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An Overview of the Current State of the Kentucky Economy

What are Some Strengths and Weaknesses?

Kenneth Troske

Gatton College of Business and Economics

February 2015

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So What Does the Kentucky Economy Look Like?• Examine the distribution of economic activity in

the state by industry and region– Divide the state into 9 economic regions

• Also look at the labor market in the state by region

• Drawn on the recent work of Dr. Paul Coomes• Not going the look at “economic impact”; instead

I will focus on actual data

Stylized economic regions based on major cities,

commuting patterns, TV markets, and terrain.

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Where do People Live in the Commonwealth and How is it Changing?

4.2M people live in the Commonwealth in 2013

More people living in urban areas

Fastest growth in large urban areas

Declining population in small rural areas

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Most people in Kentucky live in urban areas

Almost 60% of the population in KY lives in an urban area

80% of the U.S. population lives in urban areas 70% of the state

population lives in the 4 largest regions

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How can we measure economic activity?

• One common measure of economic activity in a region is Gross Domestic Product (GDP)

• What is GDP?– One way to measure GDP is total sales minus the

value of intermediate inputs—that is the value added at each stage of production

• On average the biggest component is earnings of workers and owners

• Also use earnings to measure economic activity– Data are for 2013 and come from BEA’s regional data

series

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Which Industries Account for the Biggest Share of Economic Activity?

Manufacturing has the largest share of GDPMeasured GDP in

these industries a bit misleading

Health Care is a growing sector in KY

These two industries make up logistics/supply chain

They account for 11% of GDP and are growing

Some industries that receive a lot of attention have a small share of GDP

Total GDP in KY in 2013 was $183B

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What Do Earnings Look Like?

Earnings distribution a better indicator of where people work

Looks similar to GDP distribution

Smaller manufacturing share reflects out-of-state shareholders

Firms in these industries don’t have share holders

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What are the Important Detailed Industries Within Manufacturing?

Motor vehicles (car parts) largest detailed manufacturing industry

Beverage (bourbon) a small industry

Computer manufacturing also a small industry in KYIndustry with greatest productivity growth in the U.S.

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Where Does Most Economic Activity Occur in the State?

Almost 60% of earnings are paid to workers working in the two largest regions

80% are paid to workers in the four largest regions

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Share of Earnings by Industry in Each Region—Triangle Regions

Manufacturing is the largest private sector industry in all 3 regions

Government is important, particularly for Lexington (Frankfort)

Health care, business services, supply chain also important

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Share of Earnings by Industry in Each Region—Western Regions

Manufacturing is the largest private sector industry in these regions

Business services and construction are also important

Owensboro is the second largest region for mining—mining accounts for 5% of earnings

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Share of Earnings by Industry in Each Region—Eastern Regions

Manufacturing is important in two regions

Mountain region is largest region for mining—mining accounts for 22% of earnings

Government and health care are also an important sources of earnings

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What else?

• Turn to looking at the labor market• Labor is the largest input in most businesses• Quality of workforce determines the success or

failure of businesses• Labor market data are based on 2009-2013

American Community Survey (ACS)

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What Share of Kentuckians Work?

Significantly smaller share of men in KY work compared to U.S.Only NKY has higher share of men working

In these regions only 50% of adult males work

30% of prime age males don’t work

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What are the Main Sources of Income?

Large share of income comes from transfer payments

In KY relatively small share of income comes from private sector earnings

In regions where small share of people work, transfer payments make up over 1/3 of income

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Workers are More Productive in Urban Areas

Combination of better paying jobs and better employment opportunities in urban areas

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Low Worker Skill Continues to be the Most Significant Factor Limiting Kentucky’s Growth

Seeing improvement, particularly in urban areas

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What does this tell us?

• Manufacturing is a significant source of economic activity throughout the state– But may not be a significant source of future growth

• Health care and government are an important source of earnings– Too important?

• Business services and supply chain/logistics are also important and growing– But worker skill presents significant limitations to

future growth

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What does this tell us?

• Diversity of the economy may be the most dominant feature– This is one of the strengths of the State economy

• This means don’t try to pick winners– Impossible to identify specific industries and firms that

are more important and that are likely to grow

• Adopt policies that promote growth of all firms.

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What About Kentucky’s “Signature” Industries?• Signature industries represent a small share of

economic activity in the state– These are industries Kentucky where has a large

share of a small industry– Also amount of land used in production makes

agriculture/equine and mining very visible, storage facilities make bourbon distilleries attractive

• These industries are an important part of our history and make Kentucky unique—important in marketing

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What About Kentucky’s “Signature” Industries?• But, given their size, growth (or decline) of these

industries will have a limited impact on the growth of the state and most regions– Other industries are a bigger share of earnings for

workers and will play a larger role in the future growth of the state

• Don’t pick winners

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It’s the Labor Market, Stupid• Economic research shows that place-based

economic development policies are ineffective at promoting economic growth of a region– Really, don’t try and pick winners

• Investments in people are much more effective– O.K., bet on people

• Adopt policies that provide incentives for workers to become employed and seek out gainful employment, regardless of where it is located– Adopt a State Earned Income Tax Credit– Increase KEES funding, tie it to family income, make it

more flexible

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Cities are Where Growth is Occurring

• Across the country cities are where we have seen the fastest economic growth

• True in Kentucky as well• No need to promote growth in cities, it will occur

naturally (don’t pick winners)• But don’t adopt policies that fight this trend;

doing so will only hurt people

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THANK YOU