national recession. They’re an important complement to data about job changes in the region, because they give us a sense of how we’re doing (a) in the types of jobs that are growing and declining (even if we lose fewer jobs than other regions, if we lose higher-paying jobs, it could affect families’ spending power more significantly), and (b) in non-wage income, such as interest earnings, health benefits, etc. One of the reasons this recession has been particularly problematic is the combination of a dramatic loss of jobs and a dramatic loss of investment income, but these data tell us that on balance, Pittsburgh was doing better than most places on all of these counts, at least as of last year.

Moreover, as noted in previous posts, our region’s high percentage of seniors helps to keep income growing here through both Social Security payments and Medicare benefits. Although seniors’ Social Security is often referred to as a “fixed income,” the automatic cost-of-living adjustment every year in Social Security makes it more reliable for supporting a household than many jobs or investments have been.


On a per capita basis, Pittsburgh looks even better – it had the 2nd biggest growth in per capita personal income of any of the top 40 regions in the country. Pittsburgh’s per capita income growth is high relative to other regions because the Census estimates that its population (the denominator in per capita income) declined in 2008. However, one needs to be a little cautious about using changes in per capita measures because population estimates become increasingly inaccurate as one gets farther away from the last census year (i.e., 2000). Although Census estimates indicate that our region’s population has continued to decline, labor market data suggest that it may actually be growing given the relative strength of the economy here. We won’t know for sure until after the 2010 Census results are tabulated.

The region with the slowest income growth may surprise you. It’s not Detroit, but Silicon Valley. Although Detroit lost more jobs last year than any other region, many of those workers were receiving unemployment benefits, and so income in the region still increased between 2007 and 2008. On the other hand, entrepreneurs and the employees at startup businesses in Silicon Valley may still be working, but earning a lot less than before. Silicon Valley actually saw its per capita income decrease in 2008, as did Atlanta, Charlotte, Phoenix, and New Orleans.


Although the Pittsburgh Region is doing well, you may also be surprised to learn that our immediate neighbors are doing even better. Whereas per capita income in Pittsburgh increased by 3.9% between 2007 and 2008, it increased by 6.6% in the Weirton-Steubenville area, by 6.2% in the Wheeling area, by 5.5% in Morgantown, and by 4.5% in Johnstown.

The Pittsburgh Region’s relatively high growth in personal income is good news for retailers, arts and cultural facilities, and charities, which rely on the residents of the region to have income to spend or contribute. Although each of these sectors has suffered over the past year, the impacts could have been much greater had we experienced the kinds of reductions in jobs and income that other regions have.

Whether this same success will continue this year remains to be seen. We've seen much greater losses in manufacturing jobs -- our highest-paying sector -- in 2009 than in 2008, but even so, we haven't seen the kinds of losses many other regions have, and we've had continuing growth in our strong health care and higher education sectors.

Parts of Our Region Are Suffering More Than Others

The national recession has taken a severe toll on our region over the past year. As of June, the 7-county Pittsburgh metropolitan area had lost over 31,000 jobs, 2.7% of our employment base, wiping out all of the net job gains the region had made over the previous decade.

There has been some comfort in the fact that as large as our job losses have been, they’ve been smaller than most parts of the country. Detroit has lost 175,000 jobs – more than triple the rate of job loss we’ve seen here. Cleveland has lost 63,000 jobs and Charlotte has lost 54,000, both more than twice as many in percentage terms as our region. As a result, the Pittsburgh Region’s 7.7% (unadjusted) unemployment rate in June was well below the national rate of 9.7%.

Some parts of our region, however, have been suffering much more than others. Between June 2008 and June 2009, the unemployment rate in Armstrong County jumped from 5.6% to 9.7%, the biggest increase in the region, and it’s the only county in the region with unemployment as high as the national rate. The second biggest increase was in Butler County, which went from having the lowest unemployment rate in the region in 2008 (4.6%) to 7.5% in June 2009. At the other end of the spectrum, Allegheny County now has the lowest unemployment rate in the region (7%).


Why is the recession affecting different parts of the region differently? A big reason is that some industries are being impacted more than others, and our counties have different mixes of industries.

For example, over the past year, the biggest loss of jobs in the region as a whole has been in manufacturing. There were 10% fewer manufacturing jobs here in June than a year ago, the 12th biggest drop in manufacturing jobs among the top 40 regions. The majority (60%) of the manufacturing jobs in the region are located outside of Allegheny County. At the end of 2008, manufacturing jobs represented nearly 17% of private sector jobs in Butler County, and between 12-14% of private sector jobs in Armstrong, Beaver, Lawrence, Washington, and Westmoreland Counties, whereas only 6% of the private sector jobs in Allegheny County were in manufacturing. That means the outer counties are being hurt more by the losses of manufacturing jobs than is Allegheny County.

Another industry that’s been hit hard in the past year in our region is leisure and hospitality. Here, the geographic pattern is the opposite of manufacturing. Over 60% of the Pittsburgh Region’s jobs in the leisure and hospitality industry are in Allegheny County, so job losses in this sector disproportionately affect Allegheny County.

The only industries in the region which have experienced significant job growth in the past year are higher education and health care. Allegheny County contains over 80% of the region’s higher education jobs and nearly two-thirds of the health care jobs, and the growth in these sectors has primarily occurred in Allegheny County.

Not everything is bad outside of Allegheny County. In Indiana County, the number of jobs was the same in June 2009 as in June 2008, the only county in our region that had no change in jobs in the midst of the recession. So why did its unemployment rate increase from 5.7% to 8% during the same period? Because the number of jobs is a net figure – Indiana County lost a total of 600 jobs in manufacturing, construction, and professional and other services, but it gained 600 jobs in trade, transportation, utilities, education, health services, leisure and hospitality, and government. Many of those who lost their jobs became unemployed, while some of the new jobs were likely filled by new residents of the county.

This complex mix of job growth and job loss across the region makes it imperative that the region’s five separate Workforce Investment Boards, four community colleges, and numerous job training and employment assistance programs work together on a regional basis to help unemployed individuals obtain new skills and find job opportunities as efficiently and successfully as possible, no matter where in the region they live.

(A version of this post was published as the Regional Insights column in the Sunday, August 2, 2009 Pittsburgh Post-Gazette.)

A Little Good News, At Last

If you’ve been wishing for a little good economic news, the Pittsburgh Region got some in June. After four straight months of accelerating job losses from January through May, jobs actually improved by a small amount in June. The metro area’s 12 month job losses now stand at 31,200 (a 2.7% loss between June 2008 and June 2009) vs. 32,000 last month (a 2.8% loss from May 2008 and May 2009). (Note that these are twelve-month changes, not one-month changes. Due to seasonal factors, the number of jobs ALWAYS increases from May to June. However, if that May-to-June increase is smaller than in other years, it means that jobs have been lost, and if it’s bigger, it means that jobs have been gained. This year, the increase in jobs from May to June was bigger than it was last year, both in absolute and percentage terms, which means that job losses measured on an annual basis were smaller.)


The small uptick here appears to be a function of the unique structure of our region’s economy, not improvement in the national economy, since the U.S. economy did not improve in June. In fact, the twelve month rate of job loss nationally worsened from just under 4.0% in May to just over 4.2% in June, while it improved from 2.8% to 2.7% in our region.


Moreover, among the top 40 regions, Pittsburgh was one of only 13 which did better in June than in May. A number of other regions did much worse, including sunbelt regions like Charlotte, San Diego, and Silicon Valley, as well as Cleveland and Detroit.

Overall, our region remains well below average in job losses during the recession. The Pittsburgh Region has the 12th lowest rate of job loss among the top 40 regions. Detroit has the worst rate of job loss – it has now lost 175,000 jobs in the past year – 1 out of every 11 jobs. Cleveland has lost 63,000 jobs, more than twice as many as Pittsburgh. Charlotte has lost 54,000 jobs, which is twice as many in percentage terms as our region.


Although the news in Pittsburgh overall is good, it’s still bad in some important economic sectors in the region. The region’s manufacturing sector continued to lose jobs at an accelerating rate in June. We have now lost over 10% of the region’s manufacturing jobs in the past year. That’s the 12th biggest drop in manufacturing jobs among the top 40 regions. Job losses in both the financial sector and in wholesale trade also increased in June, and while the healthcare sector continued to add jobs, the rate of job creation slowed, which reduced its ability to offset losses in other sectors. The rate of job creation in the natural resources and mining sector also slowed significantly in June, although this represents only about a hundred jobs.

On the other hand, jobs in the leisure and hospitality sector, which had been a major contributor to overall job losses in the region, recovered slightly in June. Although jobs in this sector always increase in June, the growth between May and June was actually larger here than in the previous two years, whereas nationally, it was smaller. However, even with this small improvement, our leisure and hospitality workers have experienced the 8th worst loss of jobs among the top 40 regions over the past year.

Jobs in Pittsburgh’s retail sector also improved in June. Retail workers here have not suffered nearly as much as those in other parts of the country in the past year. We’ve lost 2.2% of our retail jobs (2,800 out of 130,000 a year ago), compared to losses of 5% or more in places like Milwaukee, Charlotte, Denver, and Baltimore.

It’s too early to call this the beginning of a recovery for the region. It’s only a small improvement – one-tenth of a percent. It’s only one month, which is not enough to declare a trend; in fact, job losses also reversed slightly back in January before they headed downward in the following four months. And the data are still preliminary and subject to revision next month. However, there’s a possibility that the revisions may make things look even better -- the revised data for May were slightly better than the preliminary data reported for May a month ago (the revised figures show our region lost 32,000 jobs from May 2008 to May 2009, compared to the preliminary figure of 33,600 reported previously), so hopefully any revisions to the June figure will also make things look better here, not worse. And hopefully, July will confirm that job losses have actually stabilized.

Energizing Job Growth in Pittsburgh

Although a lot of jobs have been lost in our region over the past year, that doesn’t mean every company is reducing employment. We still have many businesses that are hiring now, with the potential for even more growth in the future.

Front and center among these is the energy industry. As the population of the U.S. and the world continues to grow, the demand for energy will also grow. But as concern about the environmental impacts of energy also increases, the demand for cleaner forms of energy will grow even faster.

The Pittsburgh Region is uniquely positioned to ride these trends into the future, regardless of what happens with Congressional energy legislation, because of our diversification across both renewable and traditional energy sources:

Wind. Our region’s role in wind energy isn’t limited to wind turbines on our mountaintops. For example, Converteam in O’Hara Township is a global leader in electrical systems for wind energy. One of the world’s leading wind energy companies, Gamesa, makes turbine blades in Ebensburg.

Solar. We don’t need a lot of sunny days to be a world leader in solar power. For example, Solar Power Industries in Belle Vernon is a top international supplier of solar panels. Plextronics, a Carnegie Mellon spinoff, is developing cutting-edge technologies that could revolutionize the way solar energy is generated.

Nuclear. For over half a century, the Pittsburgh region has been the center of the nuclear power industry. Westinghouse built the first commercial nuclear power plant in the world here, and it remains the global leader in the field, which has resulted in thousands of new jobs for our region.

Natural Gas. Where’s the biggest new source of natural gas? It’s right here in Western Pennsylvania in the Marcellus Shale. Companies tapping that resource have already created jobs in the region, with the potential for hundreds more.

Coal. Even the most optimistic projections about renewable and nuclear energy show that coal-generated power will still be the largest source of electricity in the U.S. and other countries for many decades. Not only is the Pittsburgh Region a major coal producer, it’s a leader in finding ways to make coal cleaner, through the research being conducted here by Carnegie Mellon, the University of Pittsburgh, West Virginia University, CONSOL Energy, and the National Energy Technology Laboratory.

Efficiency. One of the best ways to ensure the country meets its need for energy is to reduce the size of the need. The Pittsburgh Region is a leader in creating energy-efficient green buildings, and companies like Appalachian Lighting Systems in Ellwood City are developing technologies to improve energy efficiency.

Job growth isn’t limited to businesses focused on energy-related products and services; jobs are also being created in a wide range of supplier businesses in our region. For example, Ellwood Group is one of the major producers for steel components used in wind turbines, PPG provides structural composites and coatings for turbine blades, and Hamill Manufacturing supplies precision-machined components to the nuclear, solar, and wind industries.

What’s the single biggest challenge all these companies face? Finding enough workers! The good news for people who’ve lost work in other sectors is that jobs in energy-related firms pay well and most don’t require esoteric degrees in energy science. They’re jobs like machinists, welders, electricians, carpenters, manufacturing technicians, quality inspectors, and many others that require associate degrees, apprenticeships, etc.

We can’t take growth in the energy sector for granted, however. We need to actively encourage it. Just as our region supports the biotechnology, robotics, and information technology sectors through dedicated organizations, we’re fortunate to have a “greenhouse” dedicated to the energy sector – it’s called 3 Rivers Clean Energy, and it’s working to help energy companies address workforce shortages and obtain the resources they need to grow. You can learn more about the opportunities in the energy sector and how you can help at www.3riverscleanenergy.org.

(A version of this post was published as the Regional Insights Column in the July 5, 2009 Pittsburgh Post-Gazette.)

More Bad News for the Region's Workers

Although everyone has been looking for some good economic news, there is, unfortunately, no sign that the recession is abating locally. Indeed, May was the worst month so far in terms of job losses in the Pittsburgh Region. Between May 2008 and May 2009, the Pittsburgh metro area lost 33,600 jobs, a 2.9% drop. For the second month in a row, the region has fewer jobs than it did in 1999, i.e., an entire decade’s economic growth has been lost.

Don’t be confused if you hear reports saying that the region added jobs in May. It’s true that there were 5,700 more jobs here in May than there were in April. But there are always more jobs in May than there are in April due to seasonal hiring patterns. The key fact that is that the increase in jobs between April and May this year was smaller than in any year since 1995, and as a result of that and the losses in previous months, there are 33,600 fewer jobs in May this year than there were in May of 2008.


We’ve still lost fewer jobs than most major regions in the country, but we’ve been slowly slipping behind some regions that were previously doing worse than we were. As of May, Boston, Columbus, Kansas City, and New York had all lost fewer jobs on a percentage basis in the past year than the Pittsburgh Region did.


The most troubling news continues to be the significant and accelerating loss of manufacturing jobs in the region. In just twelve months, the Pittsburgh Region has lost over 9,000 manufacturing jobs – 1 out of every 11 manufacturing jobs that were here last year. Manufacturing jobs are among the highest paid jobs in the region and typically have some of the best health and retirement benefits, so losing a manufacturing job has a particularly large negative impact on the regional economy.


Up through the beginning of the year, Pittsburgh’s manufacturing sector was one of its strengths – even though we were losing manufacturing jobs, we were losing them at the 5th smallest rate among the top 40 regions. But in May, Pittsburgh had the 15th largest rate of manufacturing job loss among the top 40 regions. The manufacturing sector is now the biggest contributor to job losses in the region.


The second biggest contributor to job losses continues to be the leisure and hospitality industry. Over 7,000 jobs have been lost in that sector over the past year. This is not only a large jobs loss relative to other sectors here, it's the 3rd biggest percentage loss in that sector among the largest 40 regions.

Construction is the fourth largest contributor to local job losses – we have 4,900 fewer construction jobs in May than a year ago – but unlike in the manufacturing sector and the leisure and hospitality sector, construction workers have fared better here than in most regions. Although our 8.2% loss of construction jobs is high, it pales in comparison to construction job losses of 14% in Chicago, 20% in Atlanta, and 29% in Phoenix.

Health care and higher education still have more jobs than last year, but even there, the rate of growth has slowed significantly from where it was last year, particularly in higher education, which likely reflects the impacts of smaller endowment earnings at colleges and universities.

If you saw the recent news stories about a Brookings Institution report saying that Pittsburgh's economy ranked 18th best out of 100 regions, it’s important to recognize that the data used in that report were old news – they only measured employment and unemployment changes through March, whereas Pittsburgh’s job losses have accelerated rapidly in April and May. Also, little noticed was the fact that the Brookings report ranked the region only 59th (i.e, 42nd worst) over the past year in the change in gross metropolitan product, i.e., the value of goods and services produced in the region. That is probably a reflection of the accelerating job losses in high-wage sectors such as manufacturing that began here early in 2009.


It’s not likely that Pittsburgh’s economy will experience any significant turnaround before the U.S. economy recovers, and national job losses continued to worsen in May. Moreover, even when the U.S. economy turns around, Pittsburgh may lag behind as it has in past recessions.

Reducing Health Care Costs Without Rationing

Most of the national debate about health care reform has been about how to provide health insurance to the millions of uninsured and underinsured individuals. But lack of insurance is just a symptom of the real problem. It’s the high cost of health care which has led many employers to drop insurance coverage and which prevents many individuals from obtaining coverage on their own.

How do you reduce health care costs? Reducing spending on hospital care has to be a big part of the solution. Hospital care has been the largest source of healthcare spending growth in recent years, and a study by McKinsey & Company found that spending on hospitals was the biggest reason that healthcare costs in the U.S. are higher than in other countries.

Reducing spending on hospitals doesn’t mean denying hospital care to people who need it. There are several ways in which hospital costs can be significantly reduced while actually making patients better off:

1. Help people with chronic disease stay well enough to avoid hospitalization. One of the largest categories of hospital expenditures is for care of people with chronic diseases. Studies have shown that as many as 50% of the hospital admissions for these individuals can be prevented through better care. Here in the Pittsburgh Region, UPMC St. Margaret Hospital, Renaissance Family Practice, Premier Medical Associates, and Medi Home Health Agency are currently working with the Pittsburgh Regional Health Initiative (PRHI) to develop the first truly comprehensive approach to reducing hospital admissions and readmissions among chronic disease patients. Their innovative efforts, which will both reduce costs and improve patient outcomes, are already gaining national attention.

2. Reduce the use of unnecessary surgeries and procedures. National studies have shown that many patients unnecessarily receive expensive procedures such as heart surgery, diagnostic imaging, and Cesarean sections, and that overuse of these procedures can result in worse outcomes for patients. One major opportunity for reducing costs and improving outcomes is in labor, delivery, and newborn care, which is the largest category of hospital spending for people under age 65. A team at Magee Womens Hospital, using “Perfecting Patient Care” training they received from PRHI, reduced the rate of induced labor by 40% by avoiding inappropriate elective inductions, which can be more expensive and result in babies spending time in costly neonatal intensive care units. They won the Fine Award from the Jewish Healthcare Foundation (JHF) last year in recognition of their cutting-edge work.

3. Reduce infections and other complications of hospitalization. Hospital-acquired infections and other complications are both bad for patients and significantly increase costs for health insurers. Although conventional wisdom held that such infections were inevitable, Allegheny General Hospital (AGH) used PRHI’s Perfecting Patient Care techniques to prove that serious hospital-acquired infections could be completely eliminated. The AGH team also received a Fine Award from JHF.

Even though these approaches can reduce costs and help patients, they aren’t being implemented more widely because of problems with the current fee-for-service payment system. For example, Medicare and commercial health plans will pay for a chronic disease patient to be hospitalized, but won’t pay doctors to hire nurse care managers who can help them stay well. Hospitals earn less when they prevent patients from getting infections and other complications, rather than being rewarded for providing good quality care.

Fortunately, there are better ways to pay for health care. Episode-of-care payment and comprehensive care payment systems give doctors and hospitals more flexibility to deliver the care patients need and reward them for controlling costs and improving patient outcomes. You can learn more about them from the Center for Healthcare Quality and Payment Reform (www.chqpr.org).

Now it’s up to Medicare and local health insurers to use these improved payment methods. If they do, we can reduce healthcare costs, make health insurance more affordable, and make our region more economically competitive.

(A slightly modified version of this post appeared as the "Regional Insights" column in the June 7 Pittsburgh Post-Gazette.)

Bad Economic News for the Holiday

Unfortunately, the latest regional job numbers released just before the start of the Memorial Day Weekend aren't anything to celebrate. The Pittsburgh Region lost nearly 28,000 jobs between April 2008 and April 2009 (1 out of every 40 jobs in the region). The most depressing news is that the total number of jobs in the region has now fallen below 1999 levels for the first time since 2003; in other words, all of the job gains the region has made in the past decade have been lost.


The rate of job loss here is still lower than the U.S. as a whole and lower than most major regions; we had the 10th lowest rate of job loss among the top 40 regions. However, our rate of job loss increased significantly in April; if that keeps up, we will stop looking so good relative to other regions.


In particular, one of the reasons our economy had been doing well relative to others was that we had been losing manufacturing jobs at a much lower rate. Unfortunately, that is no longer true; in April, our rate of manufacturing job loss was higher than 23 of the top 40 regions.


Our health care and higher education sectors continue to be the only significant net job generators. In addition to manufacturing, our region is being hurt by large job losses in the leisure and hospitality sector relative to other regions (particularly among arts and entertainment organizations) and large job losses in professional and business services and construction (although those losses are still lower in percentage terms than most regions).


Since the U.S. as a whole has now been losing jobs for a full year, we're lucky that we've only been losing jobs for seven months and at much lower rates. But since the U.S. is continuing to lose jobs, it seems likely that things will get worse here before they get better.

Has the Economy Ever Been This Bad?

Over the past several months, job losses in the Pittsburgh Region have accelerated rapidly as the U.S. economy has continued to slide deeper into recession. Many people wonder: Has it ever been this bad before?

This is clearly the worst recession the U.S. economy has experienced in a half-century. Over the past twelve months, nearly 5 million jobs have been lost in the U.S., or 3.6% of national employment. That’s almost twice as many jobs in one year as in the entire 2001-2003 recession, when over two years, 2.5 million jobs (1.9% of the total) were lost nationally.


The last time the U.S. economy lost this large a percentage of jobs was over 50 years ago, when jobs dropped by 3.7% in March, 1958. Even though the percentage loss was slightly higher then, the U.S. economy was less than half as big, so the loss of 2 million jobs then still pales compared to the 5 million lost today.

So most people across the country have never experienced an economic downturn this bad. But it turns out that Pittsburghers have seen much worse, and many times.

Over the past twelve months (March 2008 to March 2009), the Pittsburgh Region has lost over 20,000 jobs, or 1.8% of our employment. Although that’s the largest one-year loss of jobs we’ve experienced in two decades, it’s still smaller than the total number of jobs we lost in the most recent recession. Between March 2001 and 2003, the Pittsburgh Region lost over 28,000 jobs, or 2.5% of its employment.

Of course, depending on how long the U.S. recession continues, job losses here could continue to grow and exceed the 2001-2003 total. But it’s hard to imagine that it could get as bad here as it was when the steel industry collapsed 25 years ago.

Between March 1980 and 1983, the Pittsburgh Region lost over 85,000 jobs – almost 1 out of every 10 jobs that existed at the time. More than half of that occurred in a single year; in March 1983, the region lost 45,000 jobs, or 5.2% of what was already a diminished job base in 1982. That was more than double the rate of job loss nationally that year.

Although you may not be surprised to hear that things were worse in the mid-1980s, it may be news that we’ve had worse economic problems than 2009 at least 4 other times in the past half-century. The Pittsburgh Region lost a higher percentage of jobs in 1971 (1.9%) than it has this year, and despite having a smaller economy, the region lost a much larger number of jobs during the 1961 recession (66,000 jobs at the peak), the 1958 recession (69,000 jobs at the peak), and the 1954 recession (76,000 jobs at the peak) than in the past year. (Although the Pittsburgh Region also lost jobs in the 1975 recession, it’s difficult to calculate the exact number because of changes in the way data were tabulated that year.)

A particularly troublesome aspect of the current recession in Pittsburgh is the significant loss of manufacturing jobs. In the past 12 months, the region has lost 7,400 manufacturing jobs, or 7.5% of our manufacturing job base. Yet even that is a smaller percentage loss of manufacturing jobs than what we experienced in 2002, 1983, 1982, 1961, 1958, and 1954.


All of this reflects a dramatic change in the Pittsburgh Region’s economy. In the past, national recessions hit the Pittsburgh Region much harder than the U.S. as a whole, but during the 2001-2003 recession, the rate of job loss in the Pittsburgh Region was just slightly higher than the U.S., and during the current recession, our rate of job loss (1.8%) is only half the national rate (3.6%).

Although losing fewer jobs than other regions in a recession is a good thing, it would be far better if we could also grow more jobs than other regions when the economy is strong. That will require a much stronger focus on encouraging business startups and expansions in the region. For more detail on what to do, see "The Road to the Economic Super Bowl."

(A version of this post appeared as the Regional Insights column in the May 3 Pittsburgh Post-Gazette.)

Seeing Pittsburgh's Future

If you missed Innovation Works' 2008 Community Meeting this evening, you missed an opportunity to see the Pittsburgh Region's future up close. The event was hosted inside the South Side facilities of Immunetrics, Inc., a small but rapidly growing company that helps in the development of new drugs using modeling based on human biology. And on the way through the building, you could visit with a number of the technology startup companies that Innovation Works has been helping to grow.

Those who attended heard some pretty exciting news:

• Alpha Lab, a new program that Innovation Works started last year to accelerate the growth of software and entertainment technology startup companies, received applications from over 100 companies from 10 states to fill twelve slots in this innovative incubation program, and they're now receiving inquiries from entrepreneurs from all over the world who want to come to Pittsburgh to start or grow their businesses.


• Innovation Works is now providing strategic human resources assistance to startup companies, helping them fill dozens of management and other positions. This is not only a tremendous help to the companies, all of which are too small to have their own HR departments, it's just the kind of talent attraction effort the region needs.


• And Pittsburgh Equity Partners has completed their first round of fundraising on a new early stage venture capital fund for the region. They now have $5 million in the kind of investment funding that many startup companies are starving for, and hopefully additional individuals in our community will invest in this important fund.

In some ways, the most exciting thing about the meeting was that about 400 people from all across the 10-county region attended, demonstrating the kind of community interest in startup companies that is critical to our region's success. Innovation Works' Annual Meeting is beginning to rival the Allegheny Conference's Annual Meeting for attendance, and has it beat hands down in terms of both excitement and efficiency.

You can see more of the region's future in Innovation Works' 2008 Community Report, Fostering Entrepreneurial Growth. Download it and read it -- you'll be inspired about how bright the region's future is.

The Regional Economy Is Still Worsening, Particularly in Manufacturing

Unfortunately, the recession’s impact on Pittsburgh worsened in March; we’ve now lost 20,200 jobs in the past 12 months. Although revised figures show that the job loss in February was lower than previously reported (17,700 vs. 19,200), the March figures (still subject to revision a month from now) indicate that the big jump in job loss that occurred from January to February was neither temporary nor an aberration, but reflective of a serious weakening in the regional economy.


This is the second month in a row where we have fewer total jobs in the region than we did in the year 2000, and we now have only 8,000 more jobs than we did in 1999. In other words, we’ve lost all of the job gains we’ve made in the past decade, and we’re at risk of dropping below the levels we achieved in the late 1990s.


The fact that things got worse in March isn’t really surprising, since things got worse nationally and in most major regions of the country. The U.S. rate of job loss over 12 months increased from 3.1% to 3.6% between February and March; the rate of job loss here increased from 1.6% to 1.8%.

Although we’re still doing better than the U.S. and most major regions, our relative position has slipped slightly; in February, we had the 9th smallest loss of jobs (in percentage terms) among the top 40 regions, but in March, we dropped a notch to 10th. – we now have a slightly larger loss of jobs than Columbus. Interestingly, while things got worse here over the past month, things got a little better in our rust belt neighbors of Cincinnati, Cleveland, Columbus, and Detroit – their rate of job loss was slightly smaller in March than in February. Although the rates of job loss in Cleveland and Detroit were so high that one might argue they had nowhere to go but up, Columbus wasn’t suffering nearly the way Cleveland and Detroit were; it was doing slightly worse than we were until March, and now it’s doing slightly better. Only time will tell what this really means.


Despite many news reports of belt-tightening in both higher education and health care, both of those sectors still had more jobs in our region in March than a year earlier, as did mining and utilities.

Perhaps the biggest area of concern for our region is manufacturing. The large jump in manufacturing job losses that occurred between January and February wasn’t a temporary thing; in fact, it got worse in March. Manufacturing job losses jumped from 5,700 in February (the loss was revised downward slightly from the 6,300 previously reported) to a loss of 7,400 jobs between March 2008 and March 2009. That loss of 1,700 additional jobs represents 2/3 of the 2,500 additional jobs we lost economy-wide between February and March.

The 7,400 manufacturing jobs we’ve lost in the past year is 1 out of every 13 manufacturing jobs (7.5%) that we had a year ago, the 18th largest loss of manufacturing jobs among the top 40 regions. Some of these job losses may just be temporary layoffs, but others are likely permanent, and the ripple effect of both the temporary and permanent layoffs could well cause further jobs losses in other sectors in the months ahead.

Losing Almost a Decade of Job Growth in a Few Short Months

Until recently, the Pittsburgh Region seemed almost immune to the national recession. Although the U.S. economy started losing jobs last May, our regional economy kept adding jobs all the way through October. Even when we started losing jobs in November, the job losses here paled in comparison to the tens of thousands of jobs lost in regions as disparate as Detroit and Phoenix.


Unfortunately, our economic immunity has begun to wear off in the face of tight credit markets and weak consumer demand worldwide. The latest job statistics show that between February 2008 and February 2009, the Pittsburgh Region lost 19,200 jobs. That’s the largest loss of jobs in a 12-month period that we’ve experienced in the past 20 years. Even at the height of the last recession, in February 2002, the region had only lost 16,900 jobs over the prior year. The big job loss resulted in the biggest annual increase in the unemployment rate since 1983.

The good news is that the rate of job loss here is still well below the U.S. as a whole and most other large regions. For example, Detroit and Phoenix have each lost about 140,000 jobs in the past year, Charlotte has lost 48,000 jobs, and Cleveland lost 40,000 jobs.

The bad news is that the rate of job loss here has accelerated rapidly. Between January and February, the Pittsburgh Region had the third largest increase in the rate of job loss among the top 40 regions.


What caused the sudden jump in job losses here? The single biggest factor was manufacturing – we’ve lost over 6,000 manufacturing jobs in the past year, and over 3,000 of those were lost in the last month. We have now experienced a higher rate of loss in manufacturing jobs than 22 of the top 40 regions. Since manufacturing jobs have very high wages, these job losses will likely have negative ripple effects in the retail and service sectors in the months ahead.

The second biggest factor was in temporary employment services. After holding steady throughout 2008, it suddenly fell 2,300 jobs into the negative column in February, a faster one-month drop than any other major region in the U.S. It’s not surprising that when cutbacks have to be made, businesses will eliminate temporary employees before their permanent staff.


The region’s Leisure and Hospitality sector, which includes sports and cultural facilities, hotels, restaurants, and bars, has lost 5,300 jobs in the past year, the second highest number of job losses after manufacturing. For reasons that aren’t clear, we’ve had the 5th highest percentage loss of leisure and hospitality jobs among the top 40 regions. More than one out of every 20 jobs in that sector has disappeared in the past year.

Only a few subsectors have continued to add jobs despite the recession – health care and social services (2,600), higher education (2,000), company headquarters (700), mining (400), and local government (300). But recent news reports suggest that layoffs in health care and higher education may be coming, meaning that overall job losses for the region will likely increase.


The past few months have made it clear why the region’s “slow and steady” job growth over the past decade wasn’t good enough. The job losses of the past three months have wiped out all of the small amount of job growth our region had experienced since the last recession. The Pittsburgh Region now has fewer jobs than in the year 2000, whereas most of the major regions of the country, despite having higher job losses during the recession than we did, still have more jobs today than in the year 2000.

Although it is understandable that everyone’s primary focus now is on getting through the recession, we also need to position ourselves for job growth when the national recovery finally arrives, through actions such as expanding cutting-edge research at our universities, supporting the creation and growth of startup firms, and creating a more competitive business climate.

(A shorter version of this post appeared as the Regional Insights column in the Sunday, April 5, 2009 Pittsburgh Post-Gazette.)

The Recession Deepens in Pittsburgh

The effects of the recession not only worsened significantly in the Pittsburgh Region last month, but accelerated rapidly. Between February 2008 and February 2009, the region lost 19,200 jobs, more than double the job loss as of January (when regional jobs were down by 9,400). That's the largest 12-month loss of jobs we've experienced in the past 20 years.


Although job losses here are still well below the rate of job loss in the U.S. as a whole and in most other large regions, we had a bigger increase in job losses here than most regions between January and February. In fact, over the past two months, the Pittsburgh Region had the third largest increase in the rate of job loss among the top 40 regions. The only regions that got worse faster than we did were the Dallas and Virginia Beach metro areas, both of which, like Pittsburgh, had been doing relatively well until recently.


What caused the sudden jump in job losses here? The single biggest factor was manufacturing - we lost over 6,000 manufacturing jobs in the past year, 3,000 of which were lost in the last month. Whereas the Pittsburgh region had been experiencing one of the smallest losses of manufacturing jobs of any large region throughout 2008, in February we had a higher rate of loss in manufacturing jobs than 22 of the top 40 regions. The Professional and Business Services sector, which had been growing jobs through the end of last year, suddenly fell 2,500 jobs into the negative column, although that was still a smaller loss in percentage terms than 35 of the largest 40 regions in the U.S. And the Leisure and Hospitality sector, which had already lost 4,600 jobs as of January, now has lost 5,300 jobs, making it the second largest contributor to job losses after manufacturing.

Higher education and health care continued to add jobs in the Pittsburgh Region (despite the recession, there were 4,600 more jobs in those two sectors than a year ago), which helped to offset the job losses in other sectors. But based on recent news reports, job gains will likely slow significantly in those sectors in the months ahead, meaning that overall job losses for the region will increase.

The job losses in Manufacturing and Professional and Business Services are particularly troubling, since those are relatively high wage sectors, and the loss of jobs there will likely have ripple effects in the retail and service sectors in the months ahead.

The Road to the Economic Super Bowl

The Pittsburgh Region is now the undisputed world champion in professional football – six Super Bowl rings, more than any other region.

What will we do for an encore? Will the Steeler Nation focus solely on getting Ring #7, or can some of that energy be redirected to something even more important – growing our economy?

The challenge facing us is not just how to weather the recession, but how to position ourselves for solid economic growth in the post-recession economy.


Although we’ve gotten a lot of positive attention for being a “good place to ride out the recession,” our economic performance in other years has been weak. Over the last two decades, we had the fifth lowest rate of job growth among the top 40 regions, and in most years, job growth here was less than 60% of the U.S. rate.

We know the road to the Super Bowl – it goes through Baltimore, Cincinnati, Cleveland, and the rest of the AFC. We know the key players – Roethlisberger, Ward, Holmes, Harrison. We know the stats to watch for – yards rushing, passes completed, points scored.

So what’s the road to more job creation? Who are the key members of the team, and what specific goals should we be pursuing? The strategy is actually quite simple:
1. Create new ideas.
2. Turn them into new products and services at new and existing companies.
3. Help companies successfully grow and create new jobs.
4. Create a workforce capable of filling those jobs.

Goal #1. Increase Funding for Our Research Universities.

We are fortunate to have two world-class universities generating cutting-edge new ideas in many aspects of engineering and science. We are fortunate to have two outstanding university leaders in Mark Nordenberg and Jared Cohon who continue to attract top researchers, top students, and provide a solid base of good jobs that help the region resist recessionary forces.

But they need money to do it – money for researcher salaries, for laboratories, for student tuition, etc. The good news is that Pitt and CMU do extremely well in obtaining federal research and development (R&D) funding – in 2006 (the most recent data available), Pitt ranked 8th among public universities, and Carnegie Mellon ranked 10th among universities without a medical school.


The bad news is that their rankings on total R&D spending were dramatically lower (14th for Pitt and 20th for CMU) because of their small endowments and low state government support, making them dangerously dependent on the federal budget. Despite extraordinarily successful capital campaigns and generosity from local foundations, Pitt’s endowment still ranked only 29th in 2008, and Carnegie Mellon’s ranked 69th. On top of that, state support is also very low – the Commonwealth of Pennsylvania spends the 6th lowest amount on higher education relative to personal income of any state in the country.

It’s time that we see the size of our universities’ endowments and the amount of their state and federal funding as every bit a matter of civic pride as their record on the football field and basketball courts. Those dollars translate directly into both immediate jobs and into the ideas and talent needed for future growth.

Goal #2. Increase the Number of Startup Companies

Although the universities provide a stable source of high-quality jobs and a wealth of cutting-edge new ideas, the bulk of job creation will come from translating those ideas into new companies.


Our region was founded on entrepreneurship. Most of our big companies didn’t move here, they started here. But today, we have one of the lowest rates of new business formation of any region in the country, and that severely limits our potential for future growth.

We need to make startup companies and the entrepreneurs who form them as much community heroes and give them as much media coverage as we do the players for the Steelers. We should be publicly celebrating the successes of Plextronics and Andy Hannah, Renal Solutions and Pete DeComo, RedPath and Mary Del Brady, Thorley Industries and Henry Thorne, and many others, and encouraging young people to follow in their footsteps. (You can find more of our most promising startup companies at www.innovationworks.org/companies.)

Goal #3. Make Our State Business Climate Competitive

Getting more companies started is only half the battle. We need to make sure those businesses can thrive here. The bigger and more mature companies get, the more important it is for them to be competitive on costs with companies in other regions and countries.


We can help our companies in many ways – keeping tax rates low, controlling healthcare costs, providing rapid and responsive permitting, building and maintaining critical infrastructure. Although improvements are needed in all of these areas, there is no better place to start than on the most visible sign of a poor business climate – the fact that Pennsylvania has the second highest corporate net income tax rate in the country.

We’ve invested in new stadiums for our sports teams to make them competitive – we need to invest in a better business climate to make our economic team more competitive, too.

Goal #4. Achieve 100% Proficiency for Every High School Student


In order to grow here, businesses will need to find skilled workers, and in order for our children to fill those jobs, they’ll need the right skills. Whether they’re going to college or going directly to work, the critical first step is a good high school education, i.e., proficiency in basic skills like reading and mathematics.
The sad truth is that last year, over 1/3 of the high school graduates in our region weren’t proficient in mathematics, and over 1/4 weren’t proficient in reading. And if you think the problem isn’t in your district, think again: not a single school district in the entire region had over 90% of its 11th graders proficient in math.

It doesn’t take more money. Some of the best performing schools in the region spend below-average amounts of money. It takes each community demanding that their school board, superintendent, and teachers (and yes, the parents, too) focus on proficiency.

Before you name all the other goals that you think are missing – keeping crime rates low, improving air quality, etc. – think about this: if we could all agree to focus on at least these four goals, we could transform our region’s economy and give ourselves the resources to pursue additional goals. Even our social needs and cultural aspirations will be better addressed with more jobs and more employed residents.

These four goals are ones that every citizen (yes, that means you) can help achieve. What can you do?
• Contribute to the universities’ capital campaigns;
• Invest in an entrepreneur, or buy their products or services;
• Vote for legislators and governors that will create a competitive business climate; and
• Elect school board members that will focus on achieving 100% proficiency for children. (And if you have kids, make their school work a priority).

If we focus our energies and resources, we can make Pittsburgh the City of Champions, not just in sports, but in economic growth.

(A shorter version of this post appeared in the Tuesday, March 17 Pittsburgh Post-Gazette.)

Fewer Bankruptcies in Pittsburgh Than Almost Anywhere Else

Further evidence that the Pittsburgh Region has been relatively immune from the kinds of recessionary impacts the rest of the country has been experiencing comes from the latest bankruptcy statistics issued by the Administrative Office of U.S. Courts. Whereas bankruptcy filings (both business and personal) increased nationally by 31% between 2007 and 2008, bankruptcy filings only increased by 5% in the Western District of Pennsylvania (which covers the Pittsburgh Region).

In fact, if one compares bankruptcy filings in the U.S. District Courts covering the top 40 regions in the country, one finds that the Pittsburgh Region had the 3rd lowest increase. The only two districts that had smaller increases were in Texas, which parallels the finding that regions in Texas were among the few regions in the country that have done better in job growth/loss than the Pittsburgh Region.

The differences among regions are huge -- bankruptcies in Arizona and California have jumped 70-90% compared to the 5% increase here. Moreover, the increases don't tell the whole story, either. There were 31,000 bankruptcy filings in the Northern District of Ohio (which covers Cleveland) last year, 2.5 times as many as the 12,874 in the Western District of Pennsylvania (which covers Pittsburgh).

Treading Water in the Shallow End of the Pool

The latest data on jobs in the Pittsburgh Region were released this week, and although the news isn't good, it's a lot better than in most parts of the country.
Between January 2008 and January 2009, the Pittsburgh Region had lost a net total of 8,600 jobs, or a little less than 8/10 of 1% of the total jobs in the region. That's a lot of jobs, but far less than most regions. By way of comparison, the three major metro areas in Ohio have lost between 2 and 5 times as many jobs -- Columbus has lost almost 19,000 jobs, Cincinnati has lost over 24,000 jobs, and Cleveland has lost a whopping 44,000 jobs in the past year.


The only large regions that have done better than Pittsburgh in the past year are the metro areas in Texas (Austin, Houston, and San Antonio all actually had more jobs in January than they did a year earlier), Washington, DC, Virginia Beach, and New Orleans. (New Orleans isn't really growing, it's just slowly recovering from the devastating job losses after Hurricane Katrina.)


Underneath our relatively small total net job loss are some significant increases and decreases by industry. Thousands of jobs added in health care, higher education, and local government over the past year have been helping to offset over ten thousand jobs lost in retail, leisure and hospitality, manufacturing, and several other sectors.

In most cases, the pattern of job gains and job losses here is similar to the rest of the country, but better. For example, education and health services added jobs in every major region of the country, even regions like Detroit and Phoenix that have each experienced total net losses of over 100,000 jobs. Every region but Houston lost manufacturing jobs; Pittsburgh's loss of 3,200 manufacturing jobs was actually the 6th smallest loss in percentage terms among the top 40 regions.


The one sector that has been suffering disproportionately in Pittsburgh is leisure and hospitality; we've lost 4,600 jobs in that sector (4.6% of the total), the 5th biggest reduction among the top 40 regions. Although part of this has been in the hotel and restaurant sector, the bulk has been in arts and entertainment. Unfortunately, the data available aren't detailed enough to understand exactly which organizations and which kinds of jobs are being lost.

A Low Unemployment Rate Isn’t Always a Good Thing

In the middle of a recession, one of the most closely-watched barometers of economic health is the unemployment rate.

But the unemployment rate, particularly at the regional level, can sometimes be misleading. Surprisingly, a low rate of unemployment isn’t always a sign of economic health, and the change in the unemployment rate isn’t necessarily a good measure of how well a region’s economy is doing.

The Pittsburgh Region’s unemployment rate in December was 6.0%. That’s significantly higher than the 4.4% rate a year earlier, and reflects the fact that we have over 20,000 more people unemployed than a year ago.

Although it’s little comfort to the large and growing number of unemployed workers in the region, our 6.0% unemployment rate was lower than the U.S. (7.1%) and lower than Pennsylvania as whole (6.4%); in fact, it was the 11th lowest rate among the largest 40 regions, and we had the 8th smallest increase over the past year.

But are all of the 10 regions with lower unemployment rates really doing better than we are? Milwaukee’s unemployment rate in December was only 5.8%, and its unemployment rate went up by only 1.1% over the previous twelve months, much less than the 1.6% increase in Pittsburgh. Yet from December 2007 to December 2008, the number of people working in Milwaukee decreased by over 2%. That’s faster than the decline in U.S. employment, and it was the 16th biggest decline among the top 40 regions. In contrast, employment in Pittsburgh actually increased slightly (by 0.3%) over that same time period.

How can Milwaukee have lost employment faster than Pittsburgh and the nation as a whole, but still have a lower unemployment rate and a smaller increase in the unemployment rate than either Pittsburgh or the U.S.?

The reason is Milwaukee’s labor force decreased, whereas the labor force grew in Pittsburgh. Milwaukee had over 7,000 fewer total workers (both employed and unemployed) in December than a year earlier, whereas Pittsburgh had 24,000 more workers than it did a year earlier. A decrease in a region’s unemployment rate doesn’t always mean that its residents found work – unemployment in a region can also decrease (or increase more slowly) if people get discouraged and stop looking for work or if they leave the region entirely, and that’s what appears to be happening not only in Milwaukee, but in Detroit, Cleveland, Minneapolis, and a number of other regions.

Although there’s no way to know for sure, it’s entirely possible that some people who lost their jobs in places like Milwaukee, Cleveland, and Detroit moved to Pittsburgh to look for work, since we had job growth here through most of 2008, whereas those other regions lost jobs in every month of the year. Someone can be unemployed in Pittsburgh without necessarily having lost their job here.

Similarly, some regions with bigger increases in unemployment can actually be doing better than we are. For example, Virginia Beach had a bigger increase in the unemployment rate over the past year than did the Pittsburgh Region (1.8% vs. 1.6%), but Virginia Beach also had the highest growth in employment of any large region in the country, thanks to a lot of military and government jobs. The labor force there grew faster than employment – probably due to job-seekers coming from other parts of the country – and that’s why unemployment went up.

So when Pittsburgh’s new unemployment rate comes out in mid-March, don’t assume an increase is all bad news – some of it may be new workers coming here. The only way to know for sure is to look at changes in jobs and the labor force, too, which you can find at the PittsburghToday website.

(A version of this post appeared as the Regional Insights column in the Sunday, March 1 Pittsburgh Post-Gazette.)

Which Region is Winning the Economic Competition?

All eyes in Pittsburgh and in much of the rest of the country will be watching to see who wins the Super Bowl tonight – the Steelers or the (Phoenix) Arizona Cardinals. But which of the two regions is winning on the economic playing field?

Back when Pittsburgh won its first four Super Bowls, Phoenix didn’t even have an NFL team. And up until 1992, the Pittsburgh Region was bigger – in both population and jobs – than Phoenix.

Over the past 16 years, however, the Phoenix metro area has almost doubled in population, and is now the 13th largest region in the country, while the Pittsburgh metro area has fallen from 18th to 22nd. A lot of the population growth in Phoenix was fueled by the kind of immigration that Pittsburgh has failed to attract. In 2007, 58% of Phoenix residents were born in another state, compared to only 13% in Pittsburgh, and 17% of Phoenicians were foreign-born, compared to only 3% of Pittsburghers.

Between December 1992 and December 2007, Phoenix had the second highest rate of job growth among the top 40 regions – an 84% increase in jobs – while Pittsburgh had the 4th lowest rate of job growth – only 10%. Phoenix skated through the 2001-2002 U.S. recession with almost no loss of jobs, while Pittsburgh lost 20,000 jobs and didn’t fully recover until last year. The job growth in Phoenix over the past two decades was diversified across a wide range of sectors – professional services, retail, construction, health care, tourism, and manufacturing.

But while Pittsburghers may have been envious of Phoenix’s boom economy in previous years, our slow and steady job growth looks pretty good right now. Over the past year, Phoenix has had the second largest rate of job loss among the top 40 regions. Whereas Pittsburgh lost 7,100 jobs between December 2007 and December 2008, Phoenix lost 87,000 jobs, almost 1 out of every 20 jobs in that region. While Phoenix still has far more jobs than we do, that’s little comfort to the tens of thousands of people there who have lost work in the past year.

Although Detroit’s job losses have received most of the attention nationally, the magnitude and rate of job loss in Phoenix is almost identical to Detroit. The reasons for the decline are different, though. While Detroit has lost nearly 29,000 manufacturing jobs, the leading job loser in Phoenix was the construction industry, which lost 35,000 jobs. A major reason for that is the collapse in the housing market: Arizona had the third-highest number of foreclosure filings in the country in 2008, and housing prices in Phoenix dropped by almost 17% in the past year, whereas they grew by 2% here. Phoenix has also lost over 23,000 jobs in Professional and Business Services in the past year, while Pittsburgh still has more jobs in that sector than a year ago. Clearly, a lot of the growth in Phoenix was built on a very shallow foundation.

As Pittsburghers well know, if you don’t have jobs, you can’t keep your residents. Last month, while Pittsburghers were reading that Toledo is now bigger than the City of Pittsburgh, The Arizona Republic reported that for the first time in modern history, the City of Phoenix’s population may be shrinking.

Whether Pittsburgh gets its sixth Super Bowl ring or Arizona gets its first, our focus needs to quickly shift to winning in the economic arena. We need to help our manufacturing firms stay competitive and find qualified workers, and we need to help our entrepreneurs get the financing and customers they need to ride out the recession.

Everyone can help by looking to see whether there are local products and local vendors that can meet their needs at a competitive price. In an era of internet shopping, it's all too easy to buy something from a vendor someplace else when a local vendor may have a superior product at a competitive price, but with a lower page ranking on Google (or no e-commerce site at all). Moreover, many of our local entrepreneurs complain that they have to find their first customers outside of the region, even though there are businesses here that could benefit from their product or service and would ultimately use them once they have a reputation built on sales elsewhere. If local companies are given the opportunity and successfully win the business, it will support jobs here, and the workers filling those jobs will also spend their money in the region, creating an economic multiplier effect. (Giving local companies a chance to compete is different from establishing rigid anti-competitive "buy American" types of rules that raise prices and engender retaliatory regulation. The goal should be to consider the full range of options and when all else is equal, to support the local economy.)


(A shorter version of this post was also published in the Sunday, February 1 Pittsburgh Post Gazette.)

Watching from the Upper Deck of the Titanic

Sad to say, the Pittsburgh Region has now joined the U.S. as a whole and most regions of the country in seeing a decline in total jobs. Our region had 7,100 fewer jobs in December than a year earlier. We first crossed into negative territory in November, and federal and state revisions in the jobs data now indicate that the losses were bigger than we first thought -- 1,600 jobs, rather than 500.



We still have some sectors that are growing: health care, higher education, professional and business services, mining, and construction all still had more jobs in December than they did a year earlier, which is good news. But the much higher growth in professional and business services that had been driving the economy earlier in the year has started to fade -- although there are still 1,100 more professional and business services jobs in the region than a year ago, we had over 3,000 more a few months ago.



All other sectors have fewer jobs than a year earlier. Three sectors are experiencing significant losses -- the region has lost 4,500 jobs in the leisure and hospitality industry, 3,600 jobs in retail, and 2,200 manufacturing jobs over the past year. Those large losses more than offset the growth in health care, higher ed, and business services, resulting in a net loss of jobs overall.



Although our economy is now starting to go underwater, it's still doing significantly better than most parts of the country. 32 of the top 40 regions now have fewer jobs than a year earlier, and our rate of job loss was the third smallest among those 32. Although it's little consolation to the thousands of Pittsburgh workers who've lost their jobs, tens of thousands have lost work in places like Detroit, Phoenix, and Atlanta, and there are over one hundred thousand fewer jobs in the New York region now than a year ago.

While our accelerating losses in manufacturing are a particular concern, 39 of the top 40 regions have lost manufacturing jobs (Houston is the only exception) and our rate of loss is the 10th smallest among those 39. Although we've lost 2,200 manufacturing jobs, Cleveland has lost 11,000 and Detroit has lost almost 29,000.

We can't expect to stay completely dry when the entire U.S. economy is sinking farther and farther underwater. But there are things we can do to keep our region from sinking too deeply. For example, the sector of our economy that's faring the worst right now is leisure and hospitality -- we've had the second largest percentage loss of jobs there of any of the top 40 regions -- so patronizing arts and cultural events and restaurants can help boost their revenues and avoid further reductions. And wherever there's a choice, buying local products and using local vendors helps keep money circulating in our region rather than somewhere else, supporting the jobs in our economy.

Picking the Best Stimulus Projects for the Region

Communities across the country are gearing up to spend the infrastructure funding that President-elect Obama has promised as part of his economic stimulus plan. If anything close to the amounts being discussed nationally are actually distributed, the amount of money for our region would be enormous – even $25 billion nationwide could mean $200 million for southwestern Pennsylvania, and $500 billion nationally could mean as much as $4 billion for projects here.

Although public officials in southwestern Pennsylvania were criticized for not producing a long list of projects as fast as other communities did, most people don’t realize how hard it is to spend unexpected infrastructure money quickly, particularly when it’s of the magnitude being discussed now. Months or years of preparation are typically needed to get a major infrastructure project to the point where construction can start – it needs to be designed carefully (the 2007 bridge collapse in Minnesota shows what can happen if it’s not), the land where it will be built needs to be acquired, and necessary permits have to be approved. It would have been expensive and counterproductive for our counties and municipalities to undertake this kind of advance planning for a lot of projects, merely to have them sit on a shelf with only a hope of getting money to actually complete them.

It’s not likely that sending longer lists to Washington will result in more money. The federal government is not going to have the time to review thousands of applications and try to make judgments about which are more deserving of support. (Just imagine staff trying to justify to Congressmen and Senators why some other region's projects are better than theirs.) Funding will probably be distributed based on a formula, using factors such as population and unemployment. (The fact that our region has been doing relatively well in terms of employment and unemployment relative to other regions may mean that we will do a little less well than others in getting stimulus funding.)

As each day passes, more ideas for ways to spend the funding will come forward. Our real challenge will be building consensus about what the best projects are for whatever amount of money comes our way and then making sure they are implemented quickly and effectively. Here are some important issues to consider in setting priorities for funding:

Should we build new things or fix existing things? First of all, it will be very hard to build something new that isn’t already designed. Would there be enough money to build a light rail line from Downtown to the Airport or Oakland? Potentially. Could it be done in the next year or two? No -- there is no design, and the right-of-way that would be needed doesn't exist. Moreover, the stimulus package doesn’t include funding for long-term operating and maintenance costs. If we used the funding to build a new transit line, who would pay the costs of operating it? If we use the funding to build a new highway, who will pay to fix the potholes that develop after the first few winters? Pennsylvania hasn’t figured out how to pay for maintaining the roads, bridges, and transit systems it has, much less new ones. New parks, trails, and recreation facilities sound nice, but local governments then have the burden of maintaining them year after year. Conversely, using the funds to carry out maintenance projects that would have to be done anyway could help avoid property tax and fee increases or free up local funding for other needs. Moreover, it's easier to start quickly on fixing something that already exists than building something new. So even though building new things sounds more exciting, the reality is that most of the money will need to go to projects that improve existing facilities.

Should we emphasize quality or quantity? Although the goal is to create jobs, much of the money we receive will have to be used for construction materials, not wages. Using better quality, more energy-efficient materials could mean somewhat fewer construction jobs today, but lower maintenance costs in the future. It would be better in the long run for us to rebuild one mile of highway with long-lasting materials than to put temporary patches on a hundred miles of road. Moreover, although creating thousands of construction jobs in a short period of time may sound good, there are only so many people who have the skills and training to do construction work -- the retail worker who was laid off last month will not be welding a bridge beam anytime soon. When the stadiums and convention center were being built, the region had to bring in construction workers from other regions to fill all of those short-term jobs. And if every region of the country is building projects, there will likely not be enough construction workers to go around. Spending money on high-quality materials will help to preserve jobs in businesses that supply those materials, like our local steel industry.

Will projects create or retain permanent jobs in the future, as well as create temporary construction jobs? We could lose many of the jobs we already have in manufacturing and other sectors if we don’t maintain the roads, water and sewer lines, and locks and dams that our businesses depend on. So even the maintenance projects need to be prioritized based on their importance to the local economy. And using funds to build new industrial sites, small business incubators, and research facilities could help create new businesses and facilitate expansions of existing firms, creating permanent jobs and strengthening our tax base.

Finally, it will be important to think regionally in setting priorities. With this kind of money, we could accomplish some big goals. For example, a coordinated effort to repair and rebuild our region's sewage and storm drainage systems could reduce or eliminate sewage contamination in our rivers and flooding in many communities. Creating a carbon sequestration system to capture and store CO2 emissions from power plants could make our power plants more competitive and environmentally friendly. But we can’t do big projects like these if political pressures force the money to be spread across all 549 municipalities in the region. Just as workers cross municipal boundaries every day for jobs, our elected officials should work together across those same boundaries to achieve the greatest overall impact for the funding we receive.

(A shorter version of this post appeared in the Sunday, January 4 Pittsburgh Post-Gazette.)

Bad News for Pittsburgh, Although Everything is Relative

After 5 straight months of maintaining positive job growth in the face of national declines, the Pittsburgh Region finally dipped -- ever so slightly -- into the negative column in November. There were 500 fewer jobs in the region in November than a year earlier, whereas in previous months, the region had been up by 5,000 - 7,000 jobs over the prior year.



What happened? Two sectors saw significant drops in jobs compared to the previous year -- Leisure and Hospitality (3,000 jobs) and Manufacturing (1,000 jobs). Although there were 2,600 more retail jobs in November than in October, that increase was 1,500 less than in the two prior years, so in that sense, slow holiday growth in retail contributed to the decline in overall regional job growth. The reductions in Leisure and Hospitality jobs are unfortunate, but not surprising, since that sector saw some of the largest declines nationally in November, and discretionary spending is one of the first things to be cut when people are worried about paying the bills. The same is true with retail. The reductions in manufacturing are more troubling, since we had the 7th largest percentage decline in manufacturing jobs among the top 40 regions between October and November.


Beyond that, there was a general slowing of job growth across almost all sectors. For example, although Professional and Business Services still has 2,900 more jobs than a year ago, it had 900 fewer jobs in November than October, consistent with news reports of reductions in support personnel in law firms, slowing of work for architectural firms, etc. The only sectors that did better in November than October were Health Care & Social Assistance and Finance.


What this means is that although jobs continue to be added in some areas, the rate of those additions is slowing, and a growing number of people are losing jobs in both high-wage and low-wage sectors. As a result, the unemployment rate for the region will likely be higher when the November figures are released in January.

Although it's little comfort to the thousands of people who have lost jobs, Pittsburgh continues to have fewer problems than most parts of the country. Although Pittsburgh is no longer among the fortunate few regions that continue to have more jobs than a year ago, it is one of a group of regions that have remained relatively stable in terms of overall employment. Our .04% reduction in jobs over the past year looks pretty good compared to rates of job loss that are literally 50-100 times greater in places like Atlanta, Detroit, Milwaukee, Minneapolis, Phoenix, and San Diego.

And we still have many more jobs than we did in the 1990s.

One place that's doing better than we are is Boston -- that's because Boston hasn't seen the declines in Leisure and Hospitality or Transportation that we have, at least so far. On the other hand, we're doing better than Boston in Construction, Finance, and Mining jobs. Otherwise, Boston is benefiting from some of the same strengths we are -- a concentration of jobs in health care, higher education, and business services that have been relatively resistant to the recesssion to date.

What will Pittsburgh see in the months ahead? The structure of our region's economy will, hopefully, make us less susceptible to the kinds of dramatic dislocations occurring in many other areas. Although the November dip is troubling, we have not been tracking the U.S. decline the way we did in the 2001 recession. Then, the Pittsburgh Region went into the recession more slowly than the U.S. as a whole, but it wasn't far behind. This year, we've been following a very different trend.

But our community will, inevitably, suffer more and more from the same economic forces that are affecting the nation as a whole. As long as the U.S. economy continues to decline, our manufacturers and professional services firms will have fewer customers nationally and globally; our retailers, restaurants, and entertainment venues will see less consumer spending; our construction workers will see fewer projects in the pipeline; etc. And even our recession-resistant sectors like health care and higher education will begin showing the effects of the recession, as recent reports of hiring freezes and layoffs foretell.

Is Sony's Closing A Harbinger of More Bad News to Come?

Today's Tribune-Review demonstrates how much change is going on inside the regional economy. Although the economic data measure the bottom line -- are there more jobs in total than there were a month or year earlier? -- those numbers are the net sum of what can be big pluses and big minuses above the total line.

The front page story is about strategies for attracting new businesses to the Sony manufacturing facility in Westmoreland County, following announcements Tuesday that the plant will shut down over the next 16 months, eliminating jobs for 560 workers.

The story in the Business section is about how the energy industry in the region is hiring hundreds of workers and having trouble filling all of its jobs.

And in the middle, appropriately, is a story titled "Skilled workers unlikely to be jobless long."

In the good old days, people could expect to work at the same company all their lives. But the good old days are gone -- even when the economy is growing, it's a given that some companies will shrink, while others will grow. The issue for a specific geographic region of the country is whether its economy has enough diversification that the growth offsets the decline.

Too many people think that "diversification" means more service jobs and fewer manufacturing and other industrial jobs. What diversification really means is diversification within industries as well as across industries. Detroit's problem isn't that it has too many manufacturing jobs, but that its manufacturing jobs are too concentrated in one particular type of product -- automobiles.

Southwestern Pennsylvania had the same problem in the 1970s with the steel industry. Today we're more diversified, partly because we have many jobs in other industries like health care and higher education, but even more importantly because we have many manufacturing jobs in industries that are not dependent on steel.

So is the Sony plant closing a sign that our region's industrial base is going to collapse? No, because we have exactly one television assembly plant -- Sony. It's been great that it's been here, employing so many people and supporting supplier firms across the region for so many years, and it's unfortunate that we're going to lose it, but it doesn't really tell us anything about what will happen to our local companies in the steel industry, the medical device industry, the solar power industry, the safety equipment industry, the information technology industry, the energy industry, or any of the dozens of other types of manufacturing and other businesses we have in the region. Many of those businesses are stable or growing, and our focus should be on keeping them stable or growing, and on starting new businesses, in order to make sure there are jobs for the workers displaced from Sony, its supplier firms, and any other businesses that lose jobs during the recession.

Rather than waiting for the other shoe to drop, let's work on adding more shoes (of different kinds!).

How Long Will The Good News Last?

For the past several months, the Pittsburgh Region has been outperforming the U.S. as a whole and most other large regions. The questions the pessimists keep asking are: “Can this really be true?” and “How long can it last?”

First of all, why is the Pittsburgh Region doing so much better than the rest of the country? Three reasons:


Slow But Steady Growth. It’s not that our job growth rate has somehow leaped ahead of where it had been before; it’s that we’ve maintained a steady pace of growth while the rest of the country has slowed dramatically.

Eds and Meds. A major reason for this is that one-fifth of the jobs in the Pittsburgh Region – the second highest percentage among the top 40 regions in the country – are in the two most recession-resistant sectors: health care and higher education. They have continued to add jobs over the past year, offsetting losses in other sectors.


Stable Business Services, Construction, Financial, and Manufacturing Sectors. Over the past year, we’ve done better than the U.S. as a whole in these four key sectors. Our Professional and Business Services sector has had the fifth highest growth rate among the top 40 regions. Even our manufacturing sector, which has lost 700 jobs in the past year, has lost fewer jobs than 35 of the top 40 regions. Moreover, it’s important to note that a job doesn’t officially count in these statistics as a “job” unless it’s filled. A number of our region’s manufacturers are complaining that they can’t find qualified workers, so many of those 700 jobs may simply be vacant, rather than permanently gone.


One region that had a higher growth rate in October than Pittsburgh was Charlotte. But if you look at where the jobs in Charlotte have been growing and declining, you’d probably say that Pittsburgh is really doing better. Nearly half of Charlotte’s job growth has been in retail and leisure/hospitality, two relatively low-wage sectors. In contrast, Charlotte has lost 2,900 manufacturing jobs in the past year, over 3% of its manufacturing base, which is 5 times worse than Pittsburgh.

So we’re doing well, and for good reasons. But everyone, particularly the pessimists, worry that all of this could be temporary, particularly since the November U.S. job report released this past week showed that the U.S. had lost more jobs than in any previous month so far. We won’t know what the November job totals are for regions until mid-December, but the question is: how likely is it that the national recessionary undertow will finally drag us underwater when those numbers do appear?

It’s hard for any region, even one with a high concentration of jobs in health care and higher education, to keep fighting a global recession forever, but if you look at the sectors where the U.S. economy got worse in November, you’ll see that there is still reason for optimism here in Pittsburgh.


Nationally, almost every sector in the economy did worse in November. Only 3 did not: education, health care, and utilities. And two of those are the sectors where we have an unusually high concentration of jobs. Even though UPMC announced 500 layoffs and West Penn Allegheny Health System announced 300 layoffs since the October regional job totals were announced, our health care sector will still likely have more jobs in November than it did a year ago.

At the other end of the scale, two of the sectors with the biggest reductions in jobs nationally were construction and retail. That’s because those two sectors were growing rapidly in many areas due to the housing boom, and now the bubble has burst. We didn’t have the same kind of boom that other regions did, so we’re not likely to see the same kind of downturn. Our construction sector has been adding jobs because of all the major public and private construction projects going on, like 3 PNC, the casino, the North Shore Connector, and the Penguins Arena, not because of housing construction. Those big projects are not going to end anytime soon, and so the jobs associated with them either.

Even if you assume that the job growth rates in each sector in Pittsburgh decreased in November by the same amounts they did nationally, the total number of jobs in the Pittsburgh Region would still be as high or higher than in November of 2007.

It’s important to emphasize that none of this means that people aren’t suffering here. Even though the total number of jobs has been growing here, we’ve lost thousands of jobs in sectors like transportation and retail. And some people who still have a job may be working fewer hours, taking pay cuts, or paying a greater share of health care costs, making it harder for them to make ends meet. That will likely get worse in the months ahead, even if we continue to do better than other regions and the nation as whole. Consequently, those who are lucky enough to still be employed should be generous when the United Way and other charities come calling for contributions to help those who are less fortunate.

Why Is Pittsburgh's Economy Doing Better Than the Rest of the Country?

The Pittsburgh Region now has the 6th lowest unemployment rate among the 40 largest regions in the country, and we’ve had the 9th best job growth rate over the past year (October 2007 - October 2008).


What’s the secret to Pittsburgh’s success? A big part of it is “eds and meds” -– our large health care and higher education sectors, which created 5,300 jobs here over the past year.

Caution is in order, though: we’ve become very dependent on these two sectors -- 1 out of every 5 jobs in our region is in health care or higher education, the second highest percentage among the top 40 regions. Although these are the two most recession-resistant industries nationally, they can also suffer when the U.S. economy sags. UPMC and West Penn Allegheny Health System have each announced hundreds of layoffs since the October job figures were tallied.

Fortunately, our region’s strengths are broader than health care and higher education. We have 3,400 more jobs in professional and business services than a year ago, the fifth highest growth rate in that sector among the top 40 regions. We’ve also added 1,500 construction jobs over the past year, thanks to the many building projects around the region.

The news is not all positive, however. Over the past year, we’ve lost 1,300 jobs in transportation and utilities – the seventh largest loss of such jobs among the top 40 regions. We’ve also lost 1,300 jobs in the retail sector, 500 jobs in the information sector, and 500 jobs in other services.

Consequently, it’s not surprising that regional unemployment has been increasing at the same time that jobs have been growing. Moreover, some people who still have a job may be working fewer hours, taking pay cuts, or paying a greater share of health care costs, making it harder for them to make ends meet.

We also have 700 fewer people working in manufacturing than a year ago, but that’s actually good news when you realize that 36 of the 40 largest regions lost more manufacturing jobs than we have. Moreover, our region’s manufacturers are complaining that they can’t find qualified workers, so many of those 700 jobs may simply be vacant, rather than permanently gone.


Even regions that appear to be doing better than Pittsburgh may not be. For example, although Charlotte has had a slightly higher job growth rate than Pittsburgh over the past year, much of that growth has been in lower-wage sectors such as retail and tourism. In contrast to Pittsburgh, Charlotte has lost 2,900 manufacturing jobs in the past year, over 3% of its manufacturing base.

How long can we keep bucking the national trend? It’s hard for any region to fight the riptide of a global recession, but that doesn’t mean we can’t try. You can help keep the regional economy afloat by:

* Spreading the word that we have jobs here as well as affordable housing – this is a unique opportunity to reverse the net outmigration that’s plagued us for over two decades;

* Buying local – use Pittsburgh-region products and services whenever possible; and

* Supporting entrepreneurs – startup businesses will be a key to rapid job growth once the economy turns around, but they need banks and investors to help them through today’s tight credit markets.

(A slightly different version of this post appeared in the Sunday, December 7 Pittsburgh Post-Gazette.)

Be Glad You're in Pittsburgh and Not Somewhere Else

While the rate of job loss in the U.S. worsened again in October for the fourth straight month, the Pittsburgh Region continued to go in the exact opposite direction. Not only does the Pittsburgh Region still have 7,600 more jobs than it did a year ago, that's a higher rate of job growth than the region has experienced all summer.


Although the Pittsburgh Region went into the 2001 recession more slowly than did the U.S., Pittsburgh began losing jobs within two months after the U.S. economy did. In contrast, in 2008, the U.S. economy has been losing jobs for 5 straight months, while the number of jobs in the Pittsburgh Region has been increasing throughout that same time period. (Click on the graphic if you'd like to examine it more closely.)

The fact that total jobs are up here doesn't mean that no one has lost their job; it's clear that underneath the overall growth, some businesses are downsizing or closing while others are growing. Moreover, in some cases, even if jobs haven't been cut, hours may have been reduced, salary increases or bonuses reduced or eliminated, and a greater share of health care costs shifted to employees, making it harder for families to make ends meet.


But those negative effects would be even greater if we had experienced the kind of overall job losses that other regions have. Detroit, for example, has lost over 55,000 jobs in the past year, nearly 3% of its total employment. Relative to other regions, Pittsburgh is doing very well -- it ranked 9th in job growth among the top 40 regions from October 2007 to October 2008.

How Well Do You Know Pittsburgh Today?

If you haven't already seen it, be sure to download the new report from PittsburghToday (the Regional Indicators Project) called How Well Do You Know Pittsburgh Today?

Or better yet, buy a copy of the latest issue of Pittsburgh Quarterly and get a printed copy.

If you read it, you'll get a good sense of how we stack up as a region compared to other places.

The Good News:
* We're well educated.
* There are jobs here.
* Commuting is easy.
* It's a safe place to live.
* Home values are increasing.
* There is strong support for the arts.
* We have low rates of uninsurance for health.

The Bad News:
* Many children live in poverty.
* Workers earn less here for similar jobs.
* There is a big disparity in homeownership rates between whites and blacks.
* Our governments are in debt.
* We're not very healthy.
* We're riding rough roads.
* Our air is bad (though it's not just our fault).

And if you'd like more detail, go to the PittsburghToday website.

A Fragmented But Interdependent Region

As we face challenging economic times, it’s tempting for citizens and public officials to worry only about what happens in their own borough, township, county, or legislative district.

But while local governments here like to be independent politically, they aren’t independent economically. Municipal governments and school districts depend primarily on residential property and income taxes for their budgets. Most of the residents who are taxed, in turn, depend on their jobs for the income needed to pay the taxes. However, those jobs are usually in a different municipality.

In the more than 500 municipalities in the 10-county region, on average, 87% of their residents work at a job located in a different municipality. In fact, at the time of the 2000 Census, there were only four municipalities in the entire 10-county region where the majority of residents worked at jobs located in the municipality where they live – the City of Pittsburgh, Indiana Borough, New Wilmington (in Lawrence County), and Waynesburg (in Greene County).

So the ability of most municipalities to provide police protection, road maintenance, and other public services depends on how successfully other communities are at creating and retaining jobs, since it’s those jobs that provide the home municipality’s residents with the income to pay their local taxes.

In this sense, like it or not, most communities in the entire region are dependent on the City of Pittsburgh. In 136 municipalities, more residents work at jobs in the City of Pittsburgh than in any other location, including their home municipality. And 93% of the municipalities in the entire 10-county region had at least one resident working at a job located in the City of Pittsburgh.

Although the City of Pittsburgh is the biggest regional employment center, it’s not the only one. For example, in 2000, nearly half of the people working in Findlay Township, home to Pittsburgh International Airport, came from outside of Allegheny County, and over half of the workers in Cecil Township (Washington County), where Southpointe is located, commuted from Allegheny County. The decisions made about infrastructure, taxes, etc. in these municipalities affect the job prospects for people in literally hundreds of other municipalities.


Is the picture any different if you talk about 10 counties rather than 548 municipalities? In terms of its residential tax base, Allegheny County is the most economically self-sufficient of any of the counties in the entire region, because 92% of Allegheny County residents work at a job located in Allegheny County. In most of the other counties in the region, fewer than 2/3 of their residents work in the county where they live. In fact, between 1/4 and 1/3 of the residents in Beaver, Butler, Washington, and Westmoreland Counties get their paycheck from an employer located in Allegheny County.


If you look at it from the perspective of businesses, however, they draw their workers from a broad geographic area, and to them, government boundaries are an impediment, not an asset. Even in Allegheny County, employers depend on residents of every other county in the region to fill more than 1 out of every 5 jobs. In most of the other counties in the region, between 1/4 and 1/3 of the jobs are filled by workers who commute from a different county. Fayette County is actually the most self-sufficient county in the region in terms of workforce, since 84% of the jobs in Fayette County are filled by Fayette County residents.

Our interconnections extend across the state line, too, although they’re not nearly as strong as those within the 10-county southwestern Pennsylvania region. Over 14% of the residents of Hancock and Brooke Counties in West Virginia (where Weirton and Wellsburg are located) work in southwestern Pennsylvania, primarily in Allegheny, Beaver, and Washington Counties. Nearly 11% of the residents of Greene County work in West Virginia (primarily in Morgantown).

What does all this mean for us, particularly with tough economic times ahead? First, no matter where a business is located, it will need to draw on workers throughout the region to fill those jobs. So we need high-performing schools in every one of our school districts; we need regional, not local workforce training systems; and we need transportation systems that connect our communities effectively. Second, it makes no sense for our communities to be competing with each other for businesses and jobs. A company that locates or expands in one community is likely to provide jobs that support the tax bases in many other municipalities, so the only real “loss” is if the business locates in another region entirely. And finally, with limited funding for infrastructure and economic development programs, we need to pool our resources and invest in the most strategic opportunities for the region as a whole.

(A shorter version of this post appeared in the Sunday, November 2 Pittsburgh Post-Gazette.)

Economic Opportunities for Pittsburgh in Clean Coal

Could energy history repeat itself in Pittsburgh?

Just over 50 years ago, the first commercial nuclear power plant in the world was constructed here in southwestern Pennsylvania by Westinghouse. Our initial leadership in advancing a new energy technology made Westinghouse the global leader in the field, and it is now constructing new nuclear plants around the world. That, in turn, has created major economic development benefits for the region, as Westinghouse creates a thousand new jobs and builds a new headquarters facility here.

Today, one of the major energy challenges facing the world is creating cleaner energy from coal. Concerns about global warming have led to demands for reducing carbon dioxide (CO2) emissions, particularly from coal-fired power plants. There is now broad agreement that it is impractical to eliminate or even significantly reduce the use of coal in the foreseeable future, and instead the priority should be finding ways to reduce the CO2 emissions that coal plants produce.

The most promising approach is what is called “carbon capture and sequestration” – capturing the CO2 before it enters the atmosphere, piping it to a storage location, and injecting the CO2 into the ground (“sequestering” it) permanently. The first two of these steps – capture and transport of CO2 – are already used commercially in other parts of the country for enhancing recovery of oil and gas from wells. The third step – sequestration – has been pilot-tested on a small scale, but not yet on the scale needed for a typical power plant. However, even long-term underground storage is not a new concept – there are already large underground storage facilities for natural gas both here and in other regions.

Just as with nuclear technology, the region that pioneers the implementation of production-scale carbon capture and sequestration (CCS) technology will likely be the region that reaps the economic rewards of that expertise in the future if the U.S. puts limits or taxes on CO2 emissions and when countries like China and India finally seek ways to reduce CO2 emissions from their coal plants. Southwestern Pennsylvania is well-positioned to be that pioneer because of a unique set of assets: many of our thousands of former oil and gas wells are “underground brownfields” that can be reused for sequestration of CO2; the proximity of those storage locations to major CO2 generation sites minimizes transport costs; and we have some of the best energy and environmental expertise in the world at the National Energy Technology Laboratory, Carnegie Mellon University, the University of Pittsburgh, and West Virginia University.

However, as important as they are, these assets are not enough. State government needs to create a clear legislative and regulatory framework that enables private investors to pursue CCS projects. Two things are particularly important: (1) the state should enable the use of the geologic structures under state-owned gamelands and parks as sites for carbon sequestration; and (2) the state should provide a system for dealing with liabilities associated with sequestration, analogous to what the federal government did in the early days of the nuclear power industry. Other states are already working to put appropriate legislation in place, and the Pennsylvania General Assembly needs to move quickly if we are going to maintain a leadership position.

Wouldn’t it be safer to sit back and let other states take the lead? Although there are always risks in any new technology, any risks of CCS are far less than the risks the region took in being the guinea pig for the first nuclear power plant in 1957. The economic opportunities are significant – CCS projects can create hundreds of construction, engineering, and other jobs here now, and many more in the future as we market our expertise around the world. And since our region is home to some the largest CO2 emission sources in the country, we will have to face up to the issue sooner or later.

The Institute of Politics at the University of Pittsburgh (www.iop.pitt.edu) is working in partnership with 3 Rivers Clean Energy (www.3riverscleanenergy.com) to educate public officials about CCS. You can help, by urging your state legislator to pass legislation supporting implementation of carbon capture and sequestration projects in southwestern Pennsylvania before this major economic development opportunity passes us by.

(A shorter version of this post appeared in the October 31, 2008 edition of the Pittsburgh Business Times.)

Still Adding Jobs in Pittsburgh While The Rest of the Country Loses Them

The latest job data show that, in September, the Pittsburgh Region was still doing better than the U.S. as a whole and most of the large metro regions in the country. One should take these data with several grains of salt, since they were collected before the meltdown on Wall Street, but nonetheless, the fact that we were still strongly bucking the national trend of declining jobs is good news for workers here and should make our region very attractive to people losing jobs elsewhere.


While we gained 7,000 jobs between September 2007 and September 2008, many major metropolitan regions have lost jobs -- tens of thousands of them, in fact. Moreover, September 2008 was the first time we had more jobs in the region than prior to the 2001-2002 recession.


Health care and higher education are still the biggest factors keeping our region's economy afloat, but professional services jobs, construction, and tourism are also helping to offset losses in manufacturing, retail, and transportation.

Five Ways to Transform Pennsylvania’s Economy

Everyone is understandably focused right now on getting through the current financial and economic crisis facing the country. But it’s important for Pennsylvanians to also think about how to best position the state and their communities for growth in the post-recession economy. Although Pennsylvania has many strengths, the world will likely be a very different place in the years ahead, and it’s time for us to take bold action to make the state as competitive as possible in that new environment.

Here are five ways to do that. Some require state legislation, but all require action by citizens, business leaders, and local officials – in other words, by you and me! (These five suggestions first appeared in the new online magazine Keystone Edge.)

#1 Encourage and Support Entrepreneurs

Many of Pennsylvania’s biggest employers – Air Products, Alcoa, Medrad, PPG, Respironics, U.S. Steel – were started by entrepreneurs, some as long as a century ago. But we can’t rely just on the businesses we have to keep our economy growing; we need new entrepreneurs to create new businesses that will grow and become the state’s large employers of the future.

Over the past 25 years, starting with the creation of the Ben Franklin Partnership in the Thornburgh Administration, Pennsylvania state government has put in place one of the most extensive arrays of entrepreneurial and technology support programs in the nation. But those programs are intended to complement community support, not substitute for it. Without private sector investors, lenders, customers, and employees, startup firms can’t succeed no matter how many public programs are available. And it’s particularly important to help support startup businesses now as bank credit and consumer spending have tightened.

What can you do to support entrepreneurs in your community?

1. Invest in them. Entrepreneurs particularly need “angel investors” to provide the early stage capital for developing and market-testing their products or services. Risky? Sure. But the so-called safe investments aren’t looking too good right now, either! Analyses have shown that investments in early stage capital have had significantly better returns than either later stage venture capital, buyouts, or traditional stocks.

2. Buy products and services from them. After getting its initial financing, the most critical milestone for a new business is finding its first customers. But many startup businesses in Pennsylvania claim that they can’t get in the door to sell their products or services to existing firms. We shouldn’t force our own businesses to go out of state to find their initial sales.

3. Celebrate them. When was the last time you saw headlines about a startup company’s success on the front page of the paper? When was the last time you saw a story about an entrepreneur on the television news? The public needs to understand the critical role that entrepreneurs play in creating the jobs of the future. Parents and guidance counselors can help by conveying to children that success can be “starting your own business,” not just “getting a job with a big company.” And many of the most successful entrepreneurs failed one or more times before succeeding, so we need to encourage those who fail to try again!


#2 Hold Schools Accountable for Performance

In the years ahead, businesses of all sizes will increasingly need a workforce that is proficient in basic skills, particularly mathematics. And unless workers have those skills, they’ll have trouble finding employment at a good wage.

Although Pennsylvania has a national reputation for having a high-quality workforce, we’re at risk of losing that advantage in the new knowledge-based economy. Last year, almost half (44%) of Pennsylvania’s 11th graders weren’t proficient in math, and over a third couldn’t read at a high school level. If you think your school district doesn’t have a problem, you’re probably wrong - only two school districts in the entire state had 90% of their 11th graders proficient in math, and only 19 (out of 501) had 80% or more proficient in math.

The problem starts much earlier – over a quarter of Pennsylvania’s 5th graders can’t do math properly and almost 40% can’t read at a 5th grade level.

What business could survive if 25-40% of its products were defective? How can Pennsylvania expect to be competitive in the global economy if a third of the young people entering the workforce can’t read or do math properly?

The standard excuses are that the tests are bad or that schools need more money to do better, particularly those that have many low-income students. But there are schools in Pennsylvania and in other states that have achieved high levels of proficiency on standardized tests for all children, including low-income children, while spending below-average amounts per child.

The solution isn’t more money or new state or federal laws. It’s local citizens demanding better performance from their schools for their children. What can you do?

1. Find out where your local schools rank on student proficiency. Most people know how their local high school football team is doing, but not how their local school students are performing on basic skills. You can get statistics on student proficiency for every school in the state from the Pennsylvania Department of Education website.

2. Find out if your school district has a plan for improving proficiency. Ask if the district has a goal of 100% proficiency for children, and ask if they have a plan for achieving it. Ask if they’re using tools like Value-Added Assessment to determine which schools and which teachers are performing below-par and how they are addressing problem performers.

3. Elect school board members committed to proficiency. It’s not the President, the Governor, or state legislators who oversee schools, it’s the 4,500 school board members across the state who do, and about half of the seats will be up for election next year. If your school district isn’t performing as well as it should, elect new school board members who will hold the superintendent and teachers accountable for improving performance.


#3 Create a Value-Driven Healthcare System

One of the biggest problems facing the nation in the years ahead is the high and growing costs of healthcare. It’s making our businesses uncompetitive, and it’s the primary culprit behind the growing problem of the uninsured. No plan for expanding access to health insurance will be sustainable if costs aren’t brought under control.

Imagine what it would mean for attracting both businesses and residents if Pennsylvania became the first state in the nation to reduce health care spending while improving quality. Impossible? No – a big part of the solution lies in changing the way we pay for healthcare. Under current payment systems, physicians, hospitals, and other healthcare providers receive strong financial incentives to deliver more services to more people, but they are often financially penalized for providing better services and improving health.

To fix this, people need to start choosing healthcare services based on both cost and quality, so that healthcare providers have an incentive to eliminate the estimated 40% waste and inefficiency in the healthcare system.

Read the October 5 Pittsburgh Post-Gazette for an example – a story profiled a man who found that his medication cost $46 at one pharmacy and $557 at another, but his insurance plan would pay 80% of the cost regardless of where he went, and the high-priced pharmacy said that because of that, they compete on convenience, not on price.

Or look at the 2007 report from the Pennsylvania Health Care Cost Containment Council (PHC4) showing that heart surgery costs more than twice as much at some hospitals as others in the same region, with no difference in quality, yet most health insurance plans give people no incentive to choose the lower-cost care.

What do we need to do?

1. Reauthorize PHC4 and issue public reports on healthcare providers’ costs and quality. Pennsylvania was actually a pioneer in providing information on hospital quality and costs when it established the Pennsylvania Health Care Cost Containment Council over twenty years ago. But more recently it has fallen behind other states and regions by failing to expand quality reporting to physicians and outpatient services. And now, even the hospital reporting is at risk because of the Governor’s and General Assembly’s failure to reauthorize PHC4.

2. Use health insurance plans that pay based on value. Businesses and state government in Pennsylvania should follow Minnesota’s lead and create incentives for employees to use higher-value healthcare providers. Rather than charging employees more for all of their healthcare, charge them less for using higher-value providers and more for using lower-value care.

3. Choose healthcare providers based on quality and price. National studies have shown that higher-cost healthcare doesn’t mean better quality healthcare. Just like any other product or service, the only way to lower spending is for all of us to ask about both price and quality, and use the healthcare providers that deliver the best value.


#4 Make Business Taxes More Competitive

Although there are many reasons why businesses should want to locate or expand in Pennsylvania, many never learn about them because the state publishes a big red STOP sign for economic development.

It’s called the state Corporate Net Income (CNI) Tax. Pennsylvania’s CNI tax rate is 9.99%, the highest flat tax rate in the country. (Iowa has a higher rate – 12% – on net income over $250,000, but businesses in Iowa with less than $100,000 in net income pay only 8%.)

On top of that, Pennsylvania is also one of only two states to limit the ability of companies to deduct prior-year losses from their current year’s income. That makes Pennsylvania’s high CNI tax even more uncompetitive for entrepreneurial startup firms and for some of our largest and highest-wage businesses like steel and chemicals that operate in cyclical industries.

As if that wasn’t bad enough, Pennsylvania also imposes a Capital Stock and Franchise Tax (CSFT) on non-manufacturing businesses. Fewer than half of the states even have such a tax. Although Pennsylvania is phasing out the CSFT, it won’t be gone until 2011, and that’s assuming the state doesn’t delay the phase-out, as it has twice in the past.

The bottom line is that Pennsylvania has the most uncompetitive state business taxes in the country. Pennsylvania’s worst-in-the-nation ranking sends a “take your business elsewhere” message that undercuts all of the other valuable economic development initiatives the state has undertaken. And in our current difficult economic times, businesses are going to be looking for states and regions that help them be competitive, not ones that overtax their earnings.

Pennsylvania hasn’t always been this unfriendly to businesses. Twenty years ago, the state’s CNI tax rate was reduced to 8.5%, improving the state’s ranking to 16th. Job creation in the state soared. But the success was short-lived, because the state increased the rate dramatically in 1991, making it the highest in the country, and the state’s job growth rate plummeted.

State officials will say there’s no way we could even consider cutting business taxes now, with the state facing a budget deficit this year. And it’s unfortunate that the state spent all of its big surpluses over the past several years, rather than cutting business taxes when it could afford to do so, or saving more in the Rainy Day Fund.

But even in the current economic climate, the state can enact a cut in the CNI tax – it just needs to delay implementation until 2010, the same way it has enacted future cuts in the CSFT in order to phase it out affordably. Businesses don’t make investment decisions based on what the tax rates are this year, but on what they expect the tax rates to be in the future. And a lower tax rate will encourage business growth in the state, thereby increasing state revenues from all taxes, including the personal income tax and the sales tax, helping get state finances back on track.

What can you do? It’s simple:

Ask your state legislator to make Pennsylvania more competitive by supporting a reduction in the Corporate Net Income Tax.

#5 Create Regional “Home Rule”

In today’s global economy, regions compete for jobs, investment, and talent, not states. Businesses choose between Pittsburgh and Charlotte, Erie and Buffalo, and Philadelphia and Boston, not Pennsylvania vs. Massachusetts, New York, or North Carolina.

It’s no surprise to anyone that Pennsylvania’s regions are very different places. It’s not just that we call soft drinks “pop” in the west and “soda” in the east. More important things, like land and infrastructure issues, differ dramatically across the state. For example, one of the most critical challenges in western Pennsylvania has been finding money for industrial site development and reuse of brownfields to enable business growth, while a pressing need in southeastern Pennsylvania has been controlling development of farmland from pressures for new housing. Western Pennsylvania has an abundance of water, but it has problems keeping it clean, while eastern Pennsylvania has been plagued by droughts. Pittsburgh and Philadelphia have sought predictable funding for transit systems, while the rest of the state has been more concerned with highway funding.

Yet the decisions about how to deal with each region’s unique issues are made not by the regions themselves, but by officials in Harrisburg. Although regional planning commissions develop regional transportation plans and prioritize projects, PennDOT still decides which projects will be funded, not the regions. Although county and regional agencies plan, organize, and prioritize economic development projects, the decisions about which projects get funded are made by the Department of Community and Economic Development or the Governor’s Office, and do not always match local priorities. There is no flexibility to create special programs or to reallocate funds to respond to regional needs – all programs have to be statewide, and the funding amounts and program guidelines are all established in Harrisburg.

In many of its key economic development and infrastructure programs, the state should allocate a portion of the funding and delegate the decision-making authority for spending it to those regions that have effective regional planning and decision-making mechanisms in place. For example, Southwestern Pennsylvania has demonstrated that it can effectively plan and set economic development priorities at the regional level. For over a decade, beginning with the Southwestern Pennsylvania Growth Alliance and now through the Southwestern Pennsylvania Commission, ten counties have worked together to identify priorities for infrastructure investment and business climate improvements. But all too often, the state has chosen to ignore the region’s priorities.

So what can you do?

1. Demand that the state follow regional priorities. The next time the Governor or your state legislator come bearing “gifts” from Harrisburg, ask whether the projects they’re funding were regional economic development priorities.

2. Urge that state funding programs be regionalized. What good is planning if you can’t assure that funding will follow the plan? Just as many municipalities have been given “home rule” powers by the state, state economic development and infrastructure programs should be modified to explicitly delegate decision-making responsibility to capable regional entities.

If we enable each of the state’s regions to compete effectively for jobs and talent in the post-recession economy, we’ll see greater economic success for the state as a whole.

Playing Catch-Up On Wages

Are wage and salary increases in the Pittsburgh Region keeping pace with inflation?

Yes, and then some – U.S. Department of Labor data show that, on average, wages here increased by 5% in 2006 and by 5.3% in 2007, almost double the 2.7% average annual increase between 2001 and 2005, and well ahead of inflation. This was certainly good news for workers as they faced higher costs for gasoline and other items.



Moreover, wage increases here outpaced most regions of the country. Pittsburgh’s 10.5% total increase in average annual wages between 2005 and 2007 was the 6th highest increase among the top 40 regions. In contrast, the average wage grew by less than 8% in regions such as Atlanta, Austin, Charlotte, Cincinnati, and Orlando.


The unusually high wage growth was experienced across almost every economic sector except for retail jobs. For example:

* The average wages of the region’s 100,000 manufacturing jobs grew by 10% from 2005 to 2007, the 10th highest increase among 35 of the 40 largest regions (wage data are not reported for all sectors in all of the top 40 regions). And while many may believe that the steel industry no longer exists here, the fact is that steel mills still employ over 6,000 people in the region, and their wages increased by 19% between 2005 and 2007, one of the largest increases of any manufacturing sector.

* Professional and business services wages increased by 18%, the 2nd highest increase in that sector among 38 regions. Wage increases between 2005 and 2007 ranged from 8% to 10% in law, accounting, and engineering firms, and reached 20% or more in some specialized consulting and service fields.

*Wages in the leisure and hospitality sector (including arts organizations, hotels, restaurants, and bars) increased by 11%, the 4th highest increase among 37 regions. (This increase may reflect more hours worked by part-time workers as well as higher wages per hour.)

Why are the wage increases in the Pittsburgh Region so much higher than other regions? Employers here may well be playing catch-up with other regions, since average wages in Pittsburgh have been relatively low for many years. In 2005, the average annual wage in Pittsburgh was $38,809, ranking only 32nd (i.e., 9th lowest) among the top 40 regions. Thanks to the increases in the past two years, the 2007 average wage of $42,902 improved the region’s ranking to 27th.


However, despite the recent increases, many sectors here still have low wages relative to other regions. For example, in health care and social services, our largest employment sector, average wages in 2007 were only $39,870, the fifth lowest among the 31 regions that report wages for this sector. Registered nurses (the region’s third largest occupation) made an average of $56,200, the second lowest pay level among the top 40 regions.

Are lower wages in Pittsburgh justified because of our lower cost of living? Yes, in part. For example, after adjusting for differences in cost-of-living across regions, nurses’ salaries in Pittsburgh rank 16th among the top 40 regions, rather than 39th. But they’re still 5-8% lower than in places like Cincinnati and Cleveland which have an equal or lower cost of living. And in other occupations, workers are getting relatively high wages regardless of cost of living differences. For example, average annual pay for elementary school teachers in Pittsburgh was $52,440, ranking 18th among the top 40 regions without adjusting for cost-of-living.

Research done several years ago at the University of Pittsburgh found that low salaries were a key reason why many graduates of our local universities left the region. Although the cost of living elsewhere might be higher, recent grads are still attracted to higher starting salaries. As a result, employers in Pittsburgh may need to continue raising wages if they are going to compete successfully with other regions for talented workers.

(A shorter version of this post apppeared in the Sunday, October 5 Pittsburgh Post-Gazette.)

Unemployment's Up, So Things Must Be Bad, Right? Well, Actually, No...

If you read the newspapers today, you'd certainly think the Pittsburgh economy was headed downhill fast. "Region's jobless rate jumps to 5.6%" and "Local jobless rate spikes in August," the headlines shouted. And indeed, the unemployment rate increased a whopping 1.2 percentage points over a year ago (it was 4.4% in August 2007, and it was 5.6% in August 2008), and there are reportedly over 16,000 more unemployed people in the Pittsburgh Region than there were a year ago.

This has to be bad, right? Thousands of Pittsburghers are losing their jobs!

Not so fast. You might be surprised to know that an increase in the unemployment rate does NOT necessarily mean that anybody lost a job or that the economy is doing badly. Sometimes it actually means we're doing well.

Huh?

To understand this better, let's compare ourselves to some other regions. Which region's economy do you think is doing better -- Charlotte, Silicon Valley, Milwaukee, or Pittsburgh?

If you look at the unemployment rate, Milwaukee is the winner. In August 2008, it had the lowest unemployment rate of any of the four regions. Pittsburgh, though, is in second place -- our unemployment rate, despite the big "jump" in August, is still a full percentage point lower than either Charlotte or Silicon Valley.

If you look at the change in the unemployment rate, Milwaukee looks even stronger. Its unemployment rate has been almost flat. But even Pittsburgh's big increase is still lower than Charlotte and Silicon Valley.

But if you look at employment, i.e., the number of people who are working, the picture almost completely reverses. The number of people in Milwaukee who are working has dropped by 1% in the past year, while employment in Pittsburgh has grown by 0.4%. (Although the new statistics suggest that employment dropped in Charlotte, too, that may be just a temporary anomaly, since employment was significatly higher there in July than a year ago, and separate data on the number of jobs indicate the Charlotte economy is still growing rapidly.)

How can both employment and unemployment go up in a region at the same time? It happens when the labor force is increasing. Pittsburgh has over 20,000 more workers than it did a year ago, a 1.7% increase, while Milwaukee has lost workers.

As noted in previous posts, the Pittsburgh Region has been creating jobs while many others have been losing jobs. So it's really not surprising that people may be coming here looking for work, or that students may be staying here after graduation rather than going to other regions in search of work.

It's hard for Pittsburghers to think of their region as a "hot" place for jobs, but in this weak national economy, that's exactly what our region is.

When people come to a region looking for work, or when students graduate and go looking for a job, they are temporarily unemployed. (At least we hope it is only temporary!) Employment in the Pittsburgh Region has been growing, but the Labor Force has been growing even faster, which means that the number of people looking for work (i.e., the Unemployed) is increasing. The increase in unemployment may have nothing to do with people losing their jobs; although some people may be losing jobs, more are getting jobs, which is why the total employment and the total number of jobs in the Pittsburgh Region has been increasing. Charlotte and Silicon Valley have been having similar experiences; people are still going there in search of jobs or entrepreneurial opportunities, boosting their labor force, and also temporarily boosting their unemployment.

The converse of this is that just because a region's unemployment rate decreases, it might not be good news. As in Milwaukee, it could mean that jobs are declining and that workers are leaving the region even faster.

Although newspaper headlines continue to focus on changes in the unemployment rate, it's important to understand all of the underlying elements -- the size of the labor force and the level of employment as well as the unemployment rate. All of these factors are posted each month at the PittsburghToday website so you can see for yourself what's happening.

The most meaningful indicator of our economic strength, however, is not the change in the unemployment rate but the change in the number of jobs. And on that score, we're doing pretty well, as described in more detail in the previous post.

Floating Higher Above Some, But Not All of the Competition

August was another bad month for workers nationwide, but the Pittsburgh economy continues to buck the trend. Although there were 400,000 fewer jobs nationwide in August than a year earlier, the Pittsburgh Region has nearly 4,000 more jobs than it did a year ago.


The gap between the Pittsburgh Region and much of the rest of the country is widening in a positive way. Although job losses quadrupled nationally between June and August, job growth in our region nearly doubled.


Pittsburgh's performance relative to other regions improves with each passing month. In August, four more major regions fell into the job loss category -- Chicago, Indianapolis, Kansas City, and Minneapolis -- meaning that a majority of the top 40 regions have now lost jobs compared to a year ago. Not only is Pittsburgh among the minority of major regions where there are more jobs than a year ago, but the Pittsburgh Region's ranking improved a notch in August -- we now have the 15th highest job growth rate among the top 40 regions, and the 14th highest growth rate in private sector jobs.


Our major life preservers continue to be higher education and health care, followed by professional and business services. Although we still have fewer manufacturing jobs than a year ago, the rate of loss reversed a bit in August, whereas it appeared to be accelerating in June and July. 29 of the other 39 largest regions lost manufacturing jobs at a faster rate than we did in August.


On the negative side, job losses in Pittsburgh's financial sector accelerated in August; there are now 400 fewer finance-related jobs here than a year ago, and the increase in the rate of job loss was higher here than in many other regions. The leisure and hospitality industry, which helped boost the region's overall job growth in July, lost jobs in August; that's a change from recent years, when the industry has typically added jobs in August.


Although Pittsburgh's current economic mix has helped "recession-proof" us in these challenging times, it should not be mistaken for good performance. Even in the midst of the recession, regions like Austin, Boston, Charlotte, Denver, Norfolk/Virginia Beach, and Seattle are creating jobs from 2-8 times as fast as the Pittsburgh Region is. If we're going to ever match that, we need to keep working to create a better business climate and to grow startup firms. With the credit crisis growing, it will be particularly important to make sure that the small businesses in our region can get the financing they need to stay in business and to take advantage of growth opportunities when they present themselves.

College Students and Seniors Make The City Seem Poor

A new report from the Census Bureau says that the City of Pittsburgh is one of the poorest large cities in the U.S. Median household income in Pittsburgh in 2007 was $32,263, the 4th lowest level among the central cities in the top 40 regions. By comparison, median income in the City of Charlotte was $52,690, more than 60% higher.


Why are incomes in Pittsburgh so low? Surprisingly, part of the answer is that Pittsburgh has so many colleges and universities. Most college students don’t earn much money while they’re in school, and so cities that have more college students will have lower overall income. And that’s exactly what’s happening in Pittsburgh.



Pittsburgh has a higher proportion of college students than almost any other major city in the country. In 2006, the Census Bureau estimated that more than 1 out of every 7 (15.5%) residents of the City of Pittsburgh was in college or graduate school, the second-highest percentage among the central cities in the top 40 regions. By comparison, fewer than half as many (6.8%) of the residents of the City of Charlotte were in college.


As a result, nearly 1 out of every ten (9.3%) households in the City of Pittsburgh is headed by someone under the age of 25, the second highest percentage among the central cities in the top 40 regions. Only Austin – another big college town – has a higher percentage of young households.


Not surprisingly, households headed by people under age 25 have lower income than older households do. Nationally, median income for households under 25 is $26,747, a little more than half of the overall median household income of $50,740. So cities like Pittsburgh that have more young households will have lower overall median income. And in college towns, the households under age 25 are even poorer, because more of them are in school and not working. In Pittsburgh, their income is unusually low, though – median income for households under age 25 is only $13,342, the lowest level by far for that age group of any city in the top 40 regions. This may be due to unemployment and low wages among young people not in college.



It’s not just young people in college that make Pittsburgh look poor. It’s also senior citizens. One out of every 4 households (24.4%) in the City of Pittsburgh is headed by someone age 65 or older, the second highest percentage among the top 40 regions. Only Miami has more senior households. In contrast, only half as many (12.2%) of the households in Charlotte are 65 or over. Since households 65 years or older have lower incomes than others, Pittsburgh’s overall income will be lower than other regions simply because it has more households in that age group.


If you look at households in the 25-44 age range, the median income in the City of Pittsburgh is much better -- $43,369 in 2007, ranking 27th among the central cities in the top 40 regions. That’s still low, but hardly the worst in the country. Unfortunately, the City of Pittsburgh has the second-lowest percentage of 25-44 year old households among the top 40 regions. Some of that is likely a legacy of the region’s economic collapse in the 1980s – the 18-22 year-olds who left the region in search of jobs then would have been in the 25-44 age group today.


Although the City of Pittsburgh’s unique age distribution contributes to its low ranking on income, it’s not the only factor. The City’s small physical size makes it easier than in other regions for upper-income workers to live outside the City but still work in the City. But even at the regional level, income levels within each age group here are below most other regions. Some of this reflects the lower cost of living in the Pittsburgh Region, but it’s also due to relatively low salary and wage levels for many types of jobs. More on that in a future post.



(A shorter version of this post appeared in the Sunday, September 14, 2008 Pittsburgh Post-Gazette.)

Pittsburgh Innovates

Would you like to help an entrepreneur in Pittsburgh get $10,000 to support their innovative idea? You can, not with dollars, but with a few minutes of your time, thanks to the Greater Keystone Innovation Zone (GO-KIZ for short).

GO-KIZ has created a new marketplace for innovative ideas in the region called Pittsburgh Innovates. The innovators post their innovations at the Pittsburgh Innovations website where you can review them. One of them will get the $10,000 "Community Choice" award based on votes from you and others who take the time to rate them. Another will get a $20,000 award if they are chosen by a panel of judges.

So if you'd like to get a sense of some of the innovative ideas being developed in the Pittsburgh Region, go and take a look. It's early in the process, but there are already 8 different innovative ideas there. You can rate each idea if you want, or just vote for the one you like best.

But Pittsburgh Innovates doesn't stop there. If you don't have an innovation, but if you have skills that could be helpful to somebody who does, you can offer your skills on the site, too.

If you know of somebody who has an innovation, tell them about this opportunity to get some visibility and maybe some money, too. And help show the innovators in Pittsburgh that we care about what they're doing, by voting early and often!

Keeping Our (Economy’s) Head Above Water

July was a bad month for the U.S. economy, but a surprisingly good one for the Pittsburgh Region, at least in relative terms. For the second month in a row, the U.S. economy had fewer jobs than the previous year, and the rate of job loss nearly doubled from June to July. But in Pittsburgh, the exact opposite happened –we had 4,300 more jobs in July 2008 than in July 2007, and the 12-month rate of job growth here doubled from 0.2% in June to 0.4% in July.

Although we're clearly feeling the effects of the recession -- Pittsburgh’s rate of job growth in July was well below the growth rates we experienced earlier in the year -- our region is doing better than most large regions in the country. Pittsburgh had a higher rate of job growth between July 2007 and July 2008 than 24 of the top 40 regions in the country, and seventeen of those regions actually lost jobs during that period of time. For example, Silicon Valley lost 1,400 jobs, Cleveland lost 2,100 jobs, Milwaukee lost 3,700 jobs, and Phoenix lost over 28,000 jobs.

What’s enabling our economy to swim so strongly against the recessionary undertow? The biggest factor continues to be the Education and Health Services sector, which created 5,300 new jobs in the last 12 months. People continue to need health care even in a recession, and there is a tendency for people to go back to school when the economy is weak. Our Education and Health Services sector isn’t outperforming other regions (job growth only ranks 23rd among the top 40 regions), but because Pittsburgh has the second highest proportion of its jobs in education and health care of any of the top 40 regions, even average growth in education and health care means that the overall Pittsburgh economy will tend to outperform other regions.

But the increase in the rate of job growth in July compared to June wasn’t due to education and health care, it came from nearly 2,800 new jobs in two sectors: Administrative and Support Services, and Leisure and Hospitality.

The Administrative and Support Services sector created 4,000 jobs between July 2007 and July 2008, an increase of 1,700 over the June job growth total. The data aren’t detailed enough to determine exactly which subsectors created these jobs, but the biggest categories of jobs in this sector are in employment services, call centers, security services, and janitorial services. Employment services experienced a temporary dip of about 1,000 jobs in June, and the rebound from that contributed to the better performance in the overall regional economy in July. Pittsburgh had the 5th highest job growth in this sector of any of the top 40 regions.

The Leisure and Hospitality sector created 1,900 new jobs compared to the prior year, a jump of 1,100 compared to June. A little more than half of the growth in jobs occurred in the arts and entertainment sector, and the remainder were in both hotels and restaurants. Pittsburgh’s job growth in Leisure and Hospitality was the 16th highest among the top 40 regions, and the increase between June and July was the 5th highest. It may be that the recession and high oil prices have kept many vacationers and tourists closer to home and Pittsburgh's strong arts and entertainment sector is attracting them here.

Although it’s good news that total jobs have continued to grow, many of the sectors where jobs have been growing do not pay high wages. In contrast, the manufacturing sector, which is the biggest contributor to regional income because of the high wages it pays, is not only declining, but is losing jobs at an accelerating rate. We had 1,900 fewer manufacturing jobs in July than 12 months ago, whereas we had only lost about 1,200 in the early part of the year. Moreover, our performance is slipping relative to other regions. In May, only 14 of the top 40 regions were doing better in retaining manufacturing jobs than we were, but in July, 20 regions were out-performing us. Since many other jobs in the service sector depend on manufacturing businesses and jobs, these decreases may have a ripple effect throughout the rest of the economy in future months.

So while the summer travel season seems to be helping us, if the manufacturing sector continues to decline, we could start experiencing more serious problems in our region’s economy than we have so far. The state’s uncompetitive business tax structure makes it particularly difficult for our region to retain manufacturing jobs and attract new ones.

Our Region's Future Depends on Our Small City

Our region’s ego took a hit last month when the Census estimated that the City of Pittsburgh is now only the 59th largest city in the U.S., down from 54th in 2000, and smaller than places like Aurora, Colorado and Bakersfield, California. In 1950, Pittsburgh was the 10th largest city in the country, but its population has dropped by over 50% since then, one of the largest population declines among any major city.

What caused this precipitous drop? High taxes? The loss of the steel industry? Bad city management?

The primary explanation is actually quite simple – with only 55.6 square miles, Pittsburgh is one of the tiniest of the major cities in the nation. Among central cities in the top 40 regions, only Boston, Miami, Minneapolis, Providence, and San Francisco are smaller in land area than Pittsburgh. Most big cities have at least twice the land area that Pittsburgh does.

In cities with more land area, many people who moved “to the suburbs” stayed within the corporate limits of the central city. But in Pittsburgh, the suburbs are different municipalities, and suburbanization meant population loss for the city.

However, while residents moved out, their jobs did not. Although Pittsburgh ranks only 59th in the number of residents, it ranks 25th in the number of jobs located in the City (in businesses of all types). In 2004, there were nearly 300,000 jobs in the City of Pittsburgh, more than in many cities that are much bigger in terms of population. And the City would probably rank even higher if it weren’t so small; Pittsburgh ranks 6th in the country in jobs per square mile, behind only Boston, Miami, New York, San Francisco, and Washington, DC.

The jobs located in the City of Pittsburgh support families throughout the entire region. In fact, only about a third are filled by people who live in the City. Nearly 200,000 people, from every county in southwestern Pennsylvania and from West Virginia and Ohio, come to Pittsburgh every day to work.


Most people don’t realize how much our region’s economy depends on the City of Pittsburgh. More than 1 out of every 4 jobs in the Pittsburgh metro area are located in the City. Moreover, the City houses three-quarters of the region’s higher education jobs, half of the jobs in finance and company headquarters, and over one-third of the jobs in professional services, health care, and arts and entertainment. Several of these are the sectors that have created almost all of the region’s job growth in the past several years.

And of course, the City doesn’t offer just jobs; it is also the region’s primary source for advanced health care, higher education, culture, entertainment, and sports, which are major attractions for talented workers, regardless of where in the region they live.

The challenge for the City is providing the public services needed to support these jobs and regional attractions, but with a tax base that depends primarily on a shrinking base of residents. Raising tax rates on either businesses or residents won’t work, because it’s too easy for either group to move across the City line to escape them. So it’s critical for the City to attract more residents in order to increase its tax base.


Aren’t the City’s high tax rates a major deterrent to living in the City? Yes, but high gasoline prices are an equally high deterrent to living in the suburbs. What most commuters save in taxes by living in the suburbs is now more than offset by the cost of gasoline and depreciation on their car.

Because of the central role Pittsburgh plays in the region’s economy, it’s a priority for the entire region to make sure the City can attract and retain residents. Strengthening the City’s finances and improving the quality of the City schools are particularly important. Our region’s future depends on having a healthy central city.

(A shorter version of this post appeared in the Pittsburgh Post-Gazette on Sunday, August 3, 2008.)

The Perils of Non-Diversification

The New York Times had a story on Saturday, "City and State Brace for Drop in Wall Street Pay," about the impact that layoffs and bonus cuts in investment banking will have on the regional and state economies in New York. The story reports that the largest financial companies in New York City will reduce pay and benefits by $18 billion in 2008 compared to 2007. It further reports that earnings in the financial sector account for 10% of the city's tax revenue and 20% of the state's tax revenue. And those are just the direct effects; much of the story talks about the impact that layoffs and lower pay will have on other economic sectors where the financial sector workers spend their earnings. It quotes a state official as saying that each Wall Street job creates two additional jobs in the city and a third in the surrounding region.

These kinds of impacts are reminiscent of the problems the Pittsburgh Region faced in the 1980s with the massive restructuring of the steel industry. In fact, the parallels are quite striking. In the New York metro area today, 12.1% of workplace earnings are generated by the securities industry. In the Pittsburgh metro area in 1980, 13.6% of workplace earnings were generated by the primary metals industry (mostly the steel industry).

Pittsburgh's problem then, and New York's problem today, is an over-dependence on one particular economic sector. But Pittsburgh doesn't have to worry about that any more, right? We've diversified our economy dramatically in the last 25 years, haven't we?

We're clearly less concentrated in manufacturing sectors than we once were. Whereas 13.6% of the Pittsburgh region's workplace earnings in 1980 came from primary metals, only 2.2% do today. And whereas 34% of our workplace earnings in 1980 came from manufacturing, only 13.3% today do, and those are spread across a much broader range of specific industries.

But we've now become heavily dependent on a new sector -- health care. In 2006, 12.5% of the Pittsburgh Region's workplace earnings came from the health care and social assistance sector. That's a higher percentage than the securities industry represents in New York. So our economy is every bit as dependent on the health care industry as New York is on the securities industry. And our region has a higher proportion of its jobs in health care than any of the top 40 regions except for Providence, Rhode Island.

Moreover, most of our job growth recently has been due to growth in the health care sector. Between 2005 and 2007, the total number of jobs in the region increased by 12,700, and 7,300 of those jobs were in the health care sector.

But unlike steel, can't this new goose keep laying golden eggs for us? Probably not. Remember that what's fueling the growth in health care jobs is the rapid escalation in health care costs and health insurance premiums that are making businesses uncompetitive and making health insurance unaffordable. And study after study has estimated that 30-40% or more of health care costs come from waste and inefficiency. Higher and higher priority is now being given to initiatives to lower health care costs by reducing unnecessary hospitalizations, eliminating infections and errors, increasing efficiencies, etc. That means that current growth rates in health care will have to slow, and given our region's dependence on health care for jobs and job growth, that will have a serious effect on our overall economy. The fact that we offer world-class treatments that bring patients here from all over the world will help us somewhat compared to other regions, but there is still likely to be a significant shakeout in the health care sector coming in the next decade.

We should not make the same mistake we made in the 1970s - ignoring the warning signs of over-concentration in an industry that is known to have significant inefficiencies. We need to work hard to make our manufacturing sector more competitive, to help young technology firms to grow and prosper, and to attract new entrepreneurs to the region so we can become truly diversified and better weather any storm in a particular economic sector.

Teetering on the Brink

In June, the U.S. economy lost jobs (on a year-over-year basis) for the first time since November 2003. Compared to June of 2007, there were 170,000 fewer jobs in the U.S. economy, a pretty strong sign that we’re in a recession.

In contrast, the Pittsburgh Region still had more jobs in June than it did the prior year, although not by much – we had 700 more jobs in June 2008 than in June of 2007, a mere 6/10 of a percent increase. In contrast, in April, the region’s economy was ahead by 8,400 jobs over the prior year. Each month has brought the Pittsburgh Region closer and closer to the point where we could start losing some of the job gains we’ve waited so long to see.

Although that may sound grim, we’re still doing a lot better than many other parts of the country, not only our “rust belt” neighbors, but places in the sunbelt, too. Although the 700 new jobs here may not sound like much, 16 of the top 40 regions would have been happy to have them, since they lost jobs between June 2007 and June 2008. Providence, Rhode Island lost 13,000 jobs, or more than 2% of its total employment base. Tampa lost 23,000 jobs. Phoenix lost 26,000 jobs. San Diego lost 4,900 jobs. So we’re doing pretty well compared to a lot of sunbelt regions.

If you dig behind the totals, you can find some even better news. Private sector jobs in the Pittsburgh Region increased by 1,400 in June. In percentage terms, that’s the 18th best performance out of the top 40 regions. In contrast, Silicon Valley only created 100 private sector jobs (fewer than 1/10 as many as we did) during the same period. The economies in most other regions are being supported by growth in government jobs, whereas ours is actually being slowed by losses in government jobs. The Pittsburgh Region had a net loss of 800 government jobs from June 2007 to June 2008, one of only nine of the top 40 regions to actually lose government jobs. (As noted in previous articles, although we have a lot of different government entities here, they don’t collectively add up to the size of government in other places, and our population losses mean that we don’t need more schools, more police, etc. the way other regions do.)

The biggest contributor to our economy continues to be health care; health care and social services added 3,600 jobs over the past year. However, it’s not that our health care sector is growing unusually rapidly; in fact, our job growth in health care was about average among the top 40 regions. But as explained in previous articles, health care represents an unusually large share of our economy, and so even moderate growth there has an strong stabilizing effect on our economy.

Our professional and business services sector wasn’t far behind health care in terms of job creation; we had 2,300 more jobs there in June than a year ago. But in contrast to health care, our professional and business services sector is a powerhouse relative to other regions – we had the 10th highest growth rate in that sector among the top 40 regions. Our region created professional and business services at double the rate that Chicago, Minneapolis, Philadelphia did, and more than 5 times the rate of growth in San Diego and Silicon Valley.

On the other side of the ledger, our biggest job losses occurred in manufacturing (1,900 fewer jobs than a year ago), retail (1,700 fewer jobs), and transportation and warehousing (1,300 jobs). We’ve also lost hundreds of jobs in the publishing and information sector (800 jobs), government (700 jobs), and the financial sector (400 jobs).

But here again, good news and bad news can be relative. Although the loss of manufacturing jobs will have serious ripple effects throughout our economy, all but 5 of the other large regions in the country lost manufacturing jobs, too. We were fortunate that our losses were much smaller than many other places – 11 regions lost 2-3 times as many of their manufacturing jobs (in percentage terms) as we did.

Recent news stories have pointed out that, thanks to good management at local banks like PNC, we haven’t experienced the kinds of problems in the financial sector as other regions have, and the job statistics prove that – although our region lost 400 jobs in the financial sector over the past year, in percentage terms that was actually the 13th best performance among the top 40 regions. As a comparison, Miami, Phoenix, and San Diego each lost 5,000 jobs in the financial sector in the past year.

So in terms of net job growth, although we’re teetering on the brink, we’re holding our own for now. We have several large, important economic sectors that are outperforming most other regions, and if that keeps up, it could help to keep our regional economy’s head above water, even as the U.S. as a whole takes a temporary dive.

How to Cut Health Care Costs

The rapid growth in health care costs is a major problem facing the U.S. economy. One of the main reasons why more and more people don’t have health insurance is because of the high cost of insurance, and efforts to expand insurance coverage won’t be sustainable if health care cost inflation isn’t reduced.

Health care is a regional enterprise, and the region that figures out how to reduce health care spending and make health insurance more affordable will be a magnet for both business and population growth.

The best opportunity to reduce the growth in health care costs, at least in the short run, is by reducing unnecessary hospitalizations. Hospital care represents over one-third of total health care spending, both in Pennsylvania and nationally. Since hospital care is very expensive, even small reductions in hospitalizations could reduce health care costs significantly.

Reducing hospitalizations doesn’t mean restricting people who need hospital care from getting it. Many people have what are called “ambulatory care sensitive conditions” – chronic diseases and other conditions where many hospitalizations can be prevented with the right kind of health care in the community. National data indicate that more than 1 out of every 100 adults ages 40-64 is hospitalized, possibly unnecessarily, for an ambulatory care sensitive (ACS) condition, and nearly 1 out of every 20 adults ages 65-74 is hospitalized for one of these conditions. The biggest ACS categories by far among adults are congestive heart failure, pneumonia, and COPD (chronic obstructive pulmonary disease, which includes emphysema and chronic bronchitis).

Pittsburgh does particularly poorly in preventing preventable hospitalizations. In 2005, among Medicare enrollees (the only population for which national data are available), Pittsburgh had the third highest rate of hospitalizations for ACS conditions among the top 40 regions. Pittsburghers with congestive heart failure and COPD were hospitalized more than twice as often as in places like Denver, Minneapolis, Portland, Oregon, San Diego, and Seattle. So there is clearly plenty of room for improvement in our region.

One of the best places to start is reducing hospital readmissions. Data from the Pennsylvania Health Care Cost Containment Council show that 1 out of every 5 people who go to the hospital for conditions like congestive heart failure, COPD, or pneumonia go back to the hospital within 30 days after discharge, often for the same condition, costing health insurers in our region tens of millions of dollars every year.

Demonstration projects in other parts of the country have shown that hospital admission and readmission rates can be reduced dramatically – by 20-50% or more – through fairly simple improvements in primary care. These include better education for patients about how to manage their disease, better training in how to use their medications, and more frequent contacts to identify problems early before they require hospitalization. Improvements such as these don’t cost much, and they more than pay for themselves almost immediately in reduced hospitalization costs.

So why aren’t all patients with ACS conditions getting this kind of quality care? The biggest barrier is the current healthcare payment system. Most health insurance plans won’t reimburse primary care physicians for providing this kind of care, and they often charge high co-pays for the medications that can keep patients out of the hospital. Fundamental changes in the way we pay for health care are needed in order to make fundamental improvements in the way health care is delivered.

The Pittsburgh Regional Health Initiative (http://www.prhi.org/) is leading several initiatives to improve care for people with chronic diseases and to reduce hospital readmissions, and the Pittsburgh Business Group on Health (http://www.pbghpa.com/ ) is pioneering new payment models. If employers, health insurance plans, hospitals, and physicians will support the payment changes and care changes needed to implement these kinds of initiatives, the Pittsburgh Region can be a leader in reducing health care costs.

(This post also appeared in the July 13 Pittsburgh Post Gazette.)

The PHC4 Crisis Ends -- Temporarily

The Governor has reinstituted the Pennsylvania Health Care Cost Containment Council (PHC4) by Executive Order, bringing all of the employees back after being fired a week ago.

The employees were terminated last week because the General Assembly had not reauthorized the Council, so you might think that in order for the employees to be rehired, the legislature must have reauthorized the Council. But no, it didn't. The Governor re-established the Council by Executive Order. If he could do that, why didn't he just do that last week instead of shutting it down for a week? And if he wasn't sure he could do it then, why not wait a week to figure it out?

The Executive Order is only valid through November 30, so if the General Assembly doesn't act by then, will the Governor fire all of the employees again?

How in the world can an agency expect to retain highly specialized staff in this kind of environment? With many other states looking to establish health care cost and quality reporting systems, the PHC4 employees must certainly be starting to think that the grass will be greener somewhere else.

Help Save the Pennsylvania Health Care Cost Containment Council

Before high gas prices and the recession took center stage, the #1 policy issue in the nation was health care. It costs too much, which is making businesses uncompetitive and making it harder and harder for people to afford health insurance, and the quality is unacceptably poor, with thousands of people getting preventable infections in hospitals and failing to get the health care they need to keep them out of the hospital in the first place.

There is widespread agreement across the country that one of the key elements of a solution to these problems is "transparency," an unfortunately non-transparent bit of jargon that means telling people what how much health care actually costs and how good it actually is. And believe it or not, Pennsylvania has been one of the leading states in providing that kind of transparency for over 20 years, through a state agency called the Pennsylvania Health Care Cost Containment Council, or PHC4 for short.

Since 1986, PHC4 has been collecting data, primarily from hospitals, and has been issuing reports comparing hospitals in terms of their profits, their infection rates, their mortality rates, their readmission rates, etc. Over the past few years, PHC4 has done pathbreaking work in publicly reporting on the rate of infections in different hospitals (our own Pittsburgh Regional Health Initiative here in Pittsburgh has proven that most of these infections can be completely eliminated through simple and affordable methods if hospitals make a commitment to doing it, and PHC4 lets you know which ones are making progress); in publicly reporting on the rate of hospital readmissions (did you realize that for many conditions, if you go to the hospital, you have a 1 in 5 chance of having to go back to the hospital within 30 days?); and perhaps most dramatically, in reporting on the dramatic difference in how much different hospitals are paid for doing the same procedures with no difference in quality (should it really cost twice as much at one hospital for a coronary artery bypass as another, with no difference in quality?).

This kind of information is a critical foundation for health care reform. Most states would love to have this kind of information, but they don't. Pennsylvania has it, and you can get access to all of this and other information on the web at http://www.phc4.org/.

But hurry, because thanks to yet another example of how our state leaders are spending more time playing one-upmanship with each other than trying to really get things done, the General Assembly failed to reauthorize PHC4 before the June 30 deadline. And then, since it apparently had nothing more important to do, the Governor's Office raced right over to PHC4 and laid off almost all of the employees.

Some commitment to health care cost containment the Governor and Legislature have, huh? News accounts claim that PHC4 is a pawn in a battle between the Governor and the Senate over the medical malpractice insurance fund. That would be bad enough, but it wouldn't at all be surprising if it's also because the state hospital association has been trying to get rid of PHC4 for years, since all this transparency about how expensive hospitals are and how good they are at preventing infections is a little -- maybe a lot -- uncomfortable.

Take a look at the PHC4 website and judge for yourself. You can find hospital-by-hospital and doctor-by-doctor rankings on quality, cost, infections, readmissions, etc.

And if you agree that having an agency like this is a good thing, here's what you can do (but do it right now!): Send an email to:
Governor Ed Rendell at governor@state.pa.us
Senator Dominic Pileggi, the Senate Majority Leader at dpileggi@pasen.gov
and
Rep. Todd Eachus, the House Democratic Policy Chairman at teachus@pahouse.net
and ask them to (1) stop playing partisan games with our health care, and (2) reauthorize PHC4 before they go home for the holiday, so the employees who work there won't go find other jobs and leave Pennsylvania without the unique capability it has taken two decades to build.

Lame Excuses for Not Cutting the Corporate Net Income Tax

The new state budget in Pennsylvania is due this week. Will the Governor and General Assembly use it to fix America’s Worst Business Tax?

At 9.99%, Pennsylvania’s Corporate Net Income (CNI) tax has the highest flat rate in the country. (Iowa has a 12% rate on net income over $250,000, but the rate is only 8% for the first $100,000 in income.) Moreover, Pennsylvania is one of only two states (the other is New Hampshire) that caps the amount of net operating loss carryforwards, which means that startup companies and businesses in cyclical industries pay the high tax rate on more of their income than in other states.

In 2004, Governor Rendell’s Business Tax Commission said that “Pennsylvania’s Corporate Net Income (CNI) Tax rate is not competitive with other states … [it] discourages both new economic development and the retention of existing Pennsylvania businesses.” Earlier that year, a business/labor tax commission said the high CNI tax rate “contributes powerfully to the perception of Pennsylvania as unfriendly to business.”

So with the economy struggling, why doesn’t the state cut the tax?

You’ll hear a variety of excuses and justifications for not cutting the CNI tax rate. Here’s why they are misleading or misguided:

“We need to close tax loopholes before cutting the tax rate.” As evidence that big tax loopholes exist, Governor Rendell is fond of saying that “73% of businesses subject to the CNI tax pay no taxes.” But IRS statistics show that the reason most corporations don’t pay taxes is that half of the corporations in the country have no income or profits to tax. Moreover, in some of the states that supposedly have fewer loopholes, an even smaller percentage of corporations pay taxes than in Pennsylvania. The cure the Governor has proposed (mandatory combined reporting) would be worse than the alleged disease, since it would increase taxes on manufacturers significantly even if the rate is reduced.

“National studies say that Pennsylvania’s business taxes are competitive.” Governor Rendell cites the Tax Foundation’s State Business Tax Climate Index, which ranks Pennsylvania 27th out of 50. But if you look closely at the index, you’ll see that it ranks Pennsylvania 42nd out of 50 states on corporate taxes, i.e., 8th worst. (The better ranking on the overall index is because of the state’s low personal income tax rate.)

“We can’t afford to cut business taxes.” When the state estimates how much it will cost to cut the tax, it assumes the worst case scenario, i.e., no change in the number or size of businesses to be taxed. Yet the whole reason for cutting the tax is that it is deterring businesses from locating and expanding in the state. As an example of why the estimates are too conservative, when Pennsylvania reduced the rate of the Capital Stock and Franchise Tax (the state’s other major business tax) by 33% between 2003 and 2006, the total revenues from the tax increased by over 20%. So in fact, the state can’t afford not to cut the tax.

“Instead of giving tax cuts to wealthy corporations, we should reduce the state’s Personal Income Tax.” At 3.07%, the Personal Income Tax is actually Pennsylvania’s most competitive tax. Of the 41 states with a personal income tax, Pennsylvania has the second lowest rate after Illinois. If the state can create more jobs by becoming more business-friendly, that will increase the revenues from the Personal Income Tax (more jobs = more income = more tax revenues), enabling the rate to be cut in the future.

Twenty years ago, Pennsylvania’s CNI tax was reduced to 8.5%, improving the state’s ranking to 16th. Job creation in the state soared. In fact, the only time in the past 30 years that Pennsylvania’s job growth matched the U.S. rate was in 1987, after the CNI tax rate was reduced. But then the state increased the tax dramatically in 1991, and the state’s job growth rate plummeted.

With Pennsylvania continuing to experience slower job growth than most states, it’s time to stop making excuses. The state needs to cut the Corporate Net Income tax rate significantly this year.

(A shorter version of this post appeared in the Pittsburgh Business Times on June 27, 2008.)

The Recession Starts to Arrive in Pittsburgh

The preliminary May jobs figures for the Pittsburgh Region show that the slow U.S. economy is starting to affect our region. The bad news is that our rate of job growth has slowed dramatically; the good news is that we're still creating jobs, whereas many other regions are actually losing jobs.

As of May, 2008, there were 3,200 more jobs in the Pittsburgh Region compared to a year ago (May, 2007). In the earlier part of the year (January through April) we were up between 7,000 and 9,000 jobs each month. Our rate of job growth (0.28%) was only half or less what it has been for the past year, so that's a very significant slowdown.

However, we're not alone in experiencing a slowdown; the U.S. job growth rate is only 1/10 of what it was at the end of 2007, and all but 3 of the top 40 regions have experienced reductions in their job growth rate. Pittsburgh's job growth, although lower than it has been, was three times higher than the U.S. job growth rate (0.28% vs. 0.08%) in May.

Most striking, though is the fact that 14 of the top 40 regions have fewer jobs today than they did a year ago. It's not just places like Cleveland and Detroit, which have been losing jobs for the past two years; San Diego, Los Angeles, Las Vegas, Phoenix, Miami, and Tampa all lost jobs over the past year. The Pittsburgh Region had the 23rd highest job growth rate among the top 40 regions in May, higher than Orlando, Chicago, and Cincinnati, as well the regions that lost jobs.

Why are we doing so well? One out of every 5 jobs in our region is in health care or higher education, and those are reasonably recession-resistant industries. (By way of comparison, only one out of every 14 jobs in Las Vegas is in health care or higher education.) And while we're continuing to lose manufacturing jobs, we're holding on to them better than many other regions are -- we lost 1.3% of our manufacturing jobs over the past year, while the U.S. as a whole lost 2.5% of its manufacturing jobs, i.e., almost twice as many.

The next few months will likely be critical. If the U.S. economy recovers, Pittsburgh's recesssion-resistance may enable it to ride out the dip without actually losing jobs. If the U.S. economy worsens, then we may well start to lose jobs, as more and more economic sectors are affected more and more severely by economic woes.

Is There a Perfect Source of Electricity?

How should we generate our electricity in the future? Concerns about air pollution, global warming, and high energy prices have prompted an unprecedented discussion about something most people have taken for granted all of their lives.

During the 1990s, natural gas was viewed as the low-cost, clean solution for generating electricity, and as a result, about 40% of the nation’s current generation capacity uses natural gas. But the price of gas has tripled and concerns about global warming have appeared, making it far less attractive than before.

Coal-fired electricity plants, which represent 30% of U.S. generation capacity and the largest source of power in our region, have remained the lowest-cost option. But they have become Public Enemy #1 for many environmentalists because they emit greenhouse gases, soot, and mercury.

Many people are now advocating for wind, solar, and nuclear power as the solution for the future because they don’t generate soot or carbon dioxide (CO2). But unfortunately, the choice is not that easy, because not all else is equal.

First of all, how reliable would you like your power to be? Most people expect their lights to come on at night and their refrigerators to run all day long, but the sun only shines during the day and the wind doesn’t blow all the time. Electricity can’t be stored cost-effectively; it has to be produced continuously and in sufficient quantities so it’s there when you want it. As a practical matter, that means wind and solar can never provide 100% of our electricity needs – baseload power will need to come from sources like coal, gas, and nuclear that can run continuously.

How much are you willing to pay? Higher electricity prices could cause serious problems for already-tight household budgets and for the competitiveness of many industries. The cost of solar power today (without federal subsidies) is about 4 times as much as traditional sources. Since the average household here spends about $900 per year on electricity, that means that if half of your electricity came from solar energy, it would cost you about $1,300 per year more. Wind power is much more affordable, but it still costs about 20% more than coal.

What are you willing to have in your backyard? Wind and solar power require a lot of land. To generate the same amount of electricity as a typical 1000 megawatt coal or nuclear plant, you would need to build 200 windmills over a land area of 70 square miles (larger than the City of Pittsburgh), or 17 square miles of solar cells (the equivalent of covering almost all of Monroeville). If you put the solar cells or windmills “somewhere else,” you’d need a lot of new transmission lines, increasing costs and reducing reliability, and that assumes there is “somewhere else” to put them – recent efforts to site windmills in rural areas have run into significant public opposition.

What about nuclear power? It’s a big economic development opportunity for Westinghouse and other businesses in our region, but there are constraints on nuclear energy’s ability to become our primary source of electricity, including the rising cost of construction, U.S. dependence on foreign sources of enriched uranium, the lack of a place to dispose of the nuclear waste, and the small, but still non-zero risk of nuclear accidents.

Although research is going on here and elsewhere to reduce the disadvantages of wind and solar power, even the most optimistic projections indicate that coal will remain the largest source of electricity for at least several decades. So rather than fighting it, we should work to make it cleaner. New clean coal technologies have the ability to dramatically reduce soot and mercury emissions compared to older plants, while still keeping costs affordable. Moreover, our region could become a leader in reducing greenhouse gas emissions from coal, since we have the geologic structures needed for underground storage of CO2.

The right answer for our energy future – and for southwestern Pennsylvania’s economy – is a balanced portfolio: more renewable energy sources than we have today, combined with cleaner coal.

For more insights on energy issues, visit 3RiversCleanEnergy.com.

(This post also appeared in the June 1 Pittsburgh Post-Gazette.)

Barking Up the Wrong Tree

Opponents of Allegheny County’s ill-conceived 10% drink tax are now pushing for a voter referendum to repeal the tax. (The $2 per day rental car tax is equally ill-conceived, but the restaurant and tavern owners are better organized than the rental car companies.)

County Executive Dan Onorato has vowed to fight the repeal effort, claiming that without the drink tax, he and County Council will be forced to raise property taxes, which he is adamantly opposed to doing.

Unfortunately, both sides are right (at least partially), and as a result, fighting each other is a no-win proposition. Instead, they should join forces to fight their common enemy – the Pennsylvania General Assembly.

It’s Not About Transit, It’s About Every Service Allegheny County Provides

Many people have been led to believe – falsely – that the drink tax and car rental tax are necessary to provide increased funding for public transit service in Allegheny County, when in reality, the taxes are being used to balance the County’s budget. And the County is using the drink tax and car rental tax to balance the budget because those are the only options the legislature has given it.

Under current state law, municipalities in Pennsylvania – cities, boroughs and townships – have a wide range of taxing options available to them. In addition to the property tax, they can use earned income taxes, occupation taxes, business privilege taxes, amusement taxes, and other taxes and fees to fund the public services they provide, and they have flexibility to decide what combination they will use.

In contrast, the state has given counties no such flexibility. They have basically one option – property taxes. And that lack of flexibility makes no sense for the unit of government in Pennsylvania which has become as important, if not more important, than most municipalities.

Doesn’t Allegheny County Have “Home Rule?”

In Pennsylvania, when the legislature gives a county or municipality “home rule,” it means (among other things) that the community has completely flexibility as to the rates of taxes, but not the types of taxes. If a community wants to use different types of taxes, it has to go begging to the legislature for approval to do that. That’s what the City of Pittsburgh, even though it’s a home rule municipality, was forced to do a few years ago when it wanted a more balanced mix of revenues from commuters and residents.

So instead of being truly home rule, it’s more like “house arrest” – you have freedom to do what you want, as long as you don’t leave the boundaries the legislature has defined for you.

Narrow Taxes vs. Broad-Based Taxes

Of course, any tax has negative effects on the people who are taxed. However, in contrast to a broad-based tax that would spread the burden widely, the drink tax and car rental tax impose that burden narrowly on two particular industries. And because of that, the economic dislocations will inherently be much greater than what would result from a broad-based tax.

The amount that was expected to be raised by the drink tax and car rental tax was equivalent to a 10% increase in the County’s property taxes. That’s why the County Executive and County Council refuse to give up on the drink tax and rely solely on property tax increases to balance the budget. It appears that the revenues are going to be significantly higher than expected, making them even more strongly opposed to giving up the revenues. But if they would be concerned about a tax hike of that magnitude if it applied to every property owner in the County, they should be even more concerned about taxes that generate the same amount from two industries. (It’s important to note that a 10% increase in the County’s property tax rate would not represent a 10% increase in the total property taxes that a County property owner would pay; most of a property owner’s property taxes are imposed by their school district, not by the County.)

The stark reality is that Allegheny County’s property tax revenues are not growing, partly due to the lack of economic growth in the county, and partly due to the County’s decision to freeze county assessments in the “base year” system. Although the estimated revenue from the drink tax was equivalent to what the County was planning to provide to the Port Authority, it was also roughly equivalent to the growth in total County spending. To Dan Onorato’s credit, he has kept the County’s expenditures in check, and his budget for this year included only a 3.2% increase in spending, a third of which would go to fund the County’s growing debt service burden. But property taxes are growing at an even slower rate, and that is leaving the County with a bigger and bigger gap to fill.

The Wrong Kind of Taxes, Created the Wrong Way

Providing two narrow options – a drink tax and a car rental tax – and passing them in the middle of the night was the wrong way for the legislature to provide Allegheny County with revenue flexibility. When the City of Pittsburgh pursued additional taxing sources to support its budget, a more than 2-year long public debate took place about what options were most appropriate.

In Allegheny County’s case, however, there was no discussion about options at all. Legislation suddenly emerged from Harrisburg providing the options of the drink tax and the car rental tax. Legislators went home for the summer saying, in effect, “take it or leave it” to Allegheny County. And so, thanks to this top-down approach, Allegheny County had to decide whether to take it or leave it. Unfortunately, but probably not surprisingly given their lack of options, they decided to take it.

It’s worth noting that in the case of the City of Pittsburgh’s battle for more flexibility in raising revenue, the goal was to obtain taxes that were broader-based than existing taxes. The broad-based payroll tax took the place of the business privilege tax that had increasingly come to burden a small and narrow set of businesses in the City (such as restaurants and bars), and the increased occupational privilege tax was designed to ensure that commuters and visitors joined residents in supporting the costs of City services.

In Allegheny County’s case, though, the state gave Allegheny County the ability to extract more from drinkers of poured alcoholic beverages and renters of cars, with no clear rationale as to why they, and they alone, should have to provide more support for the County’s budget. Although the two taxes would enable some support for the County’s services to be obtained from tourists and other visitors, the majority of those who will pay are probably also paying property taxes to the County. So while it won’t show up as a change in their property tax millage, their wallets will be lighter nonetheless.

A Quick Fix is Possible, If There’s a Will To Do It

The General Assembly could act quite quickly to provide additional options if it wanted to – just look at what it manages to do every year when the budget deadline is looming and at the end of each session. And in this case, the legislature doesn’t even need to spend time drafting the legislation – all it needs to do is amend the Local Tax Enabling Act to make it apply to counties as well as municipalities. How long does the legislature need to do that? A week, at most – if it wants to.

The question is, will it want to? Certainly not if the citizens and business leaders in the county sit on their hands and say “we have no choice but to accept what the legislature gave us.” And certainly not if the citizens of the County are busy fighting amongst themselves about the crippled options the legislature has already given us.

The Joke’s On Us

The folks in Harrisburg must be enjoying themselves right now watching the citizens of Allegheny County arguing about whether to repeal the drink tax or raise property taxes. What will they do for fun next year? How about authorizing additional funding for police services through a tax on golf course fees? How about paying for health insurance for the uninsured by authorizing tolls on the Ft. Pitt, Squirrel Hill, and Liberty Tunnels? The potential list of silly options is endless. So why are we accepting the one silly option they gave us, a drink tax and car rental tax, instead of demanding real tax flexibility?

At Least Solve the Problem In Allegheny County

This need not be a statewide issue – our local legislative delegation can and should take the leadership to provide a better solution. The battle over state transit funding was difficult because it involved providing funding for local transit from statewide funding sources. Legislators from rural counties understandably had concerns about the use of taxes paid by their constituents to fund services provided disproportionately in Pittsburgh and Philadelphia, particularly when the cost structures of the transit agencies there were so far out of line.

But the issue today is about how Allegheny County should fund its local services, including, but not limited to, transit. If Allegheny County wants more revenue flexibility, what do legislators in the rest of the state care? Just as the battle over the City of Pittsburgh’s revenue flexibility came down primarily to what local legislators were willing to support, the decision about what revenue flexibility Allegheny County should have depends on what the Allegheny County legislative delegation agrees to support.

Barking Up the Right Tree

Instead of wasting energies inside Allegheny County battling over whether to repeal the drink tax, the community should focus advocacy on the real third option: state legislation that provides genuine revenue flexibility for the County. To its credit, Allegheny County Council recognized that there is a third option, and they started a dialogue with state legislators about it last fall. But once they passed the drink tax, they lost all of their leverage to get action.

It’s time for the rest of the community to recognize the third option and get behind it. Instead of spending precious time, energy, and money on supporting or opposing the drink tax, attention and lobbying resources should be redirected to something really worthwhile – genuine revenue flexibility for the County.

There is no provision in the Pennsylvania Constitution for a voter-led referendum on local tax options, so the only approach is advocacy with state legislators. Rather than expending energies trying to pass a referendum in Allegheny County or to defeat candidates for County Council, whose hands are tied by state legislation, the focus should be on state legislators and the Governor, who determine the taxing options that County Council can use.

Fix It Now or Suffer Later

Maybe you're saying, "Why bother fighting the drink tax and trying to get new state legislation? What’s done is done – leave the drink and car rental taxes in place and move on."

That’s shortsighted for one simple reason. The problem’s coming back again next year, and the year after that, and the year after that. The County had a $28 million hole in the budget this year, not because of the need for more transit funding, but because of stagnant property tax revenues. When Allegheny County’s service costs go up again next year by 3% or more, the County will have another $20-30 million hole in its budget again. If you believe Dan Onorato when he says he has no other way to balance the County budget this year, then you have to believe that he’s not going to have any way to do it next year, either, unless he gets some new revenue options in the meantime.

Will we wait until the morning of July 1 each year to find out what new revenue options the state invented for us in the middle of the night, and then spend the next year fighting about whether it’s a good idea? Or will we start now to push for a permanent solution?

The choice is obvious. And it’s ours to make.

Demand that our state legislators pass legislation this summer giving Allegheny County the ability to choose the best taxing structure for the future.

Better Performing Schools Are Key to the Region's Future

Many employers in the Pittsburgh Region, particularly manufacturers, complain that they have trouble finding qualified workers to fill their jobs.

It’s no wonder – state test scores show that more than one out of four 11th graders in our region (28.6%) can’t read adequately, and two out of five (41.4%) can’t do math properly. And there’s been little sign of improvement – the percentage who are proficient in math and reading has barely changed in the past 3 years.

If you think your school district doesn’t have a problem, think again. None of the 125 school districts in the 10-county region had 90% or more of their 11th graders proficient in math, and only three districts had 90% of their 11th graders proficient in reading. In over 100 school districts, 30% or more of the 11th graders were not proficient in either reading or math. In 39 districts, more than half weren’t proficient.

In other words, if you graded school district performance the same way schools grade kids, no districts would get an “A,” and most would get a “C,” “D,” or “F.” (If you’d like to see your school district’s grade, go to www.pittsburghfuture.com/schoolgrades.html .)

It’s not just high school students that are failing. The problem starts much earlier. One-fourth of the fifth-graders in the region aren’t proficient in math, and over one-third (37%) aren’t proficient in reading. And we have a genuine educational crisis with African American students – more than half (52%) of black 5th graders aren’t proficient in math and over two-thirds (68%) aren’t proficient in reading.

What business could survive if 30% or more of its products failed to meet minimum standards? How can the Pittsburgh Region survive if 30% or more of its children aren’t proficient in basic skills? The answer: It can’t. Our public schools need to do better – a lot better – if our region is going to attract and retain businesses and jobs in the future.

Many people seem to believe that 70% proficiency is the best schools can do without more money. But on average, students in the higher-spending schools in the region do worse, not better.

In the 33 lowest-spending districts in our region (each spending less than $9,000 per child in 2005-06, the most recent data available), an average of 41% of the 11th graders were not proficient in math, and 26% were not proficient in reading. Although that’s unacceptably low, the 32 highest-spending districts (which each spent $11,000 or more per child) did worse – on average, 48% of their 11th graders weren’t proficient in math, and 34% weren’t proficient in reading. In fact, four of the ten best-performing districts in the region spent below-average amounts per child.

Educators often justify low proficiency scores in schools that are educating a lot of poor children or children with disabilities. But our schools aren’t doing well even with the kids who aren’t disabled and aren’t economically disadvantaged – 35% of those children aren’t proficient in math, and 22% aren’t proficient in reading. And again, it’s not a matter of money. Some school districts perform significantly better than others at a lower cost, even with similar numbers of poor and disabled children. For example, about 20% of the 11th graders in the both the Freedom Area School District in Beaver County and the Gateway School District in Monroeville are economically disadvantaged, but significantly more of the kids at Freedom are proficient. (79% of the 11th graders at Freedom are proficient in math, nearly a "B" grade, but only 59.5% at Gateway are proficient, for an "F" grade. 80% of the kids at Freedom can read proficiently, but only 72% are proficient in reading at Gateway.) But the Freedom Area School District spends 27% less per child than the Gateway School District does.

What needs to be done?

1. Demand that every school establish a goal of 100% proficiency for its students and a plan for achieving it. (Try this: go to the website for your school district and see if you can find either a goal for student proficiency or a report on what’s being done to improve it.)

2. Elect school board members committed to achieving 100% proficiency. (Attend a school board meeting and see how much time they spend talking about improving student proficiency. )

3. Improve the quality of early education. Learning starts before school begins, and children with quality pre-school experiences at home and in child care will do better when they start school.

(A shorter version of this article appeared in the May 4, 2008 Pittsburgh Post-Gazette.)

Good News: Progress in Our Entrepreneurial Economy

If you want some good news about the entrepreneurial economy in the Pittsburgh Region, read the 2007 Community Report from Innovation Works, released at their Annual Meeting last night in Lawrenceville. Innovation Works is our region's principal agency for helping grow technology startup companies.

Last year, Innovation Works helped 237 companies and invested $6.1 million in 67 companies, which is an impressive contribution to the region's economy. But even more impressive was the track record of the companies they've helped in the past. Those companies have received $122 million in follow-on funding from other sources, mostly private capital. 65% of the region's venture capital investments were made into the companies to which Innovation Works gave early-stage funding. That means that Innovation Works is one of the critical stages in the economic development pipeline that takes creative technology ideas and turns them into well-capitalized companies.

The companies that Innovation Works has funded have created 365 net new jobs. While that may not sound like a lot, remember that these companies all started from essentially nothing -- just an entrepreneur with an idea -- and are all less than 10 years old. The potential for future job creation is tremendous.

Behind the numbers are some impressive stories -- here is the sampling of successes among these entrepreneurial companies that Innovation Works cited:

- Aethon grew to 100 employees, and has 100 hospital clients for its robotic Tug.

- BPL Global acquired Serveron, bringing the company to more than 100 employees, and closed on $26 million in venture funding.

- Clearcount received FDA clearance for the world's first RFID (radio frequency identification) surgical sponge counting system. (And since Medicare and many insurers are now saying they won't pay hospitals for errors such as leaving a sponge in someone after surgery, the market for this could be huge.)

- ImpactGames partnered with the Peres Center for Peace to help distribute 100,000 copies of its Peacemaker software product to Israelis and Palestinians.

- Knopp Neurosciences was granted FDA orphan drug designation for its clinical developments related to ALS (Lou Gehrig's Disease).

- nanoLambda won the 2007 Nanotech Ventures Award in electronics from the Nano Science and Technology Institute.

- Plextronics set a world record for efficiency of solar cells and closed on more than $20.6 million in new investment.

- Powercast's technology was chosen "Best of Show for Emerging Technologies" at the 2007 Consumer Electronics Show, beating out major companies like Sony.

- Redpath Integrated Pathology was awarded Medicare reimbursement coverage for its Pathfinder TG cancer diagnostic.

- TalkShoe now has more than one million podcasts downloaded from its website each month.

- Thorley Industries signed a $215 million partnership with Hasbro to develop a new product line.

- Vivisimo's products won InfoWorld's award for "Best Enterprise Search" for the third consecutive year, beating out companies such as Google.


Not just one, but a dozen different companies achieving world-class milestones.

As Rich Lunak, Innovation Works CEO, said at their Annual Meeting last night, the next step is getting as many of these companies as possible to the next stage: to become major, market-leading companies that can do for the region what companies like Westinghouse, Fore Systems, Respironics, and others have done -- create hundreds of jobs, attract suppliers, and spawn additional startup companies. That will require support well beyond what Innovation Works can do -- it requires companies and individuals across the region to buy these companies' products, invest in them, and provide them with the kind of workforce and business climate they need to grow.

Misleading Headlines on Air Quality, Yet Again

Well, there they go again. The American Lung Association (ALA), with more interest in sensational headlines than accurate research and information, has released its 2008 "State of the Air" report claiming that Pittsburgh is the "most polluted city" in the country for particle pollution (what is popularly called soot).

And the local and national news media dutifully made it front-page headlines, since what a "new study" says is often more important than what the truth really is.

As has been more accurately reported here and in the Post-Gazette in the past, the ALA's rankings are based on the unusually high readings at a single monitor in the Mon Valley near the Clairton Coke Works called the Liberty Monitor. (Tip to environmental reporters: type in "Air Pollution Rankings" in Google and you'll easily find all of this information on the first or second search page.)

If you want to see how unusual the Liberty Monitor is, go to the PittsburghToday website, where the maximum readings at every PM2.5 monitor in the region are reported. (Tip to environmental reporters: the PittsburghToday website reported all of this so-called "new" information on pollution rankings last fall, six months before the ALA.) None of the news articles have bothered to report that the pollution readings at the Liberty Monitor are nearly double the readings at any other pollution monitor in the entire region, and so any ranking based on that monitor is not really representative of what most people in the region are breathing.

The Liberty monitor is in Liberty Borough, not in the City of Pittsburgh. Yet the ALA uses this monitor to rank "Pittsburgh" as the dirtiest "city" in the country. (ALA has a separate ranking for counties, where Allegheny County ranks #1, so it could easily have distinguished the City if it wanted to.) As you can see in the chart on PittsburghToday.org, the highest monitor in the City of Pittsburgh has pollution levels only half as high as the Liberty Monitor.

In fact, the U.S. Environmental Protection Agency has officially said that the pollution measured at the Liberty Monitor isn't related to the air quality that people in Pittsburgh or the rest of the region are breathing. The area surrounding the Liberty Monitor and the monitor in North Braddock were designated by EPA in 2006 as a different air quality attainment region than the rest of the Pittsburgh Region. That means that if ALA wants to use the air quality readings at the Liberty Monitor to rank something as #1 in the country, it should rank the Mon Valley as #1, not "Pittsburgh."

Now, the fact that the Pittsburgh Region doesn't really have the worst air quality in the country doesn't mean that it doesn't have a problem. In fact, as reported last fall in the Post-Gazette and as documented on PittsburghToday, the average level of PM2.5 (soot) pollution in our region is higher than most comparable regions. So we do have a serious air quality problem in our region, and it's not just in the Mon Valley.

But then the obvious question is: what's causing it? And that's where the ALA and our local media again fail to give the really important information: the high levels of soot outside of the Mon Valley are not being caused by pollution sources in the region, but by sources in upwind states. Studies done by Carnegie Mellon show that up to 80% of the particulate matter pollution in southwestern Pennsylvania is caused by pollution sources in states to the west and south, not by sources in southwestern Pennsylvania. Even if we were to shut down every power plant in our region, stop driving cars, etc., we would still have high levels of soot in the air here.

So when the ALA ranks Pittsburgh as having high pollution, but gives low rankings to the regions that are causing the pollution, it's blaming the victim. And while the ALA may think that its sensationalistic reporting will help, blaming downwind regions like ours may actually make it harder to insure that the multi-state pollution controls that are essential for pollution reduction are implemented and enforced.

Pittsburgh's Economy Is Doing Better Than Many Other Regions

The Pittsburgh Region received some really good news last month when the U.S. Department of Labor issued revised job numbers for 2007. The new statistics showed that our region created 8,400 net new jobs between 2006 and 2007. Although that was well below the levels of job creation we experienced in the late 1990s, it was more new jobs than we’ve seen in any year since 2000, and nearly twice the 4,300 jobs created between 2005 and 2006.

Moreover, while our job growth had ranked 35th or worse among the top 40 regions between 2003 and 2006, our 2007 job growth rate jumped to 28th best, ahead of sunbelt regions like Los Angeles, Miami, San Diego, and Tampa, as well as places like Cleveland, Detroit, Minneapolis, and Philadelphia.

Still, 28th out of 40 is well below average. Our job growth rate of 0.74% in 2007 was only two-thirds the U.S. growth rate of 1.13%. Why is our job growth so low?

The answer is surprisingly simple – our lack of population growth means we don’t get job growth in sectors that depend primarily on the local population. The two largest examples of this are retail stores and local government services. Regions that have a growing population need more stores, more public schools, more police, etc. Our population has been declining, so we don’t need more of those things¸ which means we don’t need more jobs there, either. In fact, in 2007, we had 1,100 fewer jobs in the retail sector and 900 fewer jobs in local government than in 2006.

If you look at job growth in the sectors that aren’t so population-dependent, you see a very different picture. Our private sector job growth from 2006 to 2007 was 0.92%, which ranked 23rd among the top 40 regions. And our private, non-retail job growth (i.e., jobs other than in government or retail) was 1.18%, ranking 19th among the top 40 regions. The U.S. job growth rate in private, non-retail jobs was identical – 1.18%.

In other words, outside of government jobs and retail jobs, the Pittsburgh Region’s job creation performance exactly matched the U.S. in 2007. Not only that, we outperformed places like Baltimore, Chicago, Las Vegas, San Francisco, and Washington DC.

Where is our private sector job creation coming from? The primary contributors to job growth in 2007 were Professional and Business Services (6,000 net new jobs), Health Care (2,100 net new jobs), Construction (1,900 net new jobs) and Leisure and Hospitality (1,200 net new jobs). Those 6,000 new professional and business services jobs were spread across a range of businesses, such as law firms, engineering firms, R&D centers, and the headquarters of our major firms.

But it’s a mistake to focus solely on the sectors that add large numbers of new jobs. The sectors that retain jobs are also important, particularly if they are good, high-paying jobs. Foremost among these is manufacturing. Although the manufacturing sector here added “only” 200 jobs in 2007, most of the top 40 regions and the U.S. as a whole lost manufacturing jobs. In fact, Pittsburgh was one of only 8 of the top 40 regions that added manufacturing jobs in 2007. Since manufacturing is our largest economic sector in terms of income generation, and since it supports many of our professional and business service jobs, this stability is good news for the region.

Will the improvements in job creation persist as the country teeters on the brink of recession? So far, so good – while job creation rates in most parts of the country have decreased recently, ours actually improved slightly in February. That’s because more than one out of every five (22.2%) of our jobs is in higher education or health care, and those are sectors that typically don’t decline in a recession. In fact, we have the second highest proportion of jobs in education and health care of any of the top 40 regions, making us more resistant to recessionary downturns than other cities.

There is no cause for complacency, though. Despite the growth in 2007, we still have 8,000 fewer jobs than we did in 2001. We need to address our serious competitiveness problems – starting with the worst state business taxes in the nation – in order to keep our existing jobs in manufacturing and other sectors and to capture new growth when the U.S. economy turns around. That should be a priority both here and in Harrisburg this year.

(A shorter version of this post appeared in the Pittsburgh Business Times on Friday, April 18.)

Who's Moving to Pittsburgh? And How Can We Keep More of Them Here?

The latest Census population estimates indicate that the Pittsburgh Region continued to lose population in 2007. Does this mean people are fleeing the region?

Although it’s true that about 6,000 more people move out than move in each year, our rate of net domestic outmigration in 2007 was actually lower than 16 of the top 40 regions, including Boston, Chicago, Philadelphia, San Diego, and Silicon Valley.

What really hurts us is that we’re the only major region in the country which has more deaths than births. This is a legacy of the much larger outmigration that occurred in the 1980s, when tens of thousands of people, particularly young people, left the region in search of employment. When they left, they took their children and their grandchildren with them.

Underneath the current net migration numbers is a significant amount of inflow and outflow. About 35,000 - 45,000 people move into the Pittsburgh metro area from outside Pennsylvania each year (either from elsewhere in the U.S. or overseas), so in any given year, between 1.5% and 2.0% of our population is new to the region and the state. Although that’s a large number, it’s one of the smallest percentages among the top 40 regions.

Who are these people? The Census Bureau’s American Community Survey tells us a number of interesting things about them. (It should be noted that since these statistics are based on surveys, they are subject to some degree of error.)

First of all, they are predominantly young. Of the 30,000 - 35,000 people who move here each year from another state in the U.S., over half are under 30 years of age. In fact, we rank in the top 5 regions in terms of the percentage of 18-24 year olds among people who move here from another state. That’s a clear indication that our colleges and universities are major magnets for in-migration.

In contrast, our greatest weakness is attracting people 30-40 years old. We rank near the bottom among the top 40 regions in the percentage of U.S. in-migrants who are in that age group.

How about international immigrants? In the past, Pittsburgh ranked dead last in the rate of international immigration, but that may be starting to change. While still very low, in the past few years the rate has increased significantly, and has moved ahead of places like Cincinnati, Cleveland, and St. Louis. We also have one of the highest rates of growth in our foreign-born population among major regions. That’s because we’re starting with such a small base (we have the smallest proportion of foreign-born people among the top 40 regions) that even our low rate of immigration increases our foreign-born population significantly.

The international immigrants we do attract are much better educated than the immigrants to other regions – over 60% of our international immigrants who are age 25 or older have a bachelor’s degree or higher, the highest percentage among the top 40 regions. Our universities, hospitals, and research centers likely play a major role in this.

Attracting more international immigrants is just one of our diversity challenges. Not only do we have the smallest percentage of foreign-born residents, we are the whitest of the top 40 regions of the country – 89% of the people in the Pittsburgh MSA are white, whereas in most of the major regions, at most 70% are white. While the people moving here are more diverse than our current population – about 20% of the U.S. residents moving to our region from out-of-state are non-white – they are still less diverse than the migrants to other regions (in most regions, 30% or more of the domestic in-migrants are non-white).

Clearly, we need to attract more people to the region if we’re going to reverse our population decline and provide the workforce our employers need. Although our current rate of in-migration is still too low, at least it’s moving us in the right direction – attracting young people, highly educated individuals, and a somewhat more diverse population than we have today. Our challenge is to make them feel welcome, and to provide the job opportunities they need to stay and build roots here. If we succeed in that, it will help to attract even more people in the future.

(A slightly shorter version of the above was also published in the Pittsburgh Post-Gazette on April 13, 2008.)

The Pittsburgh Region's Real Comparative Economic Strengths

The most common way to think about the strengths and weaknesses in the Pittsburgh Region's economy is to ask where jobs are growing and where they are declining. Over the past two years (2005-2007), the region created a total of 12,700 net new jobs. Most of these jobs were in the service sector -- 9,200 net new jobs, compared to only 3,600 net new jobs in the goods producing sector. This significantly higher number of service sector jobs is what leads many people to claim that we are now a "service" economy.

But the fact that a sector is creating more jobs relative to other sectors here does not mean that it's performing well in a broader, national context. And a sector that is stable or even slightly declining here may actually be outperforming other parts of the country.

In fact, although the service sector has been our biggest job generator, job growth in the Pittsburgh Region's service sector has been quite anemic compared to other regions -- the 0.9% growth in service jobs here ranked 37th out of the top 40 regions in the country between 2005 and 2007. Only Cleveland, Detroit, and New Orleans did worse.

In contrast, you might be surprised to learn that the goods-producing sector in the Pittsburgh had the 10th highest growth rate among the top 40 regions between 2005 and 2007. Moreover, the fact that we had net job growth in this sector was unusual -- 22 of the top 40 regions had a net reduction in goods-producing jobs during the past two years.

The biggest source of job growth in the goods-producing sector in Pittsburgh was construction, which created 3,900 net new jobs between 2005 and 2007, a 7.3% increase. We created more new construction jobs here in the last two years than Silicon Valley, Phoenix, or Orlando.

But perhaps the biggest surprise for those who think that Pittsburgh "is no longer a manufacturing region" is that our essentially stable employment in manufacturing (100,700 jobs in 2005 vs. 100,500 jobs in 2007) was the 11th best performance among the top 40 regions between 2005 and 2007. And since average wages in manufacturing are dramatically higher than in many parts of the service sector, holding on to our manufacturing jobs is as important as creating new service sector jobs. And things are improving, not getting worse -- manufacturing employment increased by 200 jobs here between 2006 and 2007, and even though that was only an 0.2% increase, it was the 7th best performance among the top 40 regions.

What about health care? Isn't that our greatest strength now? Although it's true that the health care and social assistance sector was the biggest net job creator in our region between 2005 and 2007, creating 7,300 net new jobs, its job growth has actually been anemic relative to the rest of the country. Pittsburgh's rate of job growth in this sector ranked 31st among the 35 top regions that report data on this sector. Between 2005 and 2007, jobs in health care and social assistance here increased by 4.3%, compared to a 13.5% increase in Charlotte, an 11.9% increase in Phoenix, and an 11.5% increase in Minneapolis. Although we had very strong growth in ambulatory health services (the 7th highest rate among the 31 top regions that report data on this sector), that was offset by very weak growth in hospitals (the 7th lowest job growth among the 37 top regions that report on this sector).

Our strongest service sector has actually been business headquarters operations. There was a net increase of 6,000 jobs in the "Management of Companies and Enterprises" category between 2005 and 2007, and that was the 2nd highest job growth among the 29 top regions that report this category. We had a 26.9% increase in jobs in this sector between 2005 and 2007, compared to only 5.0% in Charlotte, and 3.6% in Minneapolis. Although dramatic job increases in this sector in earlier years were primarily due to reclassifications of jobs from manufacturing, retail, and other sectors as part of the transition from the SIC classification system to the NAICS system, the continued increases in jobs in this sector suggest that our region is very attractive for business headquarters operations. And many of our headquarters operations are the headquarters of manufacturing firms.

So in terms of relative strengths, we are still very much a region that "makes things," and that is one of our key competitive strengths compared to other regions. As noted in the previous post, it's critically important that we provide the kind of business climate that manufacturers need to survive and thrive here, not only because of the high-paying jobs they directly provide, but because of the tens of thousands of other jobs they support in the service sector.

Manufacturing Our Future

One of the most counterproductive myths in the Pittsburgh Region is that manufacturing is dead and gone, or at best on life support, waiting for the last job to move overseas.

Nothing could be further from the truth. Manufacturing is actually the largest economic sector in our region. More than one out of every seven dollars (15%) of employment earnings in the Pittsburgh Region comes from manufacturing jobs.


Moreover, we are one of the leading manufacturing regions in the country. We have the 8th highest percentage of regional income from manufacturing among the top 40 regions in the U.S.


And perhaps even more surprisingly, manufacturing is becoming a bigger part of our economy, not smaller. Manufacturing’s contribution to our region’s income has increased in recent years, whereas it’s been decreasing in most regions.


If you don’t believe the numbers, read the headlines. Medical device manufacturer Medrad just opened a new headquarters and a new manufacturing plant. Westinghouse is building a new headquarters and adding thousands of jobs to develop new nuclear energy plants. U.S. Steel is planning to invest $1 billion in new pollution control equipment. Wheelabrator, a leading pollution control equipment manufacturer, just announced it’s going to create over 500 new jobs. The list goes on and on.

It’s true that there are far fewer manufacturing jobs here today than in the past – over 160,000 fewer than 30 years ago. 100,000 of those jobs were lost in just five years (1980-1985) when the steel industry collapsed. Since then, there have been continued reductions as the most labor-intensive manufacturers have moved to the Sunbelt or to Asia to take advantage of lower wages, and as the remaining manufacturers have pushed for greater productivity. But many highly skilled manufacturing jobs have remained here, and the high skills translate into high wages. The nearly 100,000 manufacturing jobs in our region today have the 8th highest average earnings among the top 40 regions.

But doesn’t the loss of manufacturing jobs mean Pittsburgh is now primarily a “service economy?’ While it’s certainly true that the majority of jobs here today are in the service sector, that’s nothing new – even in 1970, two-thirds of all of our jobs were in the service sector. Moreover, the majority of jobs in every region today are in the service sector.

What’s important to recognize is how many of our service sector jobs are directly dependent on manufacturing businesses. The headquarters and R&D jobs in our major manufacturing companies like Alcoa, Allegheny Technologies, Bayer, PPG, and U.S. Steel are now counted in the service sector, not as “manufacturing.” Whereas in the past, manufacturing firms employed everybody, including their lawyers, accountants, engineers, and janitors, now they contract out most of those functions to law firms, accounting firms, engineering firms, janitorial companies, and others in the service sectors. And a lot of health care, retail, arts, government and other jobs in the region depend on the spending by manufacturing businesses and their employees.

In fact, economists estimate that, on average, every manufacturing job results in 2-3 additional jobs in the region (through what is known as the “multiplier effect”). That means that manufacturing directly or indirectly supports about 1/4 of all the jobs in the region. And because manufacturers sell their products around the world, they bring “other people’s money” here to support our economy.

We need to pay special attention to manufacturing, not just because it’s the biggest piece of our economy, but because manufacturers are some of the most mobile of our employers. Retail stores, hospitals, and many other service firms are dependent on the local economy, and so they are unlikely to pick up and move. But most manufacturers compete in national and international markets, and they can and will pick up and move if it will make them more competitive. And if a manufacturer leaves, the multiplier means it will have an enormous ripple effect throughout the rest of our economy.

Can we continue to be a manufacturing region in the future? Yes, but only if we take the steps needed to be attractive for manufacturing businesses. Four strategies are key:

1. Reduce Business Costs.

Manufacturers compete on both the costs and quality of their products, so we need to make sure the costs of doing business here – taxes, energy, health care, regulations, etc. – are competitive with other regions.

Unfortunately, Pennsylvania has the worst corporate taxes in America, which significantly increases costs for manufacturers here. The second highest corporate tax rate of any state, a cap on net operating loss carryforwards, and an increasingly uncompetitive apportionment formula all combine to create a big red Stop sign for manufacturing growth.

More and more, the high cost of health care is what’s worrying manufacturers. Health care is a regional enterprise, and the region that figures out how to eliminate the estimated 30-40% waste and inefficiency that exist in most health care systems, and then translate that into lower health insurance costs, will be a magnet for business growth. Pittsburgh could be that region, but it’s not today.

2. Improve the Quality of Education.

Many manufacturers complain that they cannot find qualified workers to fill their jobs. It’s no wonder – 30-40% of our region’s young people graduate from high school unable to read or do math properly. In contrast to the past, most of today’s production workers need brains, not brawn. The region that figures out how to make each of its high school graduates proficient in reading and mathematics will be a magnet for business growth. Pittsburgh could be that region, but it’s not today. (And contrary to popular belief, it doesn’t require higher school spending.)

3. Encourage Innovation and Entrepreneurship.

Most of our largest manufacturing firms – Alcoa, Allegheny Technologies, Kennametal, Medrad, Mine Safety Appliances, PPG, Respironics, U.S. Steel, Westinghouse, and many others – didn’t move here from other places; they were started here by entrepreneurs. If we want more manufacturing companies and jobs, the best way to get them is not to lure them from other regions, but to grow them right here at home. That means supporting innovation in our existing firms and encouraging new startup firms in fields ranging from life sciences and robotics to clean energy and advanced materials.

Unfortunately, despite having an enormous pool of creative talent at our universities and R&D centers, we have one of the lowest rates of startup firms of any region in the nation, both in manufacturing and every other sector. That has to change if our region is going to grow. We need to encourage entrepreneurs and help them easily connect to customers and sources of capital so that they can create the jobs of the future.

4. Maintain and Improve Our High Quality of Life.

And finally, it’s undeniable that the entrepreneurs and skilled workers in manufacturing and other high-wage sectors want to live in regions with a high quality of life. As Pittsburgh’s “Most Livable” ranking demonstrates, we already are such a region today. But we still need to work hard to maintain and improve our quality of life, lest other regions catch up and surpass us.

Manufacturing is not only our past, it’s a big part of our present, and it needs to be a major part of our future. If we make manufacturing successful here, it will help all parts of our economy to grow.

More on Pittsburgh's Improved Job Growth

As noted in the previous post, re-benchmarked employment data show that the Pittsburgh Region's job growth was much better over the last year than previously thought. How do we compare to other regions?


Although we've hardly become a leader in job growth, we're also no longer in the cellar. Between 2006 and 2007, the Pittsburgh Region created 8,400 net new jobs, an increase of 0.74%. 12 of the top 40 regions had slower job growth than Pittsburgh, including some that may surprise you -- we had faster job growth than sunbelt cities like Los Angeles, Miami, San Diego, and Tampa (Tampa actually lost jobs in 2007) as well as Cleveland, Detroit, Minneapolis, Philadelphia, and St. Louis. We looked even better in January 2008, when our region had faster job growth than 14 of the top 40 regions, including Baltimore and Chicago.



Pittsburgh's growth rate in 2007 was about 2/3 of the U.S. job growth rate, the best ratio since before the 2001 recession. This is partly due to the increase in job growth in Pittsburgh, but also partly because of a significant drop in job growth nationally. As you can see in the chart, the growth rates in Pittsburgh and the U.S. converged in 2007. The convergence has continued, and job growth in Pittsburgh and the U.S. were almost identical in January 2008 (compared to January 2007).

The question is whether and when the looming recession nationally will pull down job growth in Pittsburgh. The same pattern occurred in the 1999-2002 period; Pittsburgh's economy was accelerating as the U.S. economy was slowing, but after the recession hit, Pittsburgh lagged in its recovery.


In fact, although Pittsburgh's job growth in 2007 is good news, it's important to note that the total number of jobs in Pittsburgh is still over 8,000 below the levels in 2000-2001, i.e., we still haven't fully recovered from the 2001 recession. However, we have some interesting company -- the same is true of Boston, Chicago, San Francisco, and Silicon Valley, as well as Cleveland, Detroit, and Milwaukee.

Good News! Regional Job Growth Much Higher Than Previously Thought

Each March, the Bureau of Labor Statistics adjusts its employment statistics, through a process called benchmarking, so that they more accurately reflect true job levels and changes. (The monthly reports are based on surveys, and can undercount jobs in some sectors or for small businesses.) In some years, job growth in the Pittsburgh Region has looked better after the benchmarking, while in other years, it has looked worse.

This year, our region looks much better. Based on the updated figures for 2007, there were over 8,000 more jobs in 2007 than in 2006, which is almost double what was previously thought. In the most recent month (January, 2008), there were 7,600 more jobs than in the same month the prior year, a 0.68% increase. By comparison, jobs nationally only increased by 0.72% in January, so Pittsburgh's job creation rate was almost equal to the U.S.

Although the data still indicate that job creation here slowed significantly in the last quarter of the year compared to the summer, the reduction in the U.S. economy was greater, and so Pittsburgh's job growth moved from being well below the national rate to almost identical to it. That suggests that rather than leading the way into the recession, as the unbenchmarked numbers in December indicated, Pittsburgh's economy is being more resistant. That would be similar to what happened in the 2001 recession, when Pittsburgh moved more slowly into the recession than the U.S. as a whole, although it also recovered more slowly. This is partly a function of the strong role that education and health services play in our economy, since those are non- or even counter-cyclical industries.

The biggest job creator from January 2007 to January 2008 was administrative support services (which includes a lot of call centers, temp agencies, etc.), where 3,800 net new jobs were created, followed by colleges and universities, with 2,600 more jobs, and construction, with 1,800 more jobs. Health care continued to grow, but at a slower pace than in the past (creating 1,500 net new jobs). Manufacturing jobs continued a slow decline, losing 1,400 jobs between January 2007 and January 2008.

What Would Happen If the Port Authority Shut Down?

Allegheny County Executive Dan Onorato has clearly stated that unless the local transit union agrees to significant concessions designed to bring the Port Authority’s cost structure to more reasonable levels, he will withhold the County’s funding from the transit agency. Although most people hope that the union will make the concessions, there is the very real possibility that it will strike, or that the County will be forced to withhold its funding, which would mean the Port Authority would also lose its state operating funding (since the County’s funding is a mandated match in order to receive the state funding).

Either scenario would mean a shutdown in most public transit services in Allegheny County. As reported in the newspapers, the business community is discussing plans for dealing with such a shutdown.

So what would actually happen if the Port Authority did shut down?

A detailed study was done by researchers at Carnegie Mellon University to determine what happened during the Port Authority transit union strike that occurred in 1976. That strike only lasted five days (in contrast to the 1992 strike, which lasted 28 days), but three of those days were weekdays, so it provided a reasonable test of how people would be affected. (The effects of the strike were compounded by the weather – the strike occurred in early December, and the temperatures ranged between 10 and 30 degrees (Farenheit) with strong winds and snow flurries.)

The study found that morning rush hour traffic increased by 35-45% on all routes, and the rush hour lasted longer than normal, though not dramatically so. Parking garages downtown were filled earlier than usual, and while parking increased at parking lots on the North Shore, those lots were not filled (the cold weather may partially explain the reluctance to use distant parking lots).

A telephone survey of commuters showed that 13% of the people who normally took the bus or a trolley into Downtown did not go to work at all. The largest percentage (37%) were dropped off at work by someone else (likely a spouse, but possibly a "courtesy ride" -- see below), another 28% carpooled, 10% drove alone, and 12% used other means (e.g., walking).

Of those who normally drove alone to work Downtown, 74% continued to do so, but 20% carpooled (presumably giving rides to the 28% of transit users who carpooled during the strike). Interestingly, only 46% said their trip took longer, but 65% said they had an earlier departure time.

The results were similar for people who normally took the bus to work, but who worked somewhere other than Downtown: 12% didn’t go to work at all, 41% were dropped off by someone else, 18% carpooled, 8% drove alone, and 19% used other means to get to work. 90% of those who ordinarily drove alone to a non-Downtown workplace continued to do so, only 2% carpooled, and only 25% said they had a longer trip time. The significantly lower rates of carpooling presumably reflect the greater difficulty of finding someone to carpool with from home to a non-Downtown location.

The most dramatic impacts were on those individuals who did not commute to work daily, but used transit regularly for other purposes. Many of these individuals are “transit captive,” i.e., transit is their only means of transportation. A separate survey of these individuals showed that 53% were over age 55 (in contrast to 14% of the commuters), and 40% had no car in the family. 63% reported that they did not make any of their normal trips during the strike. Over half of those who did travel during the strike rode with someone else by prior arrangement, and another 20% drove themselves.

The community did organize a strike contingency program, including (1) encouraging ride-sharing through a computerized matching program, (2) creating a “courtesy ride” program, which was, in effect, an organized hitchhiking program with designated pickup stations, (3) imposing a requirement on city employees who commuted in a city-owned car to carry at least five other persons, (4) distributing maps showing the locations of peripheral parking lots, and (5) encouraging employers to allow more flexible work hours.

The Courtesy Ride program was the most significant initiative. 88% of both drivers and non-drivers who commuted Downtown said they were aware of the Courtesy Ride program. 41% of the Downtown drivers who were aware of the program said they gave someone a ride. Only 23% of the people who commuted Downtown, who did not drive, and who were aware of the program tried to get a ride this way, but 79% of those who did were successful.

From the employers’ perspective, the biggest impact may have been the 12-13% of former bus riders who did not go to work at all. This was over 30 years ago, of course, so the opportunities for telecommuting were much more limited; today, many more workers might be able to feasibly work from home, and so the percentage who would stay home would increase dramatically. On the other hand, 30 years ago, there may also have been more spouses able to drop off a commuter at work than there are today and more people willing to pick up a stranger in a courtesy ride program, so the ability of bus riders to be dropped off may be much lower today.

Overall, from most employees’ perspectives, their commute was likely longer or more challenging, but they got to work one way or the other. Those who depended completely on transit for work, medical appointments, or shopping and had no opportunities for carpooling or being dropped off would likely have suffered the most from the strike. The longer the strike, the more severe these impacts would be. It would seem appropriate that any contingency planning for a possible Port Authority shutdown this year should focus on these individuals.

Plenty of Job Opportunities, Despite Slow Growth

Over the past several years, the Pittsburgh Region has had one of the slowest rates of employment growth among major U.S. metro areas. Does that mean young people need to look elsewhere to find a job?

Fortunately, the answer is “no.” You might be surprised by how much hiring goes on in the Pittsburgh region despite the slow growth. In 2006, while total regional employment grew by only 5,000, there were over 624,000 new hires by employers in the region, according to data from the U.S. Census Bureau. (This does not include people promoted to a different job with the same employer, or those returning to work after a temporary layoff or unpaid leave.)

That’s not a mistake – there were over six hundred thousand jobs for which new people were hired. How can that be? Because a similar number of people also left jobs during the course of the year. Some retired. Many were laid off or fired. But most left voluntarily to find better or different employment. Nationally, the majority (58%) of separations are voluntary quits, rather than layoffs, discharges, or retirements.

A regional labor market is like a very large game of musical chairs – at the end of each month or year, the total number of jobs may not have changed very much, but a huge amount of movement has happened in between.

Nationally, employers reported that just over 3% of their jobs were open each month during 2006. That means that in the Pittsburgh Region, with over 1,100,000 total jobs, there will likely be over 33,000 job openings at any point in time.

Many of the job hirings are temporary. People are hired in retail stores during the holiday shopping season, in amusement parks in the summer, on short-term construction projects, etc. But even if you look at what are called “stable jobs” (a job that lasts at least one quarter), there were over 350,000 new hires in the Pittsburgh Region during 2006.

What kinds of jobs are these? About one-third are in retail stores, restaurants, bars, and hotels. Many of those are part-time jobs, and the wages are, on average, very low. But if you exclude those industries, you find that in 2006, nearly 250,000 people got new jobs paying an average of $30,000 per year, in sectors ranging from health care to finance.

And many jobs were filled at much higher wages. For example, there were over 25,000 people hired in corporate headquarters, R&D centers, law firms, and other professional firms in 2006, at an average salary of almost $45,000. (Some people may take multiple part-time jobs or change jobs multiple times during the year, so there is some double-counting in these numbers.)

Even though the total number of manufacturing jobs in the Pittsburgh Region declined slightly in 2006, there were almost 25,000 new hires in manufacturing that year, at an average monthly wage of $3,000 ($36,000 annually). And many of our manufacturers are reporting difficulties filling vacant jobs, so there are probably more job openings than the number of hires would suggest.

Are young people getting any of these jobs? Yes. Thousands of them, in fact. During 2006, nearly 40,000 stable jobs were filled with men and women ages 22-24. For example, 1,800 22-24 year olds were hired in manufacturing, at an average wage of over $25,000, and 2,500 were hired in professional, scientific, and technical services firms, at an average salary of $28,000.

And if you think there are more job opportunities for young people in fast growth regions, think again. For example, although Austin, Texas created over six times as many net new jobs as Pittsburgh in 2006, more 22-24 year olds found jobs in high-paying industries here than in Austin.

Does this mean that slow job growth in Pittsburgh isn’t a problem? Hardly. We can’t increase our population if we don’t increase total jobs, and we can’t support big-city amenities like our arts and cultural organizations, airport, etc. without a growing population base.

But while we’re working to make the region more competitive for business growth, let’s spread the word that there are thousands of good job opportunities here right now.

Very Good News: PPG is Staying in Pittsburgh

Some extremely good news for the Pittsburgh Region appeared in the Pittsburgh Tribune-Review today (Saturday) in an article that most people will probably overlook as a story about commercial real estate. In the article, Ron DaParma reports that PPG Industries has extended the lease for its headquarters operation in PPG Place for ten years beyond the current lease expiration of 2011.

This might appear to be pretty ho-hum stuff unless you understand that PPG's previous CEO, Raymond LeBoeuf, made no secret of the fact that the company was unhappy with the way the City of Pittsburgh had treated it, with what it perceived as greater interest by the state and region in attracting new companies than retaining existing companies (in contrast to other states and regions that had actively courted PPG to move out of Pittsburgh), and with the region's lack of appreciation for PPG's many civic and philanthropic contributions. One of the reasons LeBoeuf sold PPG Place was to make it easier for the company to move out of Pittsburgh if it chose to do so.

What would be at risk if PPG left? As Ron DaParma points out, PPG has over 1,000 employees at PPG Place, and it has almost 2,700 in total across the region in its three R&D centers, its remaining manufacturing operations, and its headquarters.

That means that PPG's lease renewal is every bit as significant as Westinghouse's decision last year to keep its 2,200 jobs here and expand by an additional 1,000. Yet Westinghouse's decision was front-page news, and PPG's wasn't. The difference? Westinghouse explicitly threatened to leave, and PPG didn't. The other difference is that Westinghouse asked for significant incentives to stay, and got them, while PPG didn't. So, in fact, PPG's decision probably deserves an even bigger headline.

Although it appears that PPG is here to stay, at least for a while, the region would do well to heed former CEO Ray LeBoeuf's words in 2003: "Pittsburgh isn't actively supporting the companies that are here...Before they go out looking for new people to come in, they should look at who's here. When we look at new initiatives, Pittsburgh is not the only option we look at...No one has asked me how to keep our business in Pittsburgh."

What can the state and region do to support existing companies as well as attract new ones? One obvious thing to do is make the state's business taxes more competitive, starting with reducing the corporate net income tax below its current second-highest-in-the-nation level of 9.99%. That will make the state more attractive to its existing businesses as well as help attract new businesses. And it's a much fairer way to do it than handing large subsidies only to new businesses or those that threaten to leave.

One of the Hidden Strengths of the Pittsburgh Region

Most people don't realize that the Pittsburgh Region has approximately 7,000 people working in businesses or establishments focused on scientific research and development.

Of course, you might say, these are the jobs at our universities and medical center.

But you'd be wrong. These 7,000 jobs are in addition to the thousands of research jobs at the universities and medical center -- they are jobs in corporate R&D centers and in private businesses conducting research.

For example, PPG has not one, but three separate R&D centers here -- one for Chemicals, one for Coatings, and one for Glass. Alcoa's Technical Center, located in Westmoreland County, is the largest light metals research facility in the world. Crucible Materials Corporation's Research Facility, with the largest titanium gas atomizer in the world, is located here. Bayer's Material Science division is located here. U.S. Steel's Research Center is located here. The Heinz Global Innovation and Quality Center is located here. Seagate's Research Center is located here. Mine Safety Appliances has its Research Center located here. Sunoco has a Research Center here. Google and Intel have research centers here. The list goes on and on. There are over 130 separate establishments in the region focused on scientific R&D.

These are very well-paid jobs -- the average annual pay was $80,000 in 2006. And Pittsburgh has double or triple the number of these jobs as many similar size regions. Cleveland has only about 2,200 R&D jobs. Cincinnati has about 2,400. Atlanta has only 2,700. Austin has about 3,300. Portland has 4,000. Minneapolis has 6,000. And we're not far behind the Research Triangle, which has about 11,000, or Seattle, which also has 11,000.

What we haven't done as a region is to look at these R&D facilities, and the talent that works in them, as an economic development priority for the region. That means (a) supporting the R&D centers we have and attracting additional ones, and (b) looking for ways to encourage spinoff companies to commercialize technologies developed at the R&D centers that the parent companies aren't interested in.

We can't take these R&D facilities for granted. If one closes or moves -- and they can -- it would mean the loss of hundreds of highly paid jobs.

An example of what can happen has been playing out in Ann Arbor, Michigan over the past year. In January, 2007, Pfizer announced that it was closing its Ann Arbor research campus, which employed 2,100 workers. Michigan's Governor Jennifer Granholm called it a "punch in the gut." Even though Ann Arbor is home to the University of Michigan, the region's economy depended heavily on Pfizer, too.

But there was an interesting silver lining in the closing of the Pfizer R&D facility -- it unleashed the entrepreneurial energies of a number of the former employees.

Ann Arbor SPARK (which is similar to Pittsburgh's Innovation Works) reports that in 2007, it helped former Pfizer employees launch 23 startup firms. For example, AlphaCore Pharma LLC was founded by three former Pfizer employees, who used their severance and early retirement packages to form a company to commercialize a drug for heart attack victims they had developed that Pfizer wasn't interested in.

The same kind of thing could happen here. Rather than focusing the region's tech transfer efforts almost exclusively on creating startup companies out of university research, there should also be a focus on spinning companies out of corporate research labs. This obviously requires cooperation from the companies as well. What is often called "open innovation" is a growing trend in corporate R&D nationally, and one aspect of open innovation is for large companies to license new technologies to entrepreneurs that the companies don't plan to use , or even to allow their own employees to become entrepreneurs.

One impediment to this here is that most of our region's major R&D facilities are focused on advanced materials research, but most of our region's technology support organizations are focused, or are perceived to be focused, on life sciences, IT, and robotics. For example, we have a Life Sciences Greenhouse and an IT/Robotics Greenhouse (called the Technology Collaborative), but no "Advanced Materials Greenhouse." Innovation Works does help startup firms in the advanced materials area, and we have some successful advanced materials startup companies already in the region, such as Plextronics. But we need a more concentrated, coordinated, and visible effort -- a "virtual greenhouse," not necessarily a new organization -- to proactively encourage technology transfer and the growth of startup firms commercializing advanced materials, and perhaps similar "greenhouses" in other emerging areas of strength, such as clean energy.

Calling All Entrepreneurs

The Pittsburgh Technology Council has launched its 2008 EnterPrize Business Plan Competition, and it's a great way to help entrepreneurs. Even if an entrepreneurial team doesn't win the ultimate competition, it can get cash awards at several phases of the competition, and perhaps more importantly, merely participating can enable the team to get valuable assistance from some outstanding advisors and a lot of exposure to a network of people and potential investors who can help the business grow and be successful.

The competition is open to both new businesses and to young, small existing businesses (less than 3 years old, less than 20 employees, and less than $1 million in annual sales). And it's not just businesses with highly advanced technology products -- the competition is open to any business with an innovative product or service.

The Tech Council is hosting eight workshops and three networking events as part of this year's competition, beginning on February 20 with a workshop on "Developing the Idea" taught by Chris Allison, former CEO of Tollgrade Communications.

For more information, contact Melissa Ungar, Director of Entrepreneurial Programs, at mungar@pghtech.org.

Are Pennsylvania's Taxes Uncompetitive?

Everybody’s talking about cutting taxes lately, not only in Washington, but in Harrisburg. Some legislators are talking about cutting the state’s personal income tax, while others want to increase the income tax or the sales tax in order to cut local property taxes. And with the state running a surplus again, many hope Governor Rendell will include tax cuts in his budget proposal this week.

Which of the state's taxes are really too high? And how much of a tax cut is enough? One of the problems legislators have is that once you start proposing to cut taxes, where do you stop?

Eliminating taxes isn't realistic, so there needs to be some way to define what level of taxes is reasonable. One good way to do that is set a goal of making tax rates competitive with other states. While it would be nice to have lower taxes than other places, we should at least try to avoid being higher, particularly a lot higher.

So how do Pennsylvania's taxes stack up?

Pennsylvania’s least competitive state tax by far is the corporate net income tax. At 9.99%, Pennsylvania has the second highest corporate tax rate in the country (only Iowa is higher at 12%). That hasn’t always been true – in 1990, Pennsylvania’s corporate tax was only the 16th highest. But since then, while 13 states decreased their corporate tax rates, Pennsylvania was one of only 10 states to increase its rate (from 8.5% to 9.99%), and Pennsylvania’s increase was the largest of any of the high-tax states. Not only does Pennsylvania have a high corporate income tax rate, but it also is one of only two states that caps the amount of net operating loss carryforwards (the other is New Hampshire), so for many businesses, including startup firms, Pennsylvania has the worst corporate income tax in the country.

The state’s most competitive tax is the personal income tax. Although many people think the tax needs to be cut because it is so much higher today (at 3.07%) than in the past (it was only 2.1% in 1990), Pennsylvania’s personal income tax rate is still lower than in most states. Seven states have no personal income tax at all, and two only tax dividends and interest. But among the remaining 41 states, Pennsylvania has the second lowest rate after Illinois (which has a 3% rate).

Other states with higher personal income tax rates allow deductions and exemptions that Pennsylvania don't, or they have a graduated tax (which Pennsylvania's Constitution does not allow), and that lowers their effective income tax rate compared to Pennsylvania. But even so, it appears that on balance, Pennsylvania’s personal income tax is lower than the majority of states. That’s good news not only for individuals, but also many small businesses, since subchapter S firms pay the personal income tax instead of the corporate tax.

The sales tax is more complex to evaluate. The majority of states (28) have no sales tax at all or a lower sales tax rate than Pennsylvania’s 6% rate. But many of those states apply the tax to items such as food and clothing, making their effective tax rate higher for many taxpayers, particularly low-income families. (Also, the precise sales tax exemptions in a state, such as whether certain business services are taxed, can make a dramatic difference in the state's competitiveness for particular businesses.) And many states also have city or county sales taxes that boost the total tax rate well above Pennsylvania’s 6% rate or even the 7% rate in Pittsburgh and Philadelphia. Overall, the sales tax in Pennsylvania appears to be better than average in terms of competitiveness.

What about the local property tax? Property tax competitiveness is also challenging to evaluate, because of the wide variation in home values across the country. For example, the median amount of property taxes paid by homeowners in Pennsylvania in 2006 was $2,057, 15th highest in the country. In New York, the median amount was $3,301, which is over 60% more. But New York’s median home value was more than double Pennsylvania’s, so relative to home value, New York’s property taxes are actually 23% lower than Pennsylvania’s. In fact, Pennsylvania has the 9th highest local property taxes as a percentage of home value of any state, and the 11th highest property taxes as a percentage of homeowners’ income. (The Pittsburgh region ranks worse on one measure of property tax competitiveness and better on another than the eastern part of Pennsylvania -- see the previous post for more information on how the Pittsburgh Region, rather than the state as a whole, stacks up on property taxes.)

So Pennsylvania's property taxes are clearly uncompetitive and need to be reduced. But to make the state more competitive, the highest priority has to be cutting the corporate net income tax rate. It’s not a coincidence that Pennsylvania has both the second highest business tax and the 14th lowest rate of job growth of any state in the country. Improving the state’s business climate will help attract new jobs, which in turn will boost revenues in all of the state’s taxes, making it easier to cut property taxes while keeping other taxes competitive.

Are Property Taxes High in the Pittsburgh Region?

The state legislature is quite busy these days on yet another effort to try and reduce local property taxes. Everybody would like to pay less property taxes, but are local property taxes really high compared to other places?

The answer is: it depends on how you look at it.

The median property tax paid on owner-occupied houses in the Pittsburgh metro area in 2006 was $1,987. That's lower than 24 of the top 40 regions in the country, so in raw dollar terms, people here pay a below-average amount on property taxes compared to competitor regions.

However, housing values are also much lower here than in other regions -- in fact, Pittsburgh ranked 39th (i.e., next to lowest) among the top 40 regions in the median value of owner-occupied housing in 2006. By comparison, in Boston, the median property tax was $3,745, almost double what it is in Pittsburgh. But the median home value in Boston was almost quadruple the value in Pittsburgh. As a result, property taxes as a percent of home value in Boston are only half of what they are here.

In fact, the Pittsburgh Region had the 6th highest property taxes as a percent of home value among the top 40 regions. Only Milwaukee and the metro areas in Texas (Austin, Dallas, Houston, and San Antonio) were higher.

This problem is exacerbated for people who move to Pittsburgh from other places. They usually think property taxes are extremely high here because they are able to buy a bigger, better house here than they had elsewhere and that results in much higher property taxes.

Let's take Boston again as an example. A home of median value there is $404,000. If a person who owned a $400,000 home in the Boston region moved to the Pittsburgh area and bought a home of median value here, they would only pay $111,000 for it, and they would probably only pay half as much in property taxes on it as they paid on their house in Boston. But it's more likely that they'll use the proceeds on the sale of their Boston home to buy a $400,000 home here. They'll get a lot more house than they had in Boston, but they'll also probably pay twice as much in property taxes as a result.

However, the fact that property taxes are high in comparison to home value doesn't tell you whether people can afford them or not. A better measure of affordability is how property taxes compare to income. If you compare the median property tax paid in each region to the median income of homeowners, the Pittsburgh Region is much closer to average -- we rank 17th among the top 40 regions on that measure. That's still a little high, but much closer to the average among other regions.

Why do we look so much better when you compare property taxes to income rather than home value? Because homes here are so much more affordable than in other regions. The median-priced home here is only about double the median income, whereas in most other regions, the median-priced home costs 4 times the median income. In Los Angeles and San Francisco, the median-priced home is over 7 times the median income.

The bottom line is that property taxes are somewhat less affordable in the Pittsburgh Region than in other places, but the housing here is dramatically more affordable. Although nobody likes paying the tax man more than they have to, it's no fun paying the mortgage company more either. It's likely that if you added mortgage costs and property taxes together, you'd find that the total cost of a home of equivalent quality is still much cheaper here than in most other regions. And that's a powerful economic advantage for the Pittsburgh Region.

How Pittsburgh Can Grow -- Internationally

With regional leaders on a multi-day visit to Europe, it's worth asking: How important is the international economy to jobs in Pittsburgh, and what is the potential for growth?

The answers: very, and significant.

The Pittsburgh Region exported over $8 billion in goods internationally in 2006. That's the 20th highest level among the top 40 regions, and 21st on a per capita basis. On a per capita basis, we export more goods internationally than Atlanta, Charlotte, Chicago, and Philadelphia.

Even better news is that exports from the Pittsburgh Region grew by 20% between 2005 and 2006 -- that's the 14th highest increase among the top 40 regions. That's a bigger increase than Atlanta, Charlotte, Chicago, or Silicon Valley.

What are we exporting? The dominant exporters are our traditional industries --coal, steel, and chemicals account for more than half of regional exports. But our technology sector is also an important contributor -- nearly 9% of exports are computer and electronic products. Although the growth in exports from those businesses is below the regional average (15.7% between 2005 and 2006, compared to 20% region-wide), that growth rate was almost double the growth rate in Silicon Valley.

Where are we exporting? Our largest trading partner is Canada, followed by Mexico. China is currently the destination for only 6.7% of our exports, and that has been growing slower than other countries. In fact, our 15% growth in exports to China between 2005 and 2006 was one of the smallest of major regions -- for example, exports to China from Cleveland, Houston, Kansas City, and Minneapolis increased by 20-33% in the same time period. With the rapid growth in the Chinese economy, this is a critical area for our region to focus international trade efforts on.

Our strength in exports reflects our strength in manufacturing. In order to import dollars from other countries, one has to have something that those countries want to buy. And while we do sell many services to people from other countries, including things like architecture, health care, and consulting services, our manufacturing (and mining) sectors are the primary sources for bringing foreign dollars into our economy. That's another reason to make sure our business climate for manufacturing is as competitive as possible.

Is Pittsburgh Ground Zero for the Recession?

The preliminary job statistics for December show continuing bad news about the Pittsburgh Region's economy. The November job totals were revised downward from the preliminary figures (instead of 3,000 net new jobs between November 2006 and November 2007 as the preliminary figures had showed, there were actually only 2,100 net new jobs created here during that period). The December figures are even worse -- there were only 900 more jobs here in December 2007 compared to December 2006.

In fact, Pittsburgh had the fourth worst job growth rate in December of any of the top 40 regions in the country. The job growth rate in the Pittsburgh Region for December was only 0.08% (less than 1/10 of 1 percent), down from .18% the prior month, and down from .71% in December a year ago. That's an almost 90% drop in job creation from a year ago.

Not surprising, you may say -- everybody knows the country is teetering on the brink of a recession, if it hasn't already entered one. And indeed, the U.S. job growth rate dropped below 1% in December (to 0.92%), the lowest rate of job creation since 2004.

But the Pittsburgh Region seems to be falling harder and faster than other places in the country. Whereas Pittsburgh's job growth rate was about 20-30% of the U.S. growth rate during the summer, in December it fell to under 10% of the U.S. growth rate -- the lowest ratio since April 2006.

Moreover, the Pittsburgh Region had the second largest drop in the job growth rate compared to the prior year of any of the top 40 regions in the country. A number of regions continued to grow faster in December than the previous year (including regions similar to Pittsburgh, like Baltimore, Cincinnati, Cleveland, Milwaukee, Philadelphia, and St. Louis), and even in previously fast-growing regions like Austin, Charlotte, Orlando, and Silicon Valley, the job growth rate declined by only 33%-40%. The 89% drop in Pittsburgh's job creation rate was exceeded by only one other major region - Providence, Rhode Island, which had a 90% drop.

What's causing our poor performance? Several sectors have lost a significant number of jobs over the past year -- construction is down 900 jobs, manufacturing is down 2,100 jobs, and retail is down 1,100 jobs. And the health care sector, while it is still growing, is growing at only half the rate it was a year ago. The only sectors that have experienced improved job growth are wholesale trade and professional and business services.

Pittsburgh's economy has been growing at a snail's pace for most of the year, and now it looks like the recession may hit us harder than most other areas. It's too soon to know for sure how bad things might get, but it calls for redoubling efforts to make our business climate as competitive as possible, so our existing businesses can retain as many jobs as possible and to take advantage of growth opportunities that do exist.

Want More Jobs? Attract More Entrepreneurs

As 2007 drew to a close, three of the largest life sciences companies in the region made significant transitions. Respironics was sold to the Dutch conglomerate Royal Philips Electronics; Renal Solutions was sold to the German firm Fresenius Medical Care; and Precision Therapeutics announced a merger with a subsidiary of Greenwich, Conn.-based Oracle Healthcare Acquisition Corp.

These announcements are good news for the region in many ways. All three firms will remain here. All three will get access to significant capital and marketing resources from the acquiring firms, helping them grow and create new jobs here. The investors in all three companies will get a significant return, some of which they will hopefully re-invest in other local firms.

And all three companies demonstrate the impact of entrepreneurship. Respironics was created here in 1976 by Gerald McGinnis, and has grown to become the 11th largest manufacturing firm in southwestern Pennsylvania, with over 1,600 employees in the region. Precision Therapeutics was founded here in 1995 and has grown to over 60 employees under the leadership of Sean McDonald. (McDonald’s previous startup company, now called McKesson Automation, is 15 years old and employs over 1,000 people.) Renal Solutions was moved here 5 years ago by its founder, southwestern Pennsylvania native Peter DeComo, and now employs 38 people in the region.

In fact, young, entrepreneurial companies like these represent a significant portion of the economy in most regions. In regions like Charlotte, Denver, Kansas City, and Minneapolis, more than 1 out of every 6 workers (17-18%) is employed by a locally-owned firm 10 years old or younger. In Silicon Valley, more than 1 out of every 5 workers (22.3%) is employed in a firm that young. But in the Pittsburgh region, only about 1 in every 7 workers (14.3%) is employed by a locally-owned firm 10 years old or younger.

It’s not surprising that Pittsburgh would have fewer young firms in sectors like retail and personal services, given the population losses we’ve been experiencing. But even in manufacturing, Pittsburgh has the third lowest percentage of jobs in young firms among 16 benchmark regions. Only 16.6% of the manufacturing jobs in Pittsburgh are in firms 10 years old or younger, compared to more than 20% in Boston, Detroit, Kansas City, Milwaukee, and St. Louis, and 28% in Silicon Valley.

Fewer young firms means fewer jobs, both today and in the future. If Pittsburgh had the same percentage of jobs in young manufacturing firms as other regions, it would have at least 5,000 more manufacturing jobs today. And some of those young manufacturing firms would go on to become the Respironics, Medrads, and U.S. Steels of the future.

Why do we have fewer young firms than other regions? It’s not because young firms can’t succeed here. The survival rate for young firms is actually higher in Pittsburgh than other regions, both in manufacturing and in other sectors.

The reason is that fewer entrepreneurs start firms here. The Pittsburgh region has the third lowest rate of startup businesses in manufacturing of any of the top 40 regions, and the lowest startup rate in every other sector, from retail to finance. (The startup and survival rates by industry are available through the Pittsburgh Regional Indicators Project, at http://www.pittsburghtoday.org/. The startup rates are there now, and the survival rates will be posted there in the near future.) Because of that, Pittsburgh ranked 48th out of 50 large cities on Entrepreneur magazine’s “2006 Hot Cities for Entrepreneurs” list.

What can we do to encourage more entrepreneurship? Capital and customers are essential. Precision Therapeutics and Renal Solutions benefited from early-stage investments by Innovation Works and the Life Sciences Greenhouse. Existing businesses can provide a major boost to startup firms by becoming their first customers.

Our region made the Top 10 on many lists in 2007. Let’s make a New Year’s Resolution for 2008 to also become one of the Top 10 regions in the country in attracting and supporting entrepreneurs.

No News is Bad News

If you were hoping for some better economic news about the Pittsburgh Region before the end of the year, you're going to be disappointed. The job statistics for November were just released, and the Pittsburgh Region's economy remains in the doldrums.

Between November 2006 and November 2007, the Pittsburgh Region only created 3,000 net new jobs, a mere 0.26% growth rate. That's the fifth worst job creation rate among the top 40 regions.

The U.S. economy has been slowing, though, so even though Pittsburgh's job growth hasn't been improving, it's doing a little better relative to the U.S. In November, our job growth rate was 1/4 the national growth rate, whereas in several previous months we were growing at less than 1/5 the national rate. However, even though our economy is doing a little better in a relative sense, it's still doing badly in absolute terms, and that's what counts to the people who are looking for jobs here.

If you look at the most current statistics, it would appear that the job growth rate in November was slightly better than in the two prior months. But that's because in both October and November, the preliminary job figure for the prior month was revised downward. The preliminary figures for September and October were 3,000 new jobs, the same as what is being reported for November. The job totals for September and October have now been revised downward to only 2,500 and 2,400 respectively. It's possible that the same will happen with the November job figures (which are currently preliminary) when the December figures come out next month.

Right now, with only one month left in 2007, the average job growth rate for the year looks like it will be almost identical to last year -- less than 5,000 net new jobs, and a job growth rate of less than one-half percent. Even that 5,000 job average for the year will be misleading, however (as have the year-to-date figures so far this year), because the job creation rate in the first few months of 2007 were much higher (double or even quadruple) than what they have been since May.

In fact, 2007 looks like it will end as having the fourth-worst job creation rate of any year in the past 15 years, except when the U.S. economy was shrinking. (By way of comparison, the Pittsburgh Region created between 7,000 and 20,000 net new jobs every year between 1992 and 2001.) And that's bad news for people who want to live and work in the Pittsburgh Region.

Our Newest Competitive Advantage

On Tuesday, the Wall Street Journal reported that people flying out of Pittsburgh pay, on average, 77% less for a domestic airline ticket for a trip of the same distance than people flying out of Cincinnati do. According to the Journal, the plane fares from Pittsburgh cost an average of 11.65 cents per mile, whereas plane fares from Cincinnati cost a whopping 20.63 cents per mile.

In fact, Pittsburgh now has the 22nd lowest fares of any of the 100 largest airports. Cincinnati is the most expensive of any of the airports, but many other competitor regions have a lot higher fares than we do, too. For example, Charlotte's average is 14.43 cents per mile, 24% more expensive than Pittsburgh. Atlanta's average is even more expensive, at 14.93 cents per mile. Boston is 13.95 cents per mile, 20% higher than Pittsburgh. Cleveland is 13.60 cents per mile, 17% more.

It hasn't always been so. Although the USAirways cutbacks over the past decade have reduced the number of nonstop flying options for people in Pittsburgh, the growth of alternative airlines, particularly Southwest, has done wonders for our airfares. In fact, the Wall Street Journal analysis shows that since 2005, Pittsburgh's fares have dropped by almost 13%, the second largest decrease in fares of any of the top 100 airports. Instead of people driving from Pittsburgh to Cleveland and other airports to save money, as they did in the 1990s, people should now be driving from Cleveland, Cincinnati, Columbus to fly out of Pittsburgh.

Our lack of international flights remains a serious competitive weakness. But we still have nonstop service to most major domestic locations, and as the data cited above shows, the fares, on average, can't be beat. That's a great advantage for entrepreneurs and small businesses on tight budgets.

Using our competitive airfares to encourage more entrepreneurial growth and job creation here would result in more people flying out of Pittsburgh, and that in turn would increase our chances of getting more flights, which would make us even more competitive. That's the kind of positive economic spiral we need.

What Pittsburgh Needs to Do to Grow Again

Previous posts have pointed out how poor the economic growth in the Pittsburgh Region has been recently. Job creation here has been less than one-third the national rate for the past four years, with little signs of improving.

What do we need to do to turn things around? In November, over 50 experts and leaders in economic development from across the country met in Hershey, PA as part of the 106th American Assembly in order to create a blueprint for growth in older industrial regions like Pittsburgh. (The American Assembly was founded in 1950 by Dwight Eisenhower to serve as a national, non-partisan forum on important public affairs issues.)

The Assembly's report, Retooling for Growth: Building a 21st Century Economy in America’s Older Industrial Areas, has just been released. You can download it here.

The members of the Assembly agreed that if older industrial regions such as Pittsburgh want to be successful, they need to dramatically reinvent the way they approach economic development, both in terms of what their priorities should be, and how they should go about achieving those priorities.

First on the Assembly’s list of recommendations is placing a higher priority on promoting entrepreneurship. This is a particularly critical issue for the Pittsburgh Region, since data recently published by the Pittsburgh Regional Indicators Project (http://www.pittsburghtoday.org/) show that, in virtually every industry, we rank dead last among similar regions in the rate at which new startup companies are created.

Key steps to helping startup companies are increasing access to early-stage capital, also known as angel investment, and providing training to prospective entrepreneurs. But it’s more than just creating programs for entrepreneurs, it’s creating a culture of entrepreneurship in the region. The Assembly report urges that “the leadership of these metropolitan areas – public and private – needs to celebrate, reward, and incentivize entrepreneurial behavior as a key pathway to economic growth.” This is something that that is not done in the Pittsburgh Region, and that needs to change.

In contrast, the Assembly recommended making business attraction efforts much more selective and reducing the use of firm-specific subsidies. They noted that most job growth occurs through the retention and expansion of existing businesses and the creation of new ones, not by luring existing companies across jurisdictional lines. Yet business attraction is the primary focus for most of the region's economic development agencies.

The Assembly also called for regions to recognize that increasing the rate of job growth depends on the ability of their businesses to succeed. The Assembly’s report says “…metropolitan areas need to treat businesses as customers, continuously seek out and listen to those customers (both current and prospective), and use that feedback to set priorities for infrastructure investment, workforce development, and public services.”

In particular, they urged that local governments revamp outmoded rules, regulations, and processes to create an environment that is hospitable to the formation, attraction, and growth of businesses. They called for a reduction in the fragmentation of local government in order to improve regions’ ability to make coordinated investments in infrastructure (which is critical both for business growth and for the quality of life for residents), and for reforms in local tax systems in order to enable more effective support of regional services and to reduce intra-regional competition for growth. These recommendations should be a particularly high priority for the Pittsburgh Region, since we lead the nation in local government fragmentation.

Of course, businesses need capable workers to succeed, so the Assembly said that developing human capital must also be a high priority for regions such as ours. This includes radically improving the level of performance in public schools (in the Pittsburgh Region, one-third or more of the students who graduate high school aren’t proficient in reading or math), eliminating the fragmentation of workforce development programs, and better aligning training programs with business needs.

There are many other recommendations by the Assembly, which will be explored in future posts. On some, the Pittsburgh Region is already ahead of other regions. On others, particularly those above, it's way behind. Overall, the Assembly's recommendations can and should serve as a blueprint to help the Pittsburgh region get its economy growing again.

Why Allegheny County Should Say “No” to the Drink Tax and Send the Legislature Back to Work

Allegheny County Council is being forced this week to vote on whether to impose a 10% tax on alcoholic beverages (when “poured,” i.e., the tax is by-the-drink) and a $2/day fee on car rentals. Many people have been led to believe – falsely – that these taxes are necessary to provide increased funding for public transit service in Allegheny County, when in reality, they are being used to balance the County’s budget. County Council shouldn’t be forced to make this Hobson’s choice. The public should demand that state legislators give Allegheny County better revenue options, and quickly.

Here are the key facts:

Only a small part of the proposed taxes would represent new money for transit. The state General Assembly took action this summer to provide a larger and more predictable stream of state funding for public transit. As part of this action, the state also required Allegheny County to provide a 15% match for the state funds. Although the state is increasing funding to the Port Authority by more than $70 million (to $183 million), Allegheny County is only required to increase its local funding contribution by a little over $1 million, from $26.3 million in 2007 to $27.5 million in 2008. The amount of state funding and local match will remain the same until 2010, and then will increase after that.

It’s been estimated that the drink tax imposed at the maximum 10% level will raise about $28 million. That’s far more than needed for the $1 million in new funds needed to meet the minimum matching level required by the state. The County could provide more than the minimum match and give the $28 million in new revenue to the Port Authority above what it is currently receiving from the County, but that’s not what the County is proposing to do. Allegheny County is planning to collect $28 million in new revenues from the drink tax, but transit will only get $1.2 million in new funds – a mere 4% of the total. Looking at it another way, Allegheny County would only need to impose a drink tax of one-half of one percent, rather than ten percent, if the issue were merely where to find the money for the increased matching requirement.

Allegheny County is inappropriately proposing to shift all local transit funding from the broad-based, stable property tax to a new, untested, and narrowly-based drink tax. Allegheny County has proposed adopting the maximum drink tax so that it can shift its entire $28 million annual funding obligation for the Port Authority away from property taxes and onto the new tax.

For decades, one of the fundamental goals of transit advocates has been to obtain a stable, predictable source of funding for transit. The state legislation passed this summer creates a more stable, predictable source of state funding, by dedicating a portion of the state’s sales tax to transit. But now Allegheny County wants to go in the opposite direction, by moving the local funds – which are required in order to get the state funds – to a less stable and less predictable source of funding. The County has no experience with the drink tax, so it’s hardly a predictable source of revenue. And a tax on “poured alcoholic beverages” is a far less stable funding source than the property tax which Allegheny County has been using. If a significant number of restaurants in Allegheny County shift to BYOBs (“bring your own bottle"), as happened in Philadelphia after it imposed a similar drink tax, how will Allegheny County make up the shortfall in transit funding? If the local funding falls short, so does the state money, and the goal of stability and predictability has been defeated.

Allegheny County would be the only community in the country to make transit funding dependent on a drink tax. Communities around the country have faced the exact same issue that Allegheny County is facing – what’s the best way to fund public transit? Their answers are, in order: sales taxes, property taxes, and gasoline taxes. Not only are all of these taxes more stable and predictable than a drink tax, they are more consistent with a fundamental principle of public finance – you should use broad-based taxes for public services with broad benefit, and use narrowly-based taxes for services that benefit narrow constituencies.

While many people who ride public transit probably buy a drink in a bar or restaurant from time to time, it’s hardly the case that the biggest patrons of bars and restaurants are the major users or beneficiaries of public transit. Everyone benefits from public transit, even those who don’t use it, because (a) traffic congestion, parking availability, and air quality are all better for everybody thanks to those who ride transit, and (b) most businesses are dependent on workers who are dependent on public transit to get to work.

And since everyone benefits from transit, everyone should help pay for it. A drink tax is not a tax on everyone. (And remember that it’s not even a tax on all alcohol; it’s a tax only on alcohol served by the glass!)

The drink tax will hurt businesses and workers. You don’t need an economic impact study to understand that if you raise the price of something by 10%, people are going to either consume less of it, or less of something else, or both. Of course, some people are wealthy enough that they can and will pay 10% more for a drink without changing their consumption. But they will still have less money in their pocket as a result, and that means that they’ll spend less on other discretionary items, which are sold by other merchants. Other people will, in fact, drink less as a result (or eat less or cheaper food in the restaurant), or shift their business to another county where they won’t have to pay the tax. The bar and restaurant owners who get less revenue will have to do something; they may lay off workers, or make workers pay more for their health insurance, or just go out of business altogether if they were already only marginally profitable. And going out of business isn’t out of the question when you realize that the restaurant business is, in general, a marginally profitable business.

Nobody knows for sure how big these impacts will be. CONSAD Research Corporation, a local consulting firm, did a credible job of trying to estimate the potential impacts of the drink tax. They estimated that profits among restaurateurs would decrease by 10-25%, and would cause some to go out of business altogether.

Unfortunately, Dan Onorato seems to have dismissed the study out of hand, claiming that the study’s authors admit they didn’t have time to do a good job. But the study’s authors didn’t say that. They said “an economic decision of this magnitude deserves more comprehensive analytical review than has been conducted in this preliminary study (or in any other existing study of which CONSAD is aware), but more precise quantification of the consequences of the proposed tax would be extremely unlikely to invalidate CONSAD’s fundamental original conclusions expressed in this study.” That’s hardly a self-admission of inadequacy.

The study focused primarily on the impacts of the tax on bars, restaurants, and event facilities, and so it didn’t really describe the kinds of impacts a drink tax could have on other taxes that Allegheny County Council should be concerned about. For example, if people buy fewer drinks or food in restaurants, they will also be paying less sales tax, and that affects the Regional Asset District tax, which thereby affects (a) the funding that the Allegheny Regional Asset District provides to dozens of arts and cultural organizations, and (b) the tax relief funds that come to Allegheny County and all of its municipalities. (Because Pennsylvania exempts so many items from the sales tax, sales tax revenues are disproportionately affected by changes in things that are taxed.) If employees of restaurants are laid off, that will reduce the earned income tax revenues that municipalities collect, and if bars or restaurants close, that will reduce the business privilege, payroll, and occupational taxes that municipalities collect.

Of course, any tax has negative effects on the people who are taxed. The point is that, in contrast to a broad-based tax that would spread the burden widely, the drink tax imposes that burden narrowly on one particular industry. And because of that, the economic dislocations will inherently be much greater than what would result from a broad-based tax.

It’s worth remembering that the amount that is expected to be raised by the drink tax is equivalent to a 10% increase in the County’s property taxes. That’s why the County Executive and County Council are reluctant to give up on the drink tax and rely solely on property tax increases to balance the budget. But if they would be concerned about a tax hike of that magnitude if it applied to every property owner in the County, shouldn’t they be even more concerned about a tax that generates the same amount from a single industry?

(It’s important to note that a 10% increase in the County’s property tax rate would not represent a 10% increase in the total property taxes that a County property owner would pay; most of a property owner’s property taxes are imposed by their school district, not by the County.)

The real problem is that Allegheny County – like all counties in Pennsylvania – needs a broader range of funding sources than just the property tax. Allegheny County’s $700 million budget this year consists of two main funding sources – (1) $293 million in state and federal funds, and (2) $279 million in property taxes. Dan Onorato’s budget for next year would add the drink tax to this mix.

The stark reality is that Allegheny County’s property tax revenues are not growing, partly due to the lack of economic growth in the county, and partly due to the County’s decision to freeze county assessments in the “base year” system. Although the estimated $28 million in revenue from the drink tax is equivalent to what the County is planning to provide to the Port Authority, it is also roughly equivalent to the $23 million growth in total County spending. To Dan Onorato’s credit, he has kept the County’s expenditures in check, and is only proposing a 3.2% increase in spending, a third of which would go to fund the County’s growing debt service burden. But property taxes are growing at an even slower rate, and that is leaving the County with a bigger and bigger gap to fill.

Municipalities in Pennsylvania – cities, boroughs and townships – have a wide range of taxing options available to them. In addition to the property tax, they can use earned income taxes, occupation taxes, business privilege taxes, amusement taxes, and other taxes and fees to fund the public services they provide, and they have flexibility to decide what combination they will use.

In contrast, the state has given counties no such flexibility. They have basically one option – property taxes. And that lack of flexibility makes no sense for the unit of government in Pennsylvania which has become as important, if not more important, than most municipalities.

Providing two narrow options – a drink tax and a car rental tax – and passing them in the middle of the night was the wrong way for the legislature to provide Allegheny County with revenue flexibility. A few years ago, when the City of Pittsburgh was facing a structural budget deficit and needed additional revenue sources to support its budget, a more than 2-year long public debate took place about what options were most appropriate, before the state legislation authorizing those options was passed.

In Allegheny County’s case, however, there was no discussion about options at all. Legislation suddenly emerged from Harrisburg providing the options of the drink tax and the car rental tax. Legislators went home for the summer saying, in effect, “take it or leave it” to Allegheny County. And so now, thanks to this top-down approach, Allegheny County needs to decide whether to take it or leave it.

It’s also worth noting that in the case of the City of Pittsburgh’s battle for more flexibility in raising revenue, the goal was to obtain taxes that were broader-based than existing taxes. The broad-based payroll tax took the place of the business privilege tax that had increasingly come to burden a small and narrow set of businesses in the City (such as restaurants and bars), and the increased occupational privilege tax was designed to ensure that commuters and visitors joined residents in supporting the costs of City services.

In Allegheny County’s case, though, the state gave Allegheny County the ability to extract more from drinkers of poured alcoholic beverages and renters of cars, with no clear rationale as to why they, and they alone, should have to provide more support for the County’s budget. Although the drink tax would enable some support for the County’s services to be obtained from tourists and other visitors, the majority of those who will pay are probably also paying property taxes to the County. So while it won’t show up as a change in their property tax millage, their wallets will be lighter nonetheless.

There’s time to find a better solution. Although it’s been portrayed as an urgent necessity for County Council to pass the drink tax by the end of December, the County Executive has already made it clear that, regardless of what County Council does about the drink tax, he’s not giving any money to the Port Authority until the union makes major concessions on costs. The union has made it equally clear that it’s not planning to compromise anytime soon. So if the threat of withholding funds from the Port Authority is a serious one, it means that the Pennsylvania General Assembly has time to do what they should have done in the first place – go back to the drawing board, identify an appropriate range of local taxing options for Allegheny County (and other counties, if they wish), pass the enabling legislation, and let the County have an open discussion about what the right mix of taxes is to support the entire County budget – including funding for the Port Authority, but not limited to it.

The Pennsylvania General Assembly can provide additional options quickly – if the community demands that they do so. Transit funding proponents will argue that Allegheny County has to take the crippled options that the legislature provided because (a) there’s no guarantee that the legislature will act to provide additional options, and (b) even if they would agree to do so, the Port Authority needs money now, and the legislature moves slowly. That’s defeatism, not realism. The General Assembly can act quite quickly when it wants to – just look at what it manages to do every year when the budget deadline is looming and at the end of each session.

And in this case, the legislature doesn’t even need to spend time drafting the legislation – all it needs to do is amend the Local Tax Enabling Act to make it apply to counties as well as municipalities. How long does the legislature need to do that? A week, at most – if it wants to.

The question is, will it want to? Certainly not if the citizens and business leaders in the county sit on their hands and say “we have no choice but to accept what the legislature gave us.”

Opposing the drink tax isn’t opposing funding for transit, it’s holding state legislators responsible for doing their jobs the way they should. The folks in Harrisburg must be enjoying themselves right now watching the citizens of Allegheny County fighting amongst themselves about whether to support or oppose the joke-of-a-tax option that the state provided. What will they do for fun next year? How about authorizing additional funding for police services through a tax on golf course fees? How about paying for health insurance for the uninsured by authorizing tolls on the Ft. Pitt, Squirrel Hill, and Liberty Tunnels? The potential list of silly options is endless. So why would we say yes to the one silly option they gave us, a drink tax, instead of demanding real tax flexibility?

This need not be a statewide issue – our local legislative delegation can and should take the leadership to provide a better solution. The battle over state transit funding was difficult because it involved providing funding for local transit from statewide funding sources. Legislators from rural counties understandably had concerns about the use of taxes paid by their constituents to fund services provided disproportionately in Pittsburgh and Philadelphia, particularly when the cost structures of the transit agencies there were so far out of line.

But the issue today is about how Allegheny County should fund its local services, including, but not limited to, transit. If Allegheny County wants more revenue flexibility, what do legislators in the rest of the state care? Just as the battle over the City of Pittsburgh’s revenue flexibility came down primarily to what local legislators were willing to support, the decision about what revenue flexibility Allegheny County should have depends on what the Allegheny County legislative delegation agrees to support.

Instead of drink tax vs. no drink tax, the community should focus advocacy on the real third option: state legislation that provides genuine revenue flexibility for the County. To its credit, Allegheny County Council recognizes that there is a third option, and they started a dialogue with state legislators about it. It’s time for the rest of the community to recognize the third option and get behind it. Instead of spending precious time, energy, and money on supporting and opposing the drink tax, attention and lobbying resources should be redirected to something really worthwhile – genuine revenue flexibility for the County.

We need a better fix now for a problem that will get worse in the future. Maybe you're saying, "Why bother fighting the drink tax and trying to get new state legislation? What’s done is done – pass the drink tax, balance the county budget, and move on."

That’s shortsighted for one simple reason. The problem’s coming back again next year, and the year after that, and the year after that. The County has a $28 million hole in the budget this year, not because of the need for more transit funding, but because of stagnant property tax revenues. When Allegheny County’s service costs go up again next year by 3% or more, the County will have another $20-30 million hole in its budget again. If you believe Dan Onorato when he says he has no other way to balance the County budget this year, then you have to believe that he’s not going to have any way to do it next year, either, unless he gets some new revenue options in the meantime.

Will we wait until the morning of July 1 each year to find out what new revenue options the state invented for us in the middle of the night, and then spend the next six months fighting about whether it’s a good idea? Or will we start now to push for a permanent solution?

The choice is obvious. And it’s ours to make.

Kill the drink tax, and make our state legislators provide a real solution.

Slow Regional Job Growth Continues in October

The newest regional job statistics show that as of October, the Pittsburgh Region has only created 3,000 new jobs over the past year, the smallest level of job creation since the spring of 2006. The region's job growth rate was a mere 0.26% (a quarter-percent), compared to a U.S. job growth rate more than four times as large at 1.18%.


As you can see in this chart comparing job growth rates in Pittsburgh to the U.S. over the past decade, average job growth in the Pittsburgh Region over the past two years has averaged under 0.50%, well below the job growth rates experienced prior to the recession, and well below the U.S. job growth rates during the same period.

Although the chart suggests that the gap between the U.S. and Pittsburgh job growth rates was narrowing this year, this was due to a temporary spurt in job growth that occurred here late last year into early 2007.


The following chart, which shows monthly job growth, makes it clear that over the past six months, things have been getting progressively worse, not better. Job growth rates are much lower now than at the beginning of the year, and the gap between job growth here and the U.S. as a whole has widened.

Of particular concern is that manufacturing jobs in the Pittsburgh Region began to decline again in October after holding fairly steady during 2006 and into early 2007. The preliminary job totals indicate that there were almost 2,000 fewer manufacturing jobs here in October than in the same month last year. If that continues, it will have serious negative ripple effects throughout the regional economy.

The Perils of Looking Too Hard for Good News

As noted in previous posts, the region’s recent job growth has been disappointing across virtually every economic sector for the past several years.

Are headquarters jobs an exception? Changes in headquarters jobs can be measured from a category that the Bureau of Labor Statistics (BLS) reports called “Management of Companies and Enterprises.” If you look at the BLS data, you’ll see that employment in the Pittsburgh Region in this category began increasing rapidly starting in 2003. In fact, the number of reported headquarters jobs increased by 8,000 between 2002 and 2006, a nearly 50% increase.

What caused this remarkable success? Unfortunately, it doesn’t reflect a real increase in headquarters jobs. It’s simply an artifact of a change in the way that the Bureau of Labor Statistics classified jobs. Beginning in 2003, BLS switched from the 1987 Standard Industrial Classification (SIC) system to the 2002 North American Industrial Classification System (NAICS). The NAICS coding system has the category “management of companies and enterprises,” but the SIC system had nothing comparable. That means that prior to 2003, jobs at a company’s headquarters operations were classified as part of the sector that its products or services were in, but afterwards, those jobs were separated out. For example, prior to 2003, the employees working at Giant Eagle’s headquarters in O’Hara Township were classified as “retail,” but today, they’re classified as “management of companies and enterprises.” Prior to 2003, the employees working Downtown at the headquarters of Alcoa, PPG, and U.S. Steel were classified as “manufacturing,” but today they’re classified as “management of companies and enterprises.”

It took several years for the Pennsylvania Department of Labor and Industry to educate companies about the change and get all of the coding transitioned over to the new system. That’s why the jobs in the Management of Companies and Enterprises category increased significantly over a several year period, rather than all at once. Major reclassifications of jobs were still occurring well into 2006. Individual company job figures are confidential, so there’s no way to sort it out, but the Department of Labor and Industry will confirm that most of the job increases in this category were a result of reclassifications, not actual job growth.

The same thing happened to a lesser extent when jobs at the many corporate R&D centers in the region were reclassified from “manufacturing” to the category “Professional, Scientific, and Technical Services” under the NAICS coding system.

The flip side of this is that what appear to be job decreases in other categories, particularly manufacturing, are due to the headquarters and R&D jobs being reclassified into the Management of Companies and Headquarters and Professional, Scientific, and Technical Services categories. This phenomenon was noted last year in a study produced by Pittsburgh’s Future of job changes between 1999 and 2005 (see page 5). A significant portion of the reported loss of 15,000 manufacturing jobs which occurred between 2002 and 2005 may well have been merely a classification change. As noted in the Pittsburgh’s Future study, occupational data indicated that Pittsburgh had one of the smallest reductions in production worker jobs of any region in the country during that same time period. That’s the real good news in the data over the 2002-2005 period.

Now that the reclassifications for the transition to the NAICS coding system have presumably been completed, we can use the Management of Companies and Enterprises category to monitor changes in headquarters jobs in the future. Over the past year, they’ve grown by about 1,000 jobs, or about 3-4%. That’s much better than in most other sectors of the regional economy, and ahead of the growth rate nationally in headquarters jobs. So Pittsburgh is remaining strong as a location for corporate headquarters jobs, and that is good news for the region.

The Persistent Myth about Per Capita Income Growth in Pittsburgh

Norman Robertson's "Private Sector" column in Tuesday's Post-Gazette continues to perpetuate the myth that increases in per capita income in the Pittsburgh Region are a ray of sunshine in the otherwise gloomy local economic picture. Unfortunately, as noted in a previous post, and also in a column on the topic in the Post-Gazette itself, per capita income is a poor measure of Pittsburgh's economic strength because of some unique characteristics of our region.

Our per capita income ranks high relative to many other regions because our population includes a relatively large number of senior citizens and a relatively small number of children. Children earn no income, so in regions with more children, earnings are spread across a larger population, lowering their per capita income relative to ours. On top of that, our large number of senior citizens import a lot of Social Security and Medicare benefits (which are included in the per capita income statistics), and that boosts our per capita income over other regions. There's no question that those dollars are good for our economy, but we won't be successful in the long run if we rely on Medicare to support the region.

So why do we have higher growth in per capita income than other regions? For one simple reason -- our population is declining while other regions are growing. Per capita income is the ratio of income to population. If the denominator gets smaller (i.e., population decreases), the ratio (i.e., per capita income) increases.

Here's a simple illustration. Pittsburgh ranks better on per capita income growth than Las Vegas. Why? Between 2000 and 2005, Las Vegas had the highest growth in total income of any region in the country -- a 45% increase. In contrast, Pittsburgh ranked 10th from the bottom, with only a 17% increase. Over the same time period, Las Vegas had the highest population growth in the country -- a 23% increase -- while Pittsburgh had the largest loss of population in the country -- a 2% decrease. When you take Las Vegas's 45% increase in income and divide by its 23% increase in population, you get an 18% increase in per capita income. When you divide Pittsburgh's 17% increase in income by its 2% decrease in population, you get a 19% increase in per capita income.

In other words, Pittsburgh ranks better on per capita income growth than Las Vegas because we lost population, not because incomes grew faster here. Our senior citizens with their stable and relatively high retirement incomes have stayed here, while many of our young people with their lower incomes are leaving. That's not something to be happy about.

As noted in a separate post, recent changes in the labor force and unemployment suggest this trend may be continuing and even accelerating. Over the past nine months, Pittsburgh had the largest percentage reduction in its labor force among any of the top 40 regions.

The true measure of Pittsburgh's economy is its job growth, and we are not doing well there at all. We need to focus on getting jobs growing here, and not be lulled into complacency by misleading per capita income growth statistics.

Slow Job Growth is Reducing Our Labor Force

The unemployment data for September that were released last week showed that for the eight month in a row, the unemployment rate in the Pittsburgh Region had decreased from the same month a year ago. In fact, the Pittsburgh Region has had one of the largest decreases in the unemployment rate this year among the top 40 regions in the country. The average unemployment rate here between January and September of 2007 was 4.4%, compared to 5.1% during the same 9 months in 2006.

That’s really good news, right? Unfortunately, no – as it turns out, it’s exactly the opposite.

The unemployment rate in the Pittsburgh Region has been decreasing not because people are getting jobs, but because people are leaving the workforce, and many of them may be leaving the region altogether.

Many people believe that the unemployment rate is the percentage of the population who don’t have a job. But it’s actually the ratio of the number of people who are looking for work divided by the “labor force,” and the labor force is defined as the number of people who are either working or who are looking for work. Every month, the labor force changes size because people either start looking for work or stop looking for work.

This means there are two different reasons why the unemployment rate can go down. One is that people who are looking for work find jobs. But the unemployment rate will also go down if