6.18.13 | Are things like a metro region’s business climate, education levels, affordability, and income inequality critical to its ability to rebound after an economic downturn? That’s the question Nancy Augustine, Mara McMillen, and Hal Wolman of George Washington University, and Howard Wial of the University of Illinois at Chicago, examine in their BRR working paper, “Regional Economic Capacity, Economic Shocks, and Economic Resilience.
This preliminary paper picks up where the chapters in Urban and Regional Policy and Its Effects left off. The authors use the factors in the BRR Regional Capacity Index (RCI) as measures of capacity, including income inequality, economic diversification, regional affordability, and business environment. They ask whether these elements, which when combined can point toward a stronger or weaker capacity, really do matter to resilience in the face of a downturn. A downturn is a single-year, 2 percentage point drop in the rate of employment growth relative to the past eight years’ growth.
The authors looked at 1,067 downturns across 361 regions between 1978 and 2007. Resilience here is scored as a region recovering within four years of the downturn. On the face of it, in 369 downturns, the regions were not resilient; in the other 698 downturns, they were.
Contrary to expectations, however, the authors find little connection between prior capacity and ability to rebound. When regions were not resilient, the capacity score was just above average. In the resilient regions, it was significantly below the average.
A multivariate analysis further finds only modest—and often counterintuitive—impacts:
- Lower education levels are not a deterrent to resilience: A one percentage point increase in the share of the population with only a high school degree or less is associated with a 5.4 percent increase in the odds of being resilient.
- The business climate affects resilience: Right-to-work states are 92 percent more likely to be resilient.
- Higher pay in the workforce lowers the odds of resilience: Every additional $1,000 in wages per worker leads to a 5.2 percent decrease in the odds of being resilient.
- Health care dominance can weaken resilience: Each additional percentage point share of workers in health care industries contributes to a nearly 7 percent decline in the odds of being resilient.
The authors aren’t convinced these results are the final story, however. More work is needed, and in addition, there might be some more straightforward reasons.
On possibility is that the economic capacity may not be related to actual resilience, as they measure it, or the capacity measures may not be valid.
We do not model policies that could be instrumental in helping an area to recover from downturns, or even avoid downturns in the first place. We also do not model elss readily quantifiable characteristics of a region that we could reasonably expect to make a difference, such as political leadership, forma and informal regional governance, or structural arrangements for local autonomy, vis-à-vis the state.
It might also be a case of the cyclical nature of local economies and their tie to the larger national economy.
The same counterintuitive findings emerged in the original paper on resilience—that regions with high manufacturing and low-skilled workers tended to be more resilient. The reason, they suggested then, was tied to the cyclical nature of these economies. When the nation took a downturn, those regions that depended on manufacturing were affected, as people cut back on their spending. When the national economy recovered, so too did these local economies. The local conditions had very little impact above and beyond the national trends.
One thing for sure, the study is an employment stimulus program for academics. More studies are needed.
Photo by Michael Velardo.