1. 1 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

2. 2 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

3. Stylized economic regions based on major cities, commuting patterns, TV markets, and terrain.

4. 4 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

5. 5 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

6. 6 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

7. 7 Which Industries Account for the Biggest Share of Economic Activity? Manufacturing has the largest share of GDP Measured 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

8. 8 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

9. 9 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 KY Industry with greatest productivity growth in the U.S.

10. 10 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

11. 11 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

12. 12 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

13. 13 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

14. 14 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)

15. 15 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

16. 16 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

17. 17 Workers are More Productive in Urban Areas Combination of better paying jobs and better employment opportunities in urban areas

18. 18 Low Worker Skill Continues to be the Most Significant Factor Limiting Kentucky’s Growth Seeing improvement, particularly in urban areas

19. 19 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

20. 20 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.

21. 21 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

22. 22 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

23. 23 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

24. 24 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

25. 25 THANK YOU